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Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, June 7th, 2024. I'm Brian Pietrangelo, and welcome to the podcast.
Last week we celebrated Memorial Day, which honors those that gave the ultimate sacrifice. And this week we have a similar opportunity from the anniversary of June 6th 1944 when more than 150,000 allied troops landed on the beaches of Normandy, France as part of the largest seaborne invasion in history known as D-Day. The name and date loom large in the memory of World War II, perhaps second only to December 7th 1941. So again, we pause and honor those that helped change the future of the world and the United States with the victory from World War II.
And with me today, I would like to introduce our panel of investing experts here to provide their insights on this week's market activity and more. George Mateyo, Chief Investment Officer, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income.
As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors each week. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic news, we've got three updates for you. First, earlier in the week, the manufacturing PMI data came in slower for May down from the number in April, and it's been down for 18 out of the last 19 months, again showing slowing in the overall manufacturing part of the economy.
Second, the number of job openings decreased to 8.1 million for April, down from 8.4 million in March and down from 9.9 million in April of 2023. Again showing that employers out there are not as robust in terms of the job openings and looking for the overall health of the employment market.
And third, just this morning at 8:30, we received the information from the employment situation from the Bureau of Labor Statistics that gives us both the new non-farm payroll data as well as the unemployment rate for the month of May.
New non-farm payrolls for the month of May were 272,000, slightly above expectations, and the unemployment rate came in at 4%. So we'll start with George with his take on some of the data this morning and in general overall, George, what do you think's happening in terms of the overall economy, the data we received today and the outlook for the future, George?
George Mateyo:
Well, Brian, I think you could kind of summarize the employment situation by a simple phrase which is say goodbye to July. So I think the Fed is probably going to have to clearly move away from cutting rates in July, and any hopes of the Fed cutting interest rates in July I think were dashed by this morning's report.
Frankly, the numbers were kind of a blowout again and after last month's kind of decent but not stout report, this again suggests that maybe the fireworks would come early a little bit this year in the sense that basically the headline numbers anyway. We saw roughly 100,000 jobs added more than expected, which I think is a pretty good sign that the labor market is still pretty healthy. They were pretty broad-based too. The services sector was a great component of that. Other things as well suggested that the overall labor market is pretty strong.
Hourly earnings, which is kind of a fancy way of talking about wages, were also strongly expected. I think the number coming into the day's report was expected to see roughly an increase of two-tenths of 1% month over month, and that was actually four-tenths of 1%. So almost double the expectations there too.
So there's other things that we could probably point to that maybe were a little bit weak, but I think the bottom line was the overall number was pretty strong. So again, I think the Fed is probably on hold for a while longer, and that's going to probably cause some people to get a little bit nervous about maybe even hiking rates sometime this year. I don't think that's quite the case though, and I don't think the economy is essentially at the point where the Fed needs to start hiking. I think we're going to see some moderation perhaps later this summer or so, or maybe fall even.
The consumer still is pretty tapped out. They still have some cash in the sidelines, but it's not quite at the same level as they had a few years ago. And maybe the propensity to spend is also starting to weaken a little bit. And indeed we've even seen some numbers that suggest that maybe the overall health of the consumer is starting to wane a little bit with the delinquencies and so forth rising at the margin.
It's not a cause for concern, but we're not in recession, but we're certainly seeing the ongoing narrative around interest rates being higher for longer or at least higher for longer, meaning that maybe rates stay where they are right now. But Rajeev, I'd be curious to get your take as we think about next week's Fed meeting and what's in store for the Fed. Also, we saw the ECB actually lower rates, which I think was kind of interesting, maybe not unexpected, but certainly noteworthy. So what'd you make of all that?
Rajeev Sharma:
Yeah, George, I think the hot payrolls number that we saw, there is a bias for yields to move higher. In fact, the immediate reaction that we saw in the bond market was that there was a big jump in the two-year treasury yield. We spiked almost eight basis points right after that number came out. We went to 4.85%, and it's a move that we haven't seen since the hot April CBI print.
And what this all really means is that, as you've mentioned, the July rate cut is off the table. That has been off the table. The question really now is how many rate cuts are we going to have for the year if we start seeing these kinds of numbers? I mean we've talked about it before that the market and the Fed are both very data dependent and every single piece of data is being scrutinized.
Right now if you look at Fed swaps, there's no longer a pricing for a rate cut before December, so this can all easily change. We've got the FOMC meeting next week. We'll get a look at the Fed's dot plots. We'll get a look at the projections on rate cuts. We'll get a look on inflation and how it's trending based on the Fed and their projections. But in all likelihood, the Fed will bring down their rate cut expectations from three that we saw in the last time we saw some of the economic projections to probably two or perhaps even one. And I think that's going to probably come in line with what the market is thinking right now.
We did see the ECB cut rates this week 25 basis points, largely expected. The European Central Bank was the first mover, which is rare. Generally the US Fed sets the tone for monetary policy globally, but this time we did see the ECB move first. We also saw Canada move.
That being said, they will continue to be data dependent as well. The ECB has set it in their statement that they want to get inflation down to 2% in a timely manner. But if you look at their projections that they showed the market, they actually increased their inflation forecast and now they're seeing a year-end 2024 inflation reading of 2.5%. Their prior projection was 2.3%. And even their 2025 forecast inflation is higher than expected. So it was a rate cut, but also a revision of where they think inflation is going. So it kind of left the market a little perplexed.
I wouldn't think that the Fed is going to look at the ECB's rate cut and say we have to cut now because they did. But I would say that it's very interesting to see the other central banks globally start to cut rates even in the face of higher inflation projections.
And I would be very curious to see what the Fed says next week about their inflation projection. If they think it's going to go higher than I think the market's going to react, that maybe we don't get any rate cuts this year. And so I think that's going to be very important. I think it's going to influence how the market responds to the Fed meeting and Fed Chair Powell's presser next week.
But really right now we're not seeing any real pushback for the 10-year around the 4.5% level that we've talked about before. And I think that 4.5% level on the 10-year treasury note is very important because every time we get to 4.5%, we do see buyers step in and then we retreat from that. So we've talked about it in the past that for the 10-year treasury yield, we've seen a range between 4.3 and 4.5%. I think we still stay within that range in the near term.
George Mateyo:
So it's kind of curious to me Rajeev to see the ECB moving first as you pointed out. And I can remember they actually tightened rates, I think it was 2009 or '10, and that proved to be a mistake and they, I think, regretted that soon thereafter. Do you think they're making a mistake this time or is there something different there? I mean, you talked about that both economies, both the US and the European Union are seeing inflation come back under control. And indeed, I looked at a chart last night and saw that they were pretty much on top of each other right now. But what's happening maybe is their labor market going through something different or what do you think the differences are that they're seeing that we're not?
Rajeev Sharma:
They're seeing a lot more labor market cracks and a much more stronger cooling down than we've seen here. But we're starting to see some signs here as well. We have a much more diversified economy than Europe, and I think that helps us to be able to stay higher for longer.
But one thing I would say is if you hear the statement from the ECB, they're willing to cut rates 25 base points and then wait to see what happens. I don't think the Fed wants to do that. I think when the Fed gets on a cutting cycle, they want to maintain a cutting cycle. They don't want to do one 25 base point rate cut and then wait or pause at that point. I think they want to be in a position where they could feel confident to continue to do a rate cutting cycle. And I do feel that they don't want a policy error either.
We saw policy errors in Europe where you have to cut rates and then reverse course. I think the Fed is going to be very calculating in what they do. I think the economy here is much more stronger to be able to withstand this higher for longer environment that we're in right now. So they are different environments that we're dealing with here.
George Mateyo:
Your point about the fact that our economy here in the US is more diversified, it's kind of interesting, and Steve, I guess I kind of pivot to you here. Are we really diversified? I mean, it seems like our economy is just focused on technology and maybe one company in particular, but maybe I'm missing that. What's your take on what's happened in the stock market this week and specifically this company called Nvidia, just a little-
Stephen Hoedt:
Well, I'll tell you George, to me, there's a big difference between the economy and the stock market. I think the economy's diversified, but the stock market sure as heck isn't.
When you look at the S&P 500, we continue to have concentration grow. We saw Nvidia this week tag $3 trillion in market cap becoming one of three companies that's hit that level along with Apple and Microsoft. It's really closing in on Apple in terms of market capitalization. So clearly the market is very enamored of the AI theme and obviously the market believes the best way to play that is through Nvidia.
When you look at the earnings numbers for that company, the earnings numbers have gone up exponentially very much in line with the stock price. So we get what's going on there, but still it's remarkable to see. And Nvidia has accounted for a huge amount of the earnings gains for the S&P 500 this year. It's also accounted for a huge amount of the price appreciation for the index this year. So when you start to disaggregate the numbers to look at the impact that that concentration's had, it's also pretty remarkable.
So I think that when you go under the hood of the market, there's really a couple different markets here. You've got the S&P 500 headline index, which is really being pushed by these tech names. And I mean, I was just flipping through some charts this morning. And when you look at the sector performance year to date, we're back to the point where we only have two sectors that are outperforming the S&P 500 right now, and it's tech and communication services which are both driven by, drum roll please, the AI theme.
So we've lost the leadership of the cyclicals, which had come to the fore over the last couple of months that come off the boil here. And I think it really points to the market kind of feeling out what's going to happen both with the Fed and with economic growth as we head into the back half of the year. Clearly the Fed is not going to be as accommodative as what the market thought at the beginning of the year.
We can go back and forth about whether they'll even be able to lower rates this year. We had the Barron's cover story last week that said that they won't, and I don't think that was necessarily a foreshadowing, but at the end of the day, the numbers are what they are. And with base effects, which is the numbers for the inflation numbers which drop off from a year ago, as we move through the next three months, the numbers are going to be really difficult to see the inflation numbers come down.
So not only did you get a hot jobs report today, but you've got inflation numbers that are going to be likely moving higher over the next three months simply due to math. And when you put those two things together along with the political season that we're going to be entering, the Fed moving to accommodate it's going to be really difficult.
So I think the market's getting that and it's getting it correctly. And when I look at earnings, earnings numbers continue to go higher for the S&P 500. So I think that while we may have modest growth or moderating growth in the second half, 1.5% growth is still 1.5%, and from here, that likely translates into higher earnings over the back half of the year, which should put a modest bias to the upside in the market.
George Mateyo:
Picking up what you said just a few minutes ago, and also what you've said in the past, Steve, is that cyclicals, you said that cyclicals have kind of given back some of their gains or maybe kind of given back some of their leadership more specifically. And in the past, you kind of suggested that cyclical leadership is actually a good thing for the overall market. And if that's not the case right now, is there something more concerning that's looming out there that we should be thinking about?
Stephen Hoedt:
So we haven't seen a massive amount of performance out of the defensive yet either, George. So it's one of those things where it's something that we're watching to see if there becomes a rotation within the market.
Right now, there is no rotation. Really it's just a continued bidding up of the technology themes and a lot of kind of churn underneath between the cyclicals and the defensives, but no discernible trend.
I would want to see a discernible trend one way or the other in terms of defensive starting to show some real outperformance before I would start to turn negative here. Frankly, it seems to me that it goes along with a lot of what we talked about on our recent national call, which is that as we move into the summertime here, we could get into a period of time where we have a good two, three months of chop because of the politics and everything else. It's likely, in our view, going to be kind of a sideways choppy market at least through kind of September, October, and I think the market's smelling that out.
George Mateyo:
Well said, Stephen. Again, we also acknowledge in our call that in addition to some sideways markets, it's really important to be diversifying these markets. I think the fact that, as you noted and Rajeev pointed out too, that the Fed is probably not going to be cutting rates anytime soon, and that was actually a positive tailwind beginning, really the fourth quarter of last year that kind of extended into this year, and now those hopes are being faded and the recent uptake in the market, as you noted, Steve has been really driven by AI and some other things too.
So we would continue to really maintain your positions, be diversified, emphasize quality, and also consider new tools. We talked about, for example, real assets having some real meaning in a portfolio and maybe in some measured amount, those can be beneficial too.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Stephen, Rajeev. We appreciate your insights. And thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app.
As always, 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, portfolio strategist or financial advisor for more information, and 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 navigate your financial journey.
Speaker 5:
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