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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, September 13th, 2024. I'm Brian Pietrangelo, and welcome to the podcast. As we have been doing all week, it is very important to remember what occurred 23 years ago on 9/11, so we do take the opportunity at this moment to just pause to remember all of those that lost their lives and all of those that did everything they could to try and help. Let's take a pause. Thank you very much.
Thank you for joining me in that moment of silence. With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Mateyo, chief investment officer, and Steve Hoedt, head of equities. 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 calendar, the economic release calendar was very, very light, so we only have one item to talk about, that is CBI inflation. In addition, we'll talk a little bit about the market rebound with Steve. And going into next week, we certainly have retail sales, industrial production, and then the all-important Federal Reserve Open Market Committee meeting on Wednesday the 18th. Overall on Wednesday, when the Bureau of Labor Statistics reported overall consumer price index inflation for the month of August, it came in month-over-month, all items at 0.2%, but core items, excluding food and energy, came up 0.3%, which was a little bit of an upside surprise. That being the case, we look at the year-over-year inflation ending in August and we see a 2.5% read for all items, which was a decline, pretty healthy. But overall core, excluding food and energy, came in at 3.2%, which was the same rate as July.
So again, reminding everybody from our listener's perspective, the goal for the Fed is 2%. So as we consider what's happening with overall inflation in the same light that the Fed does, we look at whether or not inflation continues to recede as the Fed decides to make its policy decision. Next week we'll get our panel's take on that in terms of overall inflation. So turning to the market, let's talk to Steve. We had a nice little rebound this week after a little bit of volatility inconsistent with the fact that September tends to be choppy and on the decline in general, as 1 month out of 12, but in this week we had a pretty good rebound. So Steve, what are your thoughts on the overall market and your thoughts for the week? Steve?
Stephen Hoedt:
Well, Brian, it's been an interesting week. It always is, but this one even maybe a little bit more in particular because if you remember back to last week, it seems like we came into this call and we were talking about the market maybe having a double top, and the things looking like we were heading lower and, to use a hockey parlance, we had a kick save where the market has now reversed and is up now five days in a row this week. We are, as we sit here this morning on Friday, right around 50 points away from a new all-time high in the S&P 500. So quite an impressive recovery for Mr. Market this week.
I think that there's been a host of things behind this, and I'll talk about it in a minute, but one of the more positive things that has been continuing to go underneath, and we've talked about this many, many times on these calls, and other times that we talk with our clients and other folks, and that is that as long as the forward earnings line for the S&P 500 continues up and to the right, it's very hard for the market to have serious difficulties. All throughout the correction that we had in mid-summer, and then the most recent shallow pullback, the earnings line for the S&P 500 has continued to power up and to the right.
So we sit here today at a new high for the year, there at a little more than $264 a share for the S&P, and those numbers have continued to rise higher. So even with the idea that maybe there's been a bit of a growth scare or a slowdown as far as the economy goes shifting down from fairly strong growth to maybe a little bit more middling growth, the earnings lines continue to go up. And as long as the earnings line goes up, it's very likely that the S&P resolves in the direction that earnings are moving. So that's continued to be a positive underneath things all along.
I think the real story this week has been the recovery in technology. So we came into this recovery and, if you can believe, a week ago utilities were the number one performing sector in the S&P 500 year-to-date after the pullback that the tech stocks had. And we've seen that relationship shift this week, and we've seen tech regain leadership year-to-date, and there's been a significant move higher again, and it's this typical cast of characters. It's the same ones that have been performing year-to-date, it's the Nvidia's of the world and others that have pulled the market higher.
Now, again, the question is, is it sustainable from here? We'll have to wait and see. I know we have been pointing out the fact that these defensive sectors, like utilities, staples, healthcare, things like that had been performing a lot better over the last month or two than the tech stocks had, and that had been giving us some cause for concern, and to see that reverse I think is important.
Then finally, to talk about that, as we get the Fed on tap, and George will talk about that in a minute, as we head into a rate-cutting cycle next week, it's going to be very interesting to watch how cyclicals play relative to defensives here. Cyclicals have underperformed defensives over the last few months, and it seems to me that if we get the Fed to move here between now and year-end, say 75 or 100 basis points, whatever it is, I think the market's forecasting 100, maybe we see a renaissance in cyclicals relative to defensives. That also should help the breadth of the market, and likely give us an opportunity to move to significant new highs at the index level. So very different tenor than a week ago for sure. Maybe I'm a bit of a weathervane, George, but it feels a lot better to me this week than it did a week ago.
George Mateyo:
Well, indeed it does, Steve. And I guess to borrow one of your hockey terms, we had a hat-trick of economic data this week with the CPI, the PPI, and claims. Those two first things, of course, are focused on inflation that Brian touched on, and I think they were good enough to get the Fed convinced that they can start lowering rates, and claims certainly is something we watch to try to monitor the overall health of the labor market. And they kind of came in line with expectations too, in the sense that they didn't really rise too much to suggest the Fed perhaps has to do a lot in the near term, but it does have to keep their eye on the ball with respect to what happens with the labor market.
So it does seem to be a different week this time around, and the setup is such that the Fed is poised to start cutting rates for the first time in... I think it's four or five years or so now. So it's kind of a seat change, it's a bit of a regime shift in terms of where the Fed's been. I think there's some interesting things, Steve, with respect to what the Fed might do or how much they might cut. Typically, the Fed is one that is pretty well telegraphed. I think they usually come this week before they start making policy decisions, and the market has a pretty good grasp of what they're thinking, or maybe sometimes the market leads them, informed their thinking.
But this time around it seems a little bit different in the sense that the market's been swinging around in respect to the overall expectations around rate cuts. There's this big debate right now between, is it 25 basis points? So is it one cut typically? Or is it 50 basis points? There's arguments all over the place, and I think it's kind of unusual, Steve, to see the Fed causing uncertainty. Typically, they're ones that try to guide the economy on a more certain path, and this time around it seems like they're actually kind of creating more uncertainty. What do you think about that?
Stephen Hoedt:
Well, I don't disagree with you. In fact, it's funny you mentioned it. Rajiv and I were chatting on Bloomberg yesterday afternoon, in the wake of that Nick Timiraos article, which came out on The Wall Street Journal website in the middle of the afternoon, essentially putting the 50 basis point discussions squarely back on the table again. I think that we were both shocked by that, given that it seemed like the market had come to grips with the idea that we were only going to get 25 in September, and I think that they want 50 live for that meeting, based on the fact that Timiraos... He's widely viewed as a mouthpiece for the Fed during the quiet period in the run-in to the meeting. So I was shocked because it is not typical that we get this kind of messaging this late ahead of a Fed meeting, usually it's pretty well decided.
I think what's interesting to me about it is, the Fed's well aware that, if you look historically, at least over the last five cycles, if they start cutting with a 25 basis point cut, it means the economy's in good shape. If they go 50, it kind of has historically signaled that they have recession fears, or there's something else going on. I think that they're going to have to be really careful with their messaging, if they go 50, to not spook the market. Because historically, if they go 50, it means something's up. So again, I was shocked to see them put 50 back on the table. It felt to me like we were headed more toward 25 in September, and then if they wanted to go 50 at the next meeting, go for it. But, not start the cycle off with 50. It's going to be interesting to see what they do given the tone shift in the last two days.
George Mateyo:
Yeah, it's really unusual. I put some numbers on it. I was looking at the same thing last night when I saw that the futures markets... Which can move around wildly, so you don't want to hang your hat on it too much. But two days ago, the future markets were kind of like an 80/20 split between the 50 and 25. Or in other words, there was an 80% chance that they were going to cut 25, and a 20% chance they would cut 50, and now those odds have shifted almost dramatically. Not quite all the way around, but it's probably a 50/50 split. And that article that you mentioned, Steve, really kind of got things going again.
I think there's probably justification for the Fed to cut rates by 50 basis points in the sense that they've tightened a lot, so those in the camp that think we're going to probably see 50 basis points could suggest the Fed has really taken away a lot of stimulus, and they have room to do that. But I tend to agree with you, I think they've got to be pretty careful here. My best case, my thought anyways, it's just my opinion, is if the Fed should do 25 and be kind of really dovish about it saying, "Look, we're going to start gradually." The institution itself is more of a gradualist institution.
So if they, to your point, go 50, that would kind of shock the system a little bit too much, and inflation really isn't that much under control. It's come down a lot. It's kind of close to the target, but we also saw a few things underneath the hood this week that suggest that inflation is still somewhat sticky. So I think they have to be careful not to ignite the [inaudible 00:12:46] too much, but we'll see. I think the bigger takeaway for our clients is that people have probably been hiding out in cash because money market yields have been elevated for quite some time as the short-term rates of the Fed sets have been maintained for quite some time as well.
Cash has been a good investment really for the past couple of years. Stocks have done better, and other things have done better too, but cash has given you at least a competitive return. Once the Fed starts cutting rates, those returns won't be as attractive and those yields will start coming down. So we still think it makes sense to kind of move out your excess cash, move it in to high quality fixed income, high quality equities, and really try to find a more productive source for your money going forward as rates start going down. 50/25, that's kind going to be an academic exercise in the near term. We still have the elections to contend with, so we still think some volatility might arise. But again, using your excess cash to really find a more productive place for your portfolio, we think it makes a lot of sense.
Brian Pietrangelo:
Well, thanks for the conversation today, George and Steve. 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 4:
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