Key Wealth Matters

Don't miss this week's Key Wealth Matters market recap, as the KeyBank Investment Center leadership team analyzes the latest jobs report data release, upcoming Federal Reserve policy considerations, market volatility leading into January, inflation, and the omicron variant.

Show Notes

Stephen Hoedt, CMT, Managing Director, Equity & Fixed Income Research 
George Mateyo, Chief Investment Officer, KeyBank Investment Center 
Brian Pietrangelo, Managing Director of Investment Strategy, KeyBank Investment Center 
  • 00:50 – Jobs report analysis
  • 02:28 – Fed policy considerations
  • 08:39– Market volatility 
  • 12:00 – Inflation and the omicron variant
Additional Resources:
Key Private Bank Investment Brief

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The Key Wealth Institute is comprised of a collection of financial professionals representing Key entities including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

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- [Narrator] Welcome to the Key Wealth Matters Podcast, a series of candid conversations with leading experts about how individuals and organizations can grow and protect their finances, tailored around current events and trends. Here's your host for today's podcast, Brian Pietrangelo.

- [Brian] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble out about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to unlock the mysteries of the markets and investing. It's Friday, January 7th, 2022. I'm Brian Pietrangelo. Happy new year to everybody. With me today, we have two of our investment experts, George Mateyo, our Chief Investment Officer, and Steve Hoedt, Head of Equities. As a reminder, a lot of great content available on, including articles from our Wealth Institute on many different topics, and especially our Key Questions articles series, addressing a critical topic of the week. It's been an interesting week, so let's jump right in, talking about the jobs report that came out just about an hour ago. 199,000, a little bit less than expectations, but also some upward revisions from October and November. Also the out of employment rate went down overall from 4.2% in November to 3.9% in December. George and Steve, what are your thoughts?

- [George] Yeah, Brian. Good morning. Thanks for the intro. I think you're right in characterizing it as kind of a mixed report overall, but still pretty solid. You know, I still think we're kind of clawing our way back and despite maybe the fact that the headline number wasn't quite as robust as expected, you still saw some good things underneath the surface a little bit that suggest, you know, the recovery's still on track and we're kind of digging our way out of it. We're still, you know, a couple million short of where we were pre-pandemic, in terms of the number of jobs. I think that's pretty noteworthy, in the sense of demand is still pretty robust. And frankly, there just isn't the labor supply to meet that demand, you know, point to point. So I think, result of that, you're going to see wages continue to stay somewhat elevated. I think in the report that came out this morning, wages were up some 4.7, 4.5% or so. Some of that has to do with some mixed shift issues. Some other things kind of, that kind of caused those numbers to be a little bit fluky. But I think the general trend is still intact, where the recovery is ongoing and wages are still somewhat elevated. Unemployment dropped quite a bit. So the actual unemployment rate, I think fell below 4% and I think it seemed like it's headed down to the low threes, if not even lower. And that again, could kind of continue to put pressure on wages and inflation for the rest of the, at least for the quarter, maybe the first half of this year, I think. Steve, what do you take of the report?

- [Steve] You know to me, George, the most important number in this report was the 3.9% unemployment rate out of the household survey because it really opens the door for the Fed to go in March, as opposed to waiting to later in the spring or June. You've got a complete change in the liftoff scenario now. The Fed had targeted 4% as this, you know, line in the sand in terms of what it considered full employment and we're there, we're there. So, I mean, I think that we are going to see the market start to rapidly price in the idea that the tightening cycle's going to come quicker than we had expected.

- [George] Yeah, indeed. We got...It seems like we get kind of validation of that this week when the Fed didn't really do anything and they didn't really say anything, but they just, they released their minutes from their last meeting officially, but it suggested that they're getting more active. They're almost kind of taking the Omicron situation and putting that off the, off the table, basically. Removing it off the table, I should say. And it seems like, you know, they're ready, as you pointed out, Steve, to start hiking rates, potentially, maybe a couple of times more than people expected. At the same time, they're starting to signal that they're going to slow their bond buying, purchasing program, known as tapering. So, you know, I think the Fed is certainly, they've more than just pivoted. I mean, they're there, right?

- [Steve] I certainly think that they are the story of the year. You know, what, what we're going to see is something that anybody who's a professional investor that is under the age of 40 or anybody really, who's under the age of 40, hasn't seen a Fed that has been hawkish, right? So I think how markets react to this, is really an open question. Oldsters, like us George, we've been around and seen this before, but so many market participants haven't, it's going to be really interesting to watch unfold.

- [Steve] Yeah, you're right to note that. I think there's a kind of a newbieness, if you will, or a novice kind of investor base that probably has to navigate their way through this. Although we did see the Fed raise rates in 2017 and 18, they got pretty aggressive then, but then had to pivot, and now they're pivoting again. So what I haven't seen is this kind of on again, off again, cycle. I mean, certainly the coronavirus has kind of maybe exacerbated that, but I'm just kind of, I guess I feel wit's end myself, thinking that if I look over the course of, jeez, just four or five years, you know, the Fed's changed their mind and their policy pretty aggressively in that short, relatively short, period of time time.

- [Steve] The biggest fear that I have, George, that the Fed has this tendency to wait until, to wait until the data has gotten so bad that they have to become very aggressive. And then when they become aggressive, they have a tendency to break things. And whether it's the repo market in 2018, or whether it's the dotcom bubble in 2000, or the housing bubble, I mean, when they go, they tend to go too far and something in the market snaps. And I don't have any idea what it's going to be this time, but I know that market participants are really focused on trying to figure out, hey, is the Fed going to be able to remove accommodation and do it in such a way as to not cause a dislocation? Because the historical track record on them being able to remove accommodation without causing a problem is not good.

- [Brian] Yeah, that's a good observation. And one of the other things, that some believe the Fed's been consistent over the last few months, and some believe that they've been inconsistent. One of the things that showed up recently in the Fed minutes was the potential for quantitative tightening. That's a little bit new relative to the script. What are your thoughts?

- [George] Well, just to kind of lay out some terms, I mean, the thing that when Steve talks about, you know, accommodation, that again, is the, I guess the exact inverse of tightening or quantitative tightening. So accommodation is just this massive amount of stimulus that the Fed and other central banks around the world have put forth to try and save the economy from COVID. And certainly now that they're kind of reversing that, now we're going to this tightening phase, and yeah, we've been talking about the pivot for quite some time. I guess the overall tenor is it's probably a bit more aggressive, in terms of what people thought would be the case just a few days ago, literally. But, you know, I think, you know, we have to keep one thing in mind. It's that, you know, it's really not the Fed. The first Fed hike rate that causes the market to really sell off, if you will. It's a subsequent series of rate hikes. You know, I think we, if we look back over time, it's not the first shot that kind of gets everybody nervous. It's, you know, as Steve pointed out, it's multiple hikes, or maybe the Fed moving too quickly, too aggressively. And yeah, he's right to think about the fact that there there's history there that suggests that that could happen, but I don't think it's time to be uber bearish right now either and get super defensive. I mean, I think we're still kind of enjoying a pretty good recovery from where we were year ago. Profits are still really robust. We'll get, of course, a fresh set of profit numbers in the next few weeks or so, as we close out the, the year from 2021 and, you know, the overlap economic backdrop, as we started pointing out earlier, is still pretty, pretty favorable. So I think we can kind of grow our way through this. It just depends on, again, maybe the second half of this year as to how quickly the Fed moves, but maybe I'm reading that differently. Steve, what do you think?

- [Steve] No, I think when you're right to point the earnings, George, because at the end of the day, the direction of the S&P 500 tends to be governed by the direction of the forward 12 month estimated earnings line. And we will look at the same chart, seems like almost every week, but the 12 month forward estimated earnings line is still trending up and to the right for the 500. It's at 222, as this week closes. We think that that number is likely to gravitate up toward 240 as we get to the end of the year. And if you're going to have earnings go from 222 to 240, it's hard to see the market having a really bad time. Now that doesn't mean that we can't have, you know, dislocations or corrections as the market digests the removal policy accommodation, or, you know, geopolitical issues or what have you. But at the end of the day, we still think that with an increased market volatility regime for 2022, the bias for the market is to the upside.

- [Brian] Oh, speaking of volatility, Steve, we saw December unfold with pretty wide swings, almost on a daily basis, going up and down anywhere from 1% to 2%. And in some cases above 2% or below 2% on the downside. And we've seen some of that come into 2022. What are your thoughts with regard to volatility and managing the volatility from your perspective?

- [Steve] Yeah, I think that when you look at the paper from 2013, 14, it gives us a really good roadmap as to what to expect. And if you overlay that tightening cycle with the current cycle, what you see is a increase in volatility starting right about now and blasting through the next six, say six to nine months. In 2014, 13-14, we saw the market have a bias to the upside with increased volatility. And it seems to us that that roadmap is pretty applicable right now. You know, we've definitely seen some pretty pronounced rotation away from a lot of the growth high-flying names, toward some of the value and cyclicality names. In fact, the best performing group here to start 2022, is the banks, which makes perfect sense, given that they have leveraged to higher rates. Rates move up, banks move up because net interest margins improve. They earn more money plain and simple. So I think that we see pockets of opportunity where the increase in volatility is driving a rotation that investors can take advantage of. But we definitely think the regime for volatility is much higher this year than we've seen over the last couple.

- [George] Yeah. Then I haven't known, I guess that, you know, Steve is right to draw these parallels from 2013. And if anything, it's probably more of an accelerated taper. It means that the fed is actually moving more aggressively, more rapidly than they were back then, because I think we were still kind of coming out of the great financial crisis of 2008 and 2009, and the economy was still fragile. Today the economy's in really great shape. I mean, consumer's balance sheets are at record levels and that's really a function of the rising stock market and home prices. Corporate balance sheets are also really robust. And even the financial sector, as Steve pointed out, in addition to actually benefiting from higher rates, you know, their balance sheets are in really good shape as well. So we've got kind of a three legged stool, if you will, that's actually kind of providing a lot of support to the economy. And then I'd also note that, you know, these things that kind of, we kind of refer to as growth scares are really real events. And we're probably, you know, we might see one of those, to Steve's point earlier, where if the Fed is kind of overdoing it, and maybe at the same time that they start raising rates, we might start to see a bit of a momentum shift downward in the economy, not a recession, but just a deceleration of growth, if you will. And when you get these growth scare every once in a while, they're scary, but, you know, they usually are short-lived. I mean, they could last, you know, a couple of weeks or maybe even a few months. And again, markets don't really kinda respond favorably to that, but they, they really don't. We don't have a big bear market, if you will. So we have some volatility Steve pointed out. It's not surprising that in any one given year, you could see declines of 10 or 15% in the major averages, but, you know, for the time being, I think you want to kind of be focused on maintaining your discipline, looking for opportunities, as Steve pointed out, and, you know, trusting active management to try and help you navigate these choppy times.

- [Brian] Fantastic, George. Thanks for that color. And it wouldn't be a podcast at Key Wealth Matters if we didn't at least touch on the main topics of inflation and Omicron from the perspective of what might be going through your mind and what you think we're looking at for the next month or so.

- [George] Well, look. I think, you know, we're going to probably see a lot more elevated inflation ratings in the next few months, as you said. I think there's probably a bigger debate as to how quickly inflation does get back to its quote unquote long-term trend and long-term average. And even I think the definition of the long-term average is probably a little bit suspect. I mean, over a long period of time, we went back and looked at data going back almost seven years, and I think the historical average is somewhere close to 3.5%. And that probably is, you know, a reasonable way to think about where we would kind of drift down towards. I mean, again, inflation, as we've talked about on these calls, is currently ended up the high fours, low fives. And for it to kind of meander down to something with a three handle makes a lot of sense to me. Where I think some of the forecast might be a bit optimistic is that people are calling for inflation to fall to the low twos and even fall below two. And I think, you know, that might be possible in the out years, but certainly not this year. So I don't think we're going to see inflation kind of drift down to, you know 1.8, I think is the low end of the street right now in terms of overall forecast for inflation, because I feel the same, wages are pretty elevated, housing is pretty robust, and energy is kind of a wild card, but I think you've got a few factors and a few forces in play. And then with respect to Omicron, just the way that we kind of debate, you know, how you define a long-term average for inflation. I think people are starting to debate really what it means to be vaccinated. Right? So how do you actually... when you were fully vaccinated, do you have the booster too or not? What I'm kind of really sensing is that the administration and other policy makers are now kind of shifting their thinking to say that we're never going to get over this. Unfortunately, this is going to be something that's going to be with us, but it's kind of gonna be like the flu. Like we just have to kind of get our annual shot, hopefully, and then go about our lives. And so that this is a bit more scary perhaps, but certainly every year, unfortunately, many people die from the flu. And if we can kind of maybe change our mindset around Omicron and COVID-19, you know, maybe we'll be in a different place in a couple of months from now. Who knows? But that's one thing I'm thinking about. How 'bout you, Steve?

- [Steve] I'll echo your comments there, George, on Omicron. At the end of the day, this is going to be endemic. And we just are going to have to learn how to live with it as a society. And, you know, it's... I think the part of the thing that people are just going to have to get over is the fear. And whether it's the media that has stoked it or, you know, politicians using it for various reasons, you know, I think as a society, we just need to figure out how to move forward and get back to living, you know?

- [Brian] When you think about inflation,

- [Steve] Inflation is going to be persistent, and you know, we're going to be dealing with it. I think that that 2% handle that you mentioned, it's not, we're not likely to see that for quite a while.

- [Brian] Well, George, Steve, thanks so much for your insights as always. We appreciate your joining us today. Past performance is no guarantee of future results, and we know, your financial situation is personal to you. So reach out to your relationship manager, your portfolio strategist, or your advisor for more information. We'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you achieve your financial success. Thanks everybody.

- [Narrator] The Key Wealth Matters Podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of a collection of financial professionals, representing Key entities, including Key Private Bank, KeyBank Institutional Advisors, and Key Investment Services. And the opinions, projections, or recommendations contained here in are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Bank and trust products are offered by KeyBank National Association, a member of FDIC, and Equal Housing Lender. Key Private Bank and KeyBank Institutional Advisors are part of KeyBank Investment products, brokerage, and investment advisory services are offered through Key Investment Services LLC, or KIS. Remember, a FINRA, SIPC, and SEC registered investment advisor. Insurance products are offered through KeyCorp Insurance Agency USA, or KIA. KIS and KiA are affiliated with KeyBank. Investment and insurance products are not FDIC insured, not bank guaranteed, may lose value, not a deposit, not insured by any federal or state government agency. KeyBank and its affiliates do not provide tax or legal advice. Individuals should consult their personal tax advisor before making any tax-related investment decisions. This content is copyrighted by KeyCorp, 2021.