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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 14th, 2024. I'm Brian Pietrangelo and welcome to the podcast. As we head into the weekend, we'll obviously talk about Sunday, which is the celebration of Father's Day. So thanks to all the fathers out there for doing what they do and especially for the dads, the grandpas, the Pops, and the Papas. We appreciate it and hope you have an opportunity to celebrate with your family. 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 Cindy Honcharenko, director of Fixed Income Portfolio Management.
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 have three key updates for you this week and we will begin with yesterday's report on the initial unemployment claims for the week ending June 8th came in at 242,000, which was a decent increase from the prior week of up 13,000. So we'll take this into consideration two ways. One, we don't want to overreact to the increase because it is just a weekly update. And second, we will want to continue to watch it to make sure it's not something that's increasing from a concerning level as we continue to monitor the overall employment front.
The second update came out on Wednesday of this week, which relates to the consumer price index of inflation, which was pretty important as we continue to watch this for the last few years. The results came in as follows for the month of May. Inflation remains somewhat sticky but did have some softening or improving on the month-over-month numbers. So for example, for the month of May, the month-over-month inflation for all items came in at 0.0%, which was flat, which was significantly lower than April at 0.3. However, if we exclude food and energy known as the core measure of inflation, it came in a month-over-month basis for May at 0.2%, which was only slightly lower than 0.3% for April. In addition, we always try to give you the year-over-year numbers because they give you a little bit more of a trend, and when we look at that in terms of year over year numbers for May, the core numbers came in at 3.4%, which was slightly lower than 3.6 for April and 3.8 for March. So all in all, we're seeing some levels of moderation, which is welcomed as we look at the overall inflation picture going into the second half of the year.
And finally, the third update for the week is probably the most important update, which also came out on Wednesday of this week at the afternoon where the Federal Open Market Committee had its two-day meeting, its press conference and its statement release, which indicated that the Fed is keeping interest rates where they are at 5.5%, but the more important conversation is will the Fed cut later in the year. The indications from the Federal Reserve's summary of economic projections indicates that they're projecting basically only one rate cut later in the year. So we will talk to our panel and have a dialogue about what that means specifically and what it might mean for investors and what it might mean for future rate cuts in the remaining half of the year. So we will get right to that update starting with Cindy to talk about what the Federal Open Market Committee did in terms of three items. What did the Fed do, Cindy, what did they say? What were their projections and what does this mean for future rate cuts? Cindy?
Cynthia Honcharenko:
The Fed left all target and administered rates unchanged as expected. The federal funds rate target range remains at five and a quarter to five and a half percent. There were no dissents and this marks the seventh consecutive pause in the tightening cycle. The pace of balance sheet runoff was unchanged at 25 billion per month for treasuries and 35 billion per month for mortgages. The policy statement was mostly unchanged, but the Fed modified the language on progress in getting inflation down to target it to reflect a modest improvement in the inter meeting period. Interestingly, there was no revision to the growth forecast, which suggests that the committee probably expects strong growth for Q-two through Q-four in order to remain at 2.1%. Meanwhile, they did mark up inflation by a couple of tenths to reflect the strength over the first four months of this year. Overall, the statement does nothing to suggest that the stance or bias of policy has changed.
The outlook is balanced and the committee does not feel confident enough in the prospects for further disinflation to justify a rate cut. The June summary of economic projections was more hawkish than expected signaling only one rate cut in 2024 down from three in the March summary of economic projections. The long-run forecast was revised higher as well. More rate cuts for 2025 and 2026. There's a hundred basis points and cuts in each year respectively. The Fed ultimately reaches their target. It will just take a little longer to get there, hence the higher for longer. Powell's press conference started off once again with a commitment to resume progress toward the inflation target. The press challenged the notion that policy rates are truly restrictive and questioned the judgment that inflation is moving towards target. But Powell stood his ground. Unsurprisingly, Powell dodged a question about a potential September rate cut and would not commit any future moves in interest rates.
He refused to say specifically how many months of good data he would need to see in order to build confidence. Powell was often asked why the committee would cut rates given the forecast revisions, and his response essentially boiled down to a desire to maximize the potential for a soft landing.
So the bottom line current monetary policy remains data dependent. The data is exceedingly difficult to forecast at the moment, and the committee lacks confidence to project a path forward for rates. The committee still sees the labor market as rebalancing, not deteriorating, and remain adamant that the recent developments in the labor market do not constitute unexpected weakening. They continue to believe labor conditions will allow them to remain patient to gain confidence on the inflation front. Investors need to look at the SEP but put a greater emphasis on the incoming economic data because as we know, we're not dealing with a forecast based Fed, but a data dependent Fed. And as it stands now, the Fed does not have to cut rates, but if they were to cut, I believe the December 17th and 18th meeting would be the time and the committee pretty much points us to that direction based upon the revisions to their June forecasts. George, what are your takeaways from the Fed's meeting this week?
George Mateyo:
Well, I think you said it right when you talked about the fact that this is not a forecast driven Fed and we probably shouldn't use these projections as something that's gospel and something that's kind of carved in stone, right? These are going to be pretty fluid numbers and coincidentally of the day that the Fed met, we also got some information on inflation and I think for the first time in over two years we saw inflation on a month off month basis go down. I mean, it was down slightly, I think it was zero point something, but it was pretty small, and that was the smallest increase, like I said, in quite some time. And so I think it's curious that the Fed probably acknowledged that they had some of that information when they made the decision, but maybe to some extent that information came in a little bit too late for them to really act towards it.
And the market seems to be expecting now the Fed might be cutting quicker than you expected, but we'll see. I mean, I think it's kind of fair to say that the Fed has been a little bit spooked by inflation earlier this year. I think when they started the year, as many people did, they would've thought that inflation would be coming down and we had three or four consecutive months where inflation was highly unexpected. So now we've got one month that it's actually a bit weaker than expected, and so I guess we've got maybe two to go, or at least a few to go before the Fed, as you said, Cindy, really has that true competence to start thinking about cutting rates. I think the thing that's also notable is that the Fed is they want to be apolitical, but they're certainly aware of the politics, right?
And they don't want to be really the main driver of the investment narrative or the political narrative this summer and this fall in the sense that there's going to be a lot of conversation, of course about the economy, about inflation, and I think the Fed would probably prefer to remain in the background for much of the conversation. But they also can't ignore the fact that when we look back, and I was doing this this morning to understand where inflation's been. And if you look at where we were just coming out of the COVID recession back in 2020, and if you look at maybe where inflation and prices have gone since the pandemic, inflation actually is still up some 25% in the last few years. At the same time, over that same period of time, I should say wages are only up about seven or 18%.
So many people are seeing and experience inflation in a real way that's really not really captured in these year over numbers that we talked about. So I think inflation is still a situation that the Fed needs to be responsible for and responsive to, but the bigger question from in my mind is what happens with the labor market going forward? And we've seen just this past week some softness as you pointed out, there's some moderation. We're kind of getting back to maybe where we should be in terms of equilibrium relative to the pandemic. But nonetheless, I think the Fed is going to be very careful to really watch the employment situation going forward too.
And I guess if I could put this in context for the market, I think it is probably fair to say that the Fed would probably like to start cutting, and that's probably pretty bullish for bonds. I mean, at some point you might actually see bonds start to rally. You might start to see money move out of the sidelines. You might just start to see people taking some of their excess cash and investing that where they can kind of recognize perhaps that these yields on these money market products are probably not sustainable if the Fed starts cutting rates. So as we've talked about from time to time in the past, it's probably good to maybe extend duration a little bit to try and find opportunities where you can find them and also deploy some of that cash because if the Fed does start cutting rates through this year, those enticing money market funds that you see on TV and other places won't be as durable as people think.
I think what's durable for me, Steve, also is the fact that the equity market has really been quite resilient, particularly these mega tech stocks that we talk about from time to time. They seem to kind of maintain the leadership irrespective of what happens with a broader macro environment. So what are your thoughts about the equity market these days?
Stephen Hoedt:
Yeah, George, to your point about the mega caps, it's funny, but to me the analogy I would use is that of a relay race because basically since we've had the NVIDIA earnings report a few weeks ago, NVIDIA hasn't been the only mega cap name that's been doing well. It seems like each week for the last month or so, we've had a different mega cap name move to the fore this week was Apple with their worldwide developer conference, which seemed to exceed expectations. But the mega caps seem to have a baton that they just keep passing around each other to the rest of the markets maybe detriment, but it seems like investors really are continued to be captivated by these mega cap names. Each week we have a different leader that helps to power the market to a new all time high, and this week was no exception.
It's very clear to us that investors are focused on three things, which is strong employment, friendly inflation, and unrelenting performance and mega cap tech names. That's like the triumvirate for the market right now, and it seems like things are in a good place. That said, as we look to the summer, to us, it still feels like it's going to be a noisy one. When you think about the different cross currents that we're dealing with, you're dealing with the idea that is there a reflation trade? Is the stagflation trade on or is it dead? Is there divergence in the market from the economy? Is there convergence, soft landing, no landing, hard landing, bad is good, good is bad in terms of economic numbers. I mean, you got all these things that people are trying to parse through and that doesn't even get into the political stuff.
And you put all those things together, there's a volatility in that macro narrative that underpins the market. And to us, the outlook or the setup for the market as we move through the summer months just really, it's not very clear. So I think that when you in a situation where the market continues to make all time highs and the outlook is not very clear, it falls back to the things that you and I and Rajiv we talk about on these calls all the time, which is stick with your high conviction ideas, stick with high quality and stick with diversification. You put those three things together and you should be in a pretty good place in a market that we believe is going to get more difficult to navigate as we move through the next few months.
George Mateyo:
I think that's great advice, Steve. And I think to your point about diversification, it seems to some extent that there's a bear market in diversification these days where people have been maybe wired more recently to focus on just a couple of these investment darlings and really focus on really what they've been doing lately. I guess it's also more important to recognize what happens next is really the bigger story. I mean, obviously what's happened in the past 6, 12, 36 months is really important to kind of get captured by that. But as you pointed out, I think going forward things might get a little bit sloppier and maybe a little bit messier, not to say that we're expecting a real bear market, but things should be a little bit more difficult.
And in that environment, diversification should actually pay off. So even though that people might be able to program to think and respond to what's happened recently, I think because other things should start working, maybe the market broadens out a bit. As we talked about a few minutes ago, maybe bonds provide some support again, and other things can complement a portfolio. It's important to recognize that diversification is going to work at some point. It's just not working right now in the sense the market has been concentrated. But I think over the next several months going forward, I suspect that diversification will matter once again.
Stephen Hoedt:
George, to the point we mentioned it on our recent national call how the seasonality typically plays in the election year kind of scenario. And what you typically see sell in May go away is not an actual thing. It tends to be more in terms of market weakness, sell in mid-summer and then come back in the fall, and that tends to be pronounced during the election season. So from say, mid-July through mid-September, the market gets very difficult to navigate in these election years. And when you look at how things are set up right now with the market up double digits year to date already with that more difficult seasonal period to navigate, we think that that's likely going to be the scenario for the summer.
And then if you look at the way things typically resolve themselves, the market bottoms in October, and as the uncertainty starts to remove itself from the equation, we typically get a pretty good rally from October through year-end. When you look at the typical return pattern for the market, when the market's up double digits in June, you typically do get a 20% return. And we're not telling you that that's not going to happen this year, but it may be really backend loaded this year once we get through the election season.
Brian Pietrangelo:
Well, thank you for the conversation today, George, Steve, and Cindy. 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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