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 unlock the mysteries of the markets and investing. Today is Friday, October 27th, 2023. I'm Brian Pietrangelo, and welcome to the podcast. As we prepare our recording for this morning, we continue to pause and reflect on the war between Israel and Hamas and the horrific human casualties that we're seeing, and now also US involvement in the conflict in Syria. Plus terrible tragedies here at home in the state of Maine this week. As we reflect on those events, which are certainly significantly more important than ourselves, we also realize we need to turn back to the purpose of our podcast, which is to try and bring you up to speed on this week's market and economic news.
So with me today, I'd 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, Steve Hoedt, Head of Equities, and Rajeev Sharma, Head of Fixed Income. And for today's podcast, we have a special treat for you. No, not in terms of Halloween, which is next week by the way, but in terms of a special portion of our conversation to celebrate the 100th episode of the Key Wealth Matters podcast. So after we discuss our usual weekly market and economic recap topics, our special treat is that we'll hear from our experts as to some of their favorite investing principles that they have learned and still use over their professional careers and personal lives. We think our listeners will especially enjoy this, so stay tuned. 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, which we talk about and reference every Wednesday. In addition, if you have any questions or need more information, please reach out to your financial advisor.
In terms of this week's news, we've got a lot to report, so we'll start with the economic data for the week. Leading off with Wednesday where we had new home sales up for the month of September. On Thursday, we saw initial unemployment claims for the week ending October 21st, came in at 210,000, which remained low and were up 10,000 compared with the previous week, but almost exactly the same as two weeks ago. So that's consistency for you as the job market remains resilient for now. Also, on Thursday, the advanced estimate for the third quarter 2023 real GDP or gross domestic product for the United States came in at a 4.9% annualized rate, which was higher than expected and more than double for the second quarter, which was at 2.1%. So this continues to be boosted by consumer spending and it's good news to keep the economy on track.
And finally, just this morning, the report on personal consumption's expenditures index of inflation, otherwise known as PCE was released and it showed that overall PCE inflation rose 3.4% year-over-year for the month of September, which is the third month in a row at that level. However, the measure that the Fed keeps an eye on for policy decisions is core PCE inflation, which excludes the more volatile sub-components of food and energy. And that increased 3.7% year-over-year for September, modestly lower than 3.8% for August. And the Federal Reserve is highly likely to pause next week given the directional slowing of PCE inflation as part of their dual mandate and wait for additional data, including the employment situation next Friday to consider for the December meeting. But we'll certainly give Rajeev the opportunity to share his insights with us a little later in the podcast.
Also, earlier in the week in Washington, Mike Johnson, Republican from Louisiana was named speaker of the House, possibly bringing a little bit of stability back to the dysfunction that we see within the capital. We'll also talk third quarter earnings releases from some big companies this past week and we'll preview next week's FOMC meeting. So George, let's turn to you for your reaction to this week's economic news and see if you think the classic Halloween pillow case will be full of economic tricks or treats. George.

George Mateyo:
So Brian, I think there's probably a bit of each that could be gleaned from this past week in terms of tricks and treats, but mostly I think there's probably a week full of treats on the economic side. Generally speaking, the numbers were pretty strong and probably stronger than expected. Maybe turning to inflation first. Inflation was probably a little bit stronger than expected. It's coming down and we've talked about that on these podcasts before, but it's still somewhat elevated and kind of sticky as people might call it. So we're making some progress there, but not a whole lot. We're still kind of in that kind of three to 4% range, which is obviously higher than two, the Fed's official target. So there's still some wood to chop there, but again, the trend is still our friend, if you will, in the sense that it has come down a little bit from where it was this past summer.
I think also in the treat category you could say the jobs numbers were pretty decent as well. We look at things like early indications of unemployment or measuring the overall strength of the labor market and something called employment claims actually did rise this past week, but it wasn't anything too worrisome. Typically, when you start to see those numbers kind of float around 325, 329,000, that probably suggests that things are really slowing down. The numbers this week are so low at 200 thousands. That said inside the trick category, there were a few things in those numbers that suggest that people who are unfortunately unemployed are probably having a little tougher time finding work in the sense that once you're filing unemployment, those numbers kind of pick up a little bit and we actually see those numbers kind of build a little bit. Maybe that's strike related. Maybe there's other things that are somewhat maybe boosting those numbers, but I think overall the numbers suggest that things are okay in the labor market and still relatively healthy.
And then lastly, I kind of point to the fact that overall consumer spending continues to be pretty brisk and also income levels based on wages was also pretty healthy for the past month or so as well. We got some numbers on that this morning. So I think overall, I think it's probably a situation where the economy is doing quite well, slowing a little bit at the margin. I think the big number that people probably focus on this week, even though it's backward looking, I think it still deserves a mention, which is the overall measure of the entire economy, which is measured by something called GDP or gross domestic product. That number rose almost 5% year-over-year.
The consensus forecast, I think it was around three and half percent. So the consensus missed it by a lot. And not only was the consensus wrong coming into this report, but four months ago, many people in the consensus community thought that the economy would be growing close to zero. So we're kind of well above that, for sure. I mean, five's a lot greater than zero, and the overall nominal level of GDP right now is really quite extraordinarily high. A lot of that, again, is being boosted by spending and the consumer, again, is a big part of that overall number, but we saw other parts of the economy growing probably faster than expected too. So I would guess, Steve, what you're seeing on the company side is probably a reflection of that in the sense that we've talked about nominal GDP as being really kind of a correlation, a high correlation with that and overall revenues. So what have you seen this week with respect to earnings and corporate profits as we go through the quarter?

Stephen Hoedt:
Well, we've gotten both treats and tricks, George. So if you look at the actual numbers that are coming through, both revenue and EPS are surprising modestly to the upside, and we're on pace to see year-over-year growth in both revenues and earnings, if you extrapolate the current beat rate out through the end of earnings season. And I say that because right now we're about halfway through, we've got right around 250 of the S&P 500 companies that will have reported by the end of the week, so we're making a little bit of a guess there. It looks like earnings at the end of earning season will be growing somewhere between four and 5% year-over-year, which is kind of in line with those GDP numbers that you're saying. And if you look back where we were a year ago, this kind of brings us out of this quote, unquote, "earnings recession" because it would mean that earnings would hit a new high as we head head into the fourth quarter.
The trick in this has been that companies that have been beating on both top and bottom lines are only up about a half a percent on average relative to a beat. Normally when you double beat, you go up a percent over the last five years on average. And double misses are just getting smacked. They're down 6% on average versus a minus 3% move typically. So it's really been a rough earning season. I think there have been some companies that have thrown in the towel on maybe what their expectations were for the year. October earning season is usually rough because you tend to get companies that have been maybe living on hopes and dreams for the first half of the year. You get a reality check in the third quarter, that numbers are going to have to be adjusted. So you're getting a little bit of that, but I will admit that it's been a pretty rough row to hoe so far this quarter.

George Mateyo:
So Rajeev, on the fixed income side, we probably should acknowledge the fact that next week could be an interesting week full of tricks and treats for you as well. We've got the Fed coming down on us, and look, we talk about it's rates pretty soon. What are you seeing in the bond market this week?

Rajeev Sharma:
Well, definitely a lot of tricks and treats in the bond market, George, but the big thing that everybody's looking at is the FOMC meeting next week, and all expectations are that the Fed will keep rates unchanged for that meeting. Some of the reasons for why these expectations are there is we have geopolitical risk, which is always an X factor. The recent surge in rates across the yield curve has almost served as a rate hike in itself. We had the ECB pausing yesterday for the first time in over a year. And then you have that core PCE price index coming in softer than expected. So if we look at that PCE print in isolation, it really does feel like it's playing into the soft landing narrative that the Fed wants us to believe in. It caused yields in the front end of the yield curve to move lower.
That lower than expected core PCE number outweighed the positive surprise that you mentioned about the GDP data. So we saw two year yields push lower, we saw SOFR futures yields. They also went down a couple of basis points on the day. There was some initial confusion on how to balance both the PCE data and the GDP data. You have a stronger economy, so that plays into the Fed being higher for longer, keeping the Fed in play, but then you look at the lower inflation data, so maybe that takes the Fed out of the equation. And bond traders, I believe were really caught off guard how to position. They were really positioned for a bear steepener going into that GDP print. A bear steepener, in other words, is betting that long-term bond rates would increase at a faster pace than shorter dated ones. Quite the opposite occurred.
We saw a front end actually move lower, and that leads to our conviction here to maintain a duration discipline. And also like the Fed, we also remain data dependent as well. So the data dependency that we're seeing in the market, it's leading to the expectation that the Fed will remain on hold at the next meeting, which is next week. And in all likelihood, I think the Fed could really be done raising rates, to be all in all, I think they might be done. But the big question is does the Fed stick to that narrative of higher for longer? And if they stick to that narrative, I don't think the market's going to like that. The market really wants to see the Fed start to talk about rate cuts. They're not doing it. That narrative that we've seen from the Fed is really playing a big role in keeping the 10 year Treasury note yield trending towards that 5% that we've been seeing for the last couple of weeks.
And as soon as we got to that 5% point earlier this week, we saw buyers step in. And they stepped in a big way and got us down to around 485 on the 10 year. We also had a $38 billion seven year treasury option this week. All expectations were that it would not do well, it actually did well, and I think it has a lot to do with the fact that investors are getting comfortable with adding some duration. You've got month end around the corner, maybe investors are looking at adding duration around this time. Bonds have rallied post the data yesterday, and I do expect some of this rally to maybe stall next week because we do have the FOMC meeting next week. We have Treasury funding announcements next week. But all in all, I think the market really is looking at opportunities to add duration in this market and then they're taking advantage of some of these rates.
I also want to point out that we did see a slowdown in new issuance for corporate bonds this week, and I think that's very important because we've talked about credit spreads on these calls before, and we only had about 5 billion in new issuance for investment grade and we're on track for the slowest October in over a decade. October is generally a blockbuster month for new issuance. It's slowed down a little bit this month. That coupled with solid earnings announcement from some of the bigger issuers, it led to credit spreads moving tighter this week. And for investment grade, we see credit spreads around 126 basis points over US Treasuries. That's less than the one year average, which is 130 basis points.
So we're well below the wides that we saw in credit spreads for investment grade. The wides were back in March when we had the banking crisis. We saw credit spreads around 160 basis points at that time. So it seems very comfortable right now in credit land, and I think that the demand remains there. The demand is robust, it should keep credit spreads range bound in the near term, and we're not showing any panic signs in credit spreads right now of an economic recession.

Brian Pietrangelo:
So thanks for the shortened discussion today for today's economic and market recap so that we can now turn to the special portion of our podcast to hear from each one of you on one or two of your favorite investing principles that you've embraced and have used over your illustrious careers that might be helpful to our listeners. So George, let's start with you with some of your favorites.

George Mateyo:
Well, Brian, I think I could probably think about a lot of things that I've taken to heart over the past several years of my career, but one of which I kind of often refer to is the fact that markets don't care about good or bad, markets care about better or worse. Meaning fortunately there's all kinds of bad news that we have to process in the investment business and really kind of throughout life, but oftentimes the markets really are somewhat agnostic about that in the sense they want to see incremental progress and maybe monitor if things are getting better or worse. And so I think it's sometimes the second derivative that the markets care most about, not so much the actual news in itself.
And then kind of related to that, I had a boss that once told me that don't confuse genius for the bull market. Maybe he was talking to me, he probably was. And the idea is sometimes a rising tide does lift all boats, but you have to be more discerning amidst some market volatility on the upside as well as the downside. And he often used to say as well that you shouldn't equate motion with progress, meaning sometimes we often see things moving on our screen or moving around the news flow, and we often put an outside importance on those things as well. So I think those are things that I look to as things in my career that have been helpful.
I'd also acknowledge, Brian, really quickly that a really legendary person named Byron Wien passed away this past week. Byron is somebody I knew kind of casually, but he knew a lot more people than I could even acknowledge, but he often used to talk about the fact that when you meet somebody new, treat them as your friend. And really I think that's kind of a good way to kind of end my thoughts on key principles for us to focus on.

Brian Pietrangelo:
Fantastic, George. Thanks for sharing that. How about you, Steve?

Stephen Hoedt:
I'll give you two, Brian. So the first one is always know your edge. And what I mean by that is if you're going to place an investment, you better understand exactly why you are putting that position on and understand why you're different from consensus. Because if your view isn't different from consensus, then you're not going to have any performance come out of that position. And quite frankly, we're lucky here because we've got two sources of edge that come from, one comes from our clients who are listening to this podcast, and that is they trust us to invest their money for the long-term. And we compete in the market daily with people who get measured on weekly and monthly performance in some instances. So having a true long-term orientation helps us win in the markets. And then the other one is myself and my team, we have to put the puzzle pieces together differently than other folks if we want to have an edge, so we know what our edge is. If you're an investor, you better know what yours is. If you don't know what it is, you don't have one.
And then the second one is always place meaningful bets. I can't tell you how often early in my career, whether it's myself or other people, you come up with a great investment idea, you put it in a portfolio, but you haven't sized the position large enough to make an impact on the portfolio's return. So think about maybe you picked a stock and it goes up 50%, but you only have a 1% position on in the portfolio. You didn't really do yourself any favors by picking that winner. So we really focus on managing our risk within the portfolio to allow us to take meaningful bets on the ideas that we think are truly differentiated and give us the ability to generate returns for the client. So always place meaningful bets is my second one.

Brian Pietrangelo:
Spoken from a true investor running stock portfolio, Steve. Thanks so much for sharing with us. And finally, Rajeev, what are your thoughts?

Rajeev Sharma:
Well, thank you, Brian. I really feel that throughout my career there's been a couple of very solid investing principles that I've stuck with. One of them that comes to mind is the fact that always listen to your client what their risk tolerance is, adhere to that. There's no gray area here. When we work with our clients, we really want to do what's right for them. We work for them, we craft investment policy statements with them, and we never want to have a gray area on investment policy statement or taking an outside risk the client is not prepared for. So I think listening to the client is extremely important. I think I've worked with clients in the past that we've really tried to cover every single scenario, so to make sure that we're not going to do something outside of their best interest. And I think that's very important for us.
And I'd say the second investment principle that I really stuck with is the fact that you want to create a diversified portfolio. We construct portfolios for our clients. We look at asset classes in fixed income, we look at security selection, and when we craft a portfolio, we don't want to have any single adverse event negatively impact the entire portfolio. So you want to be diversified, you want to have diversity of asset class, you want to have diversity of securities. It's extremely important. We've seen it in the past where there's the GFC back in 2008 or the recent banking prices we saw this year. No single adverse event should be enough to take out an entire portfolio, and I think it's very important to be diversified. But I'm not going to stop right there, Brian, I'm not going to let you off the hook. What are your investment principles that we're talking about? What's close to your heart, Brian?

Brian Pietrangelo:
Oh, thanks, Rajeev. I appreciate it. So one of mine is also along the same lines as yours within diversification, but I go to the asset allocation level. So if you go back to those of us that have studied a couple decades ago, Roger Hipperson and Rex Sinfield talked about their studies in their research that concluded the prominent driver of an investor's portfolio performance is related to their overall asset allocation, which is the mix of your stocks, bonds, and cash relative to what your goals and objectives are, rather than trying to time the market or individual security selection.
So as a result, I kind of believe asset allocation is really an important aspect of why we consider and why I personally have considered in my own investment strategy this core and explore strategy or philosophy where we're using the low cost index based investing to cover the main or core areas of asset allocation. And then we also add other areas of active management or private capital or alternatives to round out our positions on the explore area of your portfolio. And doing that, in my opinion, really balances the risk that you have in addition to where you want to concentrate your portfolio over the long-term.
My second one is something I learned from my dad who was in the banking business for 35 years, and as I grew up in that, as important as diversification is, the saying that I've heard is, you can't diversify yourself to retirement. So therefore, savings and accumulation is a really important component of investing success because it starts with the saving side of the equation that allows you to then invest earlier in your career, take the advantage of compound accumulation of returns, take advantage of things like dollar cost averaging into the market, taking advantage of things when the market is down, being willing to have money on the sidelines to invest when you want to buy low and sell high. So that would be my second one that I came to really love and enjoy from the perspective of not only my personal investing habits, but also really helping clients and young investors help to save for their overall career.
Well, thanks for the extra special conversation today, George, Steve and Rajeev. We appreciate your insights as well as a glimpse into a few of your favorite investing principles. In addition, I'd like to thank our extended team behind the scenes that helps to assemble and distribute this podcast each week as it's a tremendous help that supported our ability to get to our 100th episode. Quentin Jenkins, our production expert, Sarah Fay, Bethany Hench, and Arlan Grave from our marketing team, Laura Marmora from our public relations and media team, and Tina Myers from our Key Wealth Institute.
Also, thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app and maybe you've got a few of your investing principles that you like as well. In addition, 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 achieve your financial success.

Speaker 5:
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