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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, August 9, 2024. I'm Brian Pietrangelo, and welcome to the podcast. Congratulations to all the athletes competing in the Olympics, especially Simone Biles for returning to glory and winning multiple gold medals after taking a break a few years ago recollecting herself and persisting through with the dominance of a champion. So great story there.
Speaker 1:Wonderful success and congratulations to Simone Biles. In addition, congratulations to Sydney McLaughlin LaVronne winning the gold medal in the 400 meeting hurdles in dominating fashion. What a great story there as well. Lastly, good luck to all those athletes that continue to compete as we look for the USAID to continue to collect multiple gold medals. Congratulations and good luck.
Speaker 1:For today's podcast, I'd like to introduce our panel of investing experts here to share their insights on this week's market activity and more. George Matteo, chief investment officer. Steve Haight, 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 adviser.
Speaker 1:Taking a look at this week's market and economic news, we've got a light economic calendar for only 2 updates, which is great because we wanna spend more time on the market side of our update this week. So earlier in the week on the economy side, we've got the overall Institute For Supply Management Services, PMI, or Purchasing Managers Index, which showed an increase in July over June. But more importantly, economic activity in the services sector has been expanding for the last 47th out of 50th months. So a great trend for the overall services economy for roughly the past 4 years. And secondly, the weekly initial unemployment claims for the week ending August 3rd came in at 233,000 yesterday, and that's a change from down 17,000 from the prior week.
Speaker 1:Now the interesting point here is that this number has been going up and down by roughly 20,000 increments over the past few weeks, which has caused a little bit of consternation. And we're trying to figure out whether this is just a short term volatility trend or there's something more important in terms of the unemployment claims with regard to the overall health of the jobs market going forward. Right now, it looks like just short term instability. And switching to the overall market side of our conversation, we're gonna spend a lot of time with our panel today on the market because there has been significant volatility, which started a little bit in Friday of last week coming off of some weaker economic reports. And then over the weekend and into Monday became very volatile in terms of downside losses, then a rebound throughout the month throughout the rest of the week, I should say, in terms of some volatility.
Speaker 1:So we're gonna dig in there. By doing that, Steve, let's talk with you first in terms of what's going on in the market, and what do you think it means for investors? Steve?
Speaker 2:Well, Brian, you know, I I'm as I sit here, and we look at the markets on Friday morning when we're recording this podcast, the S and P 500 is at 5316. And, you know, last Friday was 53 46. So you look at those two numbers, and you think, well, this has been a normal quiet week in August. Right? The S and P down less than a percent.
Speaker 2:Oh, okay. Wrong.
Speaker 3:Well, I I mean, when
Speaker 2:you think about what happened on Monday, it was it was truly total chaos, especially premarket open. We we went down and touched 51/19, and what was even more kind of crazy was what happened with the the VIX. The VIX is the Chicago Board Options Exchange Volatility Index. Last Friday, it was at 2339. It was as high as 65 premarket open on Monday.
Speaker 2:Now those were not necessarily tradable numbers. They were indications from the options market, and it opened much lower than that. But you had just true chaos, in the market. Because if you take a look historically, you typically don't get standard deviation moves like we saw premarket, except in times of of of true a crisis in the market. So 2,008, 2020, you know, you saw the, during 2020 during the COVID sell off.
Speaker 2:You you saw huge moves in in volatility that eclipse these numbers. You know, we've printed 80 in in the COVID crisis. But you're you're you're looking at those type of of moves, which are are very, very rare. And, you know, when we when we saw that, I think our our message to to to investors was, look. When you take a look at how this plays out historically, when you get this type of a crisis move or chaos in the markets, you you don't necessarily wanna rush in and buy right away.
Speaker 2:But you if you look historically, investors have been rewarded for for for being patient and putting positions on during these times of of market, maelstrom. When you look at what happened over the course this week, we had the biggest one day sell off and the biggest one day rally in the past 2 years all in the same week. And now we we sit almost unchanged. So it it it feels like we've we've kind of had a year's worth of price action in a week. I mean, I feel I just feel exhausted.
Speaker 2:When you look at what caused this, you know, I think a lot of people have pointed to the economic numbers last week. But, you know, George, it it seems like there was a whole bunch of macro that was that was going on behind the scenes that may have been influencing some of this kind of this volatility storm that we had much more so than the the jobs number.
Speaker 3:Yeah, Steve. I think you're a 100% correct. And, yeah, it is kinda funny to see, you know, point to point that we're pretty much right back where we started, a week or so ago. But, as you pointed out, it hasn't been the typical week by by a long shot. Yeah.
Speaker 3:This time next week, we're talking about the job number. We we I think we briefly mentioned things happened in Japan, but we probably didn't give it enough, credence. But that really, to me, seemed to be the, the epicenter of this volatility we've seen this week. And it's kind of esoteric to kinda talk about carry trades and things like that, but, basically, there are a lot of people that were banking on the fact that the Bank of Japan would keep their interest rates at 0 or or near 0 for a long period of time. They've been doing that, and they've been hinting that they would probably be raising it to some point.
Speaker 3:They actually did lift their their policy rate a little bit, not too long ago, but they really took the market by surprise, last Thursday morning when they essentially raised rates, without much, foreshadowing with that. And and the markets, as you pointed out, didn't take the news very kindly. We kind of saw the, begin strengthen at a pretty rapid clip, And then they kinda cascaded into the equity market there, Sunday morning. So you had a lot of exporting companies that really depend upon currency and a weaker currency for their growth prospects. And, when you have the currency moves as much as it did, it was kind of just amazing to see the Japanese stock market fall 12% in one day.
Speaker 3:I mean, we talked about 2% moves that you've seen this week, Steve, here in USRP market. The Japanese stock market was down 12%, and it was then it was up 10% the following day. So we've seen tremendous volatility, internationally as well. And I think that, you know, we're kind of at this point where we're sorting this out. There's been a lot of speculation as to how far these trades have become unwound and maybe where we are in the process of healing and kind of normalizing things.
Speaker 3:I don't think anybody really has a really good idea, frankly, as to how how much damage was done, how, how this actually both finally get resolved, how how far we're in the process of of addressing the situation. But I do think that, you know, the calmer heads are prevailing. So interesting enough, the same the same day that some of the economic news here back in United States started to kind of turn up a little bit better. Maybe not much as, not maybe not as weak as feared. The Bank of Japan then kind of came out and said, whoops.
Speaker 3:We're sorry. We won't, we won't surprise the market again. And I think the market kinda took that in stride. So we've seen this kind of, kinda this point in time right now where there's a lot of uncertainty. We talked about the fact that summers, are usually pretty, pretty soft to begin with in terms of trading volume.
Speaker 3:So we have a lot of volatility, probably more than normal. And, I don't think we're out of the woods just yet, but maybe, Steve, you think you think differently about that.
Speaker 2:No. It seems to me that that's that that's the the correct narrative. You know? I the thing that I continue to come back to is the way that credit markets behave. Because if you go back historically over the last 20 to 30 years, credit markets have been the key to understanding where we are in terms of risk for for equities.
Speaker 2:And while we did see the b, double a to 10 year spread move up from 1.50 ish over the last month to month and a half to up toward 180, You gotta view that in perspective, and that's really only back to the average level that we've seen in terms of of credit spreads over the last 5 years. So it's nowhere near the the, crisis type levels. For example, that spread blew out to over 400 basis points during the COVID sell off, right, as people were thinking that there was a huge economic problem. So I continue to watch the credit markets, and the credit markets right now don't tell me that there's anything that's amiss in terms of the economy. Right?
Speaker 2:I I think if we thought that this was if we were heading into some kind of a steep economic decline or a recession, you would see credit markets behaving much more weak than they are currently. So, you know, this seems to me that we're kind of in this that you used the phrase earlier. It's an uncertain period. We're kind of in between 2 economic regimes right now. We're we're we're kind of in a political mid, you know, half half time report, I guess, or whatever in between the two conventions.
Speaker 2:And and, you know, we're not we're gonna have more volatility probably due to that kind of stuff as we head into the fall. So I I I think that we've we've been talking for a while that we thought that summer into the fall would be a period of time when investors needed to be, you know, up in quality, and high conviction and diversified because we were heading into a period where where volatility was likely to increase. And while we sure didn't expect what we got on Monday, it it kind of fits the playbook for a period of of fairly high uncertainty. And as we get that uncertainty to come off, you know, assuming that we don't get some kind of exogenous shock from a war or whatever, I I think that the the the bias will be to see things reassert to the upside. Because if you look, you know, we still have economic growth.
Speaker 2:Yes. It's slowing, but there's economic growth, and inflation seems to, at least right now, be fairly under control. And if you get a fed that starts to become more accommodative toward the back end of the year, that's a a loosening of financial conditions, and those are all bullish equity market kind of conditions.
Speaker 3:Yeah. You're right about the slowdown, Steve. I mean, I think, you know, we were talking about this last week a little bit on the fly when we saw the weaker than expected payroll number come out. So to be to remind our listeners, we we saw a payroll gain of about a 114,000, and that was about 60,000 less than expected. That's not a big number in the context of a labor market that's a 100 and call it 58 or 59,000,000 people.
Speaker 3:But, it was enough to get the market a little bit, flustered. And, you know, I went back here. Actually, I kinda looked kind of pre pandemic. If you look kind of between the period of time of 1990 to 2019, the average number of jobs added in a month were a 119,000. So a 114 about a 119, you know, that's that's just splitting hairs.
Speaker 3:And, you know, again, I think it's probably fair to say that, yes, things are definitely slowing, so we've kinda decelerated from kinda kinda call it 200,000 a month or so to a 114. But anytime you get below a 114, anything you get really below 50,000 or maybe 75 to 50000 jobs a month, it suggests that things are really slowing down. So we're not really at the point where we're stalling out right now, but we are slowing down. And the consumer is hanging in there. I think there are, more and more signs that the consumer at the lower end of the income spectrum are struggling, and we have to keep greetings to that and pay attention to that.
Speaker 3:But overall, with large spending is, is hanging there pretty well. So we'll have to see how this plays out. I think that's really key to the margin story, Steve, in terms of what happens with corporate profits, and and, you know, we need to see these margins continue to expand or at least stay the same relative to where they've been over the past 5 years. But how is earning season been, you know, kinda transcending so far this quarter?
Speaker 2:Yeah. I would put I would point out 2 things. Number 1, that we had really high expectations coming into this quarter for earnings. And while earnings have been okay, it's been very hard for, companies across almost across the board to to beat those high expectations. So we're we're setting up for a quarter where, the the the the reaction from the market is is not going to be uniformly positive as we head out the other side.
Speaker 2:That said, you know, you're still looking at at earnings growth of 8% or 9%. So the numbers are are solidly in in the in the positive camp. Will it be enough to get revisions higher as we think about, you know, as we move out for for our forward earnings forecast? That's gonna be something that we're gonna be need to be watching because as long as the forward earnings line continues to move higher, the markets typically are in a in a positive position. So we don't wanna see revisions have to tilt negative because things haven't been as strong this quarter.
Speaker 2:But, you know, so far, I think we're in a place where revisions will be modestly higher, maybe not a step function as we come out of the quarter. The other thing that I would point out is we have yet to have the most important stock report, which is NVIDIA, and they report on August 28th. So almost a little little less than 3 weeks from now. And I think it'll be all eyes on that stock. And the other thing that I would point out about that reporting date is that's really gonna be like, it's the last real big week of vacation in the summer prior to the Labor Day weekend.
Speaker 2:So market conditions could be a little bit thin that week. So, the the reaction could be outsized. But, you know, I think that people right now are willing to give, to give the AI theme the benefit of the doubt. But, there have been some some hiccups with some of the ancillary names. Another one of the semiconductor companies that touches on that space.
Speaker 2:Supermicro did not have a great number earlier this week. So it'll be very interesting to see what happens when NVIDIA reports, and how that is gonna play into this overall market theme, George.
Speaker 1:So, Steve, I've got one question for you and one question for you, George. When we think about all of this data and what it might mean for investors out there as how they look at the market, Steve, I'm going to use a nontechnical term, and I'd like to get your reaction to it. And the term is with it fragile or fragility, meaning not that the market is weak, but it seems like there's more sensitivity as it relates to the VIX and reaction that people are making to the slightest amount of news. What are your thoughts on that and how should investors think about it?
Speaker 2:So it seems to me, Brian, that there is a lot less liquidity at certain points right now. And that, I think, is a lot of what we saw over the weekend and into the open on Monday. Things got really sloppy really fast. And when you look at the the the liquidity measures, I mean, Bloomberg posts, measures of estimated trading liquidity in the S and P 500. And the index that they use has 100 being the long term average for S and P 500 liquidity.
Speaker 2:And as we sit today, it's at 60. So so we we have 40% less liquid market conditions today than we do relative to the long term. So that means when we get some kind of a shock, if you're in low liquidity conditions, it's gonna really have a an, an outsized impact. So I think we kinda got into a bit of a perfect storm on Monday where we had low liquidity, and then we had this kind of, exogenous stuff coming out of Japan, and and it all just kinda cascaded. I feel like if you look historically over the last few years, we've had a lot more of these kind of outsized reactions when we do have events, and it speaks to that lower liquidity kind of situation in the market.
Speaker 2:And it's something that we have to be aware of as market participants, for for sure because we we, obviously, we have to manage our our our exposures in that type of an environment, and it's different than than what it was maybe 10 years ago.
Speaker 1:Great, Steve. Thanks for that for our audience. And, George, to you, as we think about that volatility spiking, there's actually some counterintuitive data out there that it may be better just to do nothing and sit there with your financial plan because long term, it's somewhat advantageous. What what are your thoughts on the the VIX as it as it plays out?
Speaker 3:Yeah. I mean, the VIX and to be clear, VIX is something you could kinda find probably if you, you Google it or you can look at Yahoo Finance or some other traditional media, website and kinda track it there. But, typically, Brian, when you start to see VIX move about 2 standard deviations above its long term average. Right? So that kinda puts you in territory kinda mid thirties, upper 40 mid forties rather.
Speaker 3:You know, you can start to see that that's a point when fear is highest, and that's probably when most people feel like dumping stocks. But, conversely, you know, if you can hold on, as you pointed out, once you start to see that volatility spike, a high percentage of the time, like, really high percent of the time, a year forward, you're gonna be money good, meaning you're essentially gonna be okay, and and, and stock prices are generally higher than where they were a year prior. So it is something counterintuitive, and it feels kind of funny maybe to to, to buy when market prices are down. But, you know, typically, if things are on sale, you'd probably be buying them too. So we have to look at it that way also.
Speaker 3:And I think I would point out, actually, just yesterday, we celebrated or maybe acknowledged maybe not celebrated, but acknowledged the fact that 50 years to the day, president Nixon resigned from the White House. And, you know, I was, you know, just a couple years old when it happened, so I can't remember it vividly, but I I've read a lot of history about it. And it's a pretty tough time for America. Right? We have the war going on.
Speaker 3:We have rise inflation. We also had surging unemployment, so a lot of the bad things were happening, and the mood of the country was pretty grim. Since that period of time, the stock markets actually increased over 20,000%. I mean, that's just staggering. And we've had wars.
Speaker 3:We've had pandemics, of course. We've had, you know, financial crises and all kinds of things flare up. And yet again, you can kinda hold on and let's say let's say you have to be in the market for 50 years to kinda see those returns. But generally speaking, I think it's didn't generally work out, and stock prices are really kind of buoyed by innovation and ingenuity that we talked about in this call before, and that'll continue to happen, going forward time and time again, I think.
Speaker 1:Well, thanks for the conversation today, George and Steve. We appreciate your insights, and I know that our listeners do as well in terms of great content for investors. 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.
Speaker 1:So reach out to your relationship manager, portfolio strategist, or financial adviser 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.
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Speaker 3:4.