Brian Pietrangelo [00:00]
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, December 12th, 2025. I'm Brian Pietrangelo, and welcome to the podcast. And before we begin today's conversation, we would like to wish everybody out there a happy holiday season for every religion and especially a Merry Christmas as we get into the December holidays. Also, a program note due to those holidays and some scheduling opportunities, this will be our last podcast of 2025.So we want to make sure we wish everybody a great holiday season. 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, Steve Hoedt, Head of Equities, Rajeev Sharma, Head of Fixed Income, and Cindy Honcharenko, Director of Fixed Income Portfolio Management. As a reminder, a lot of great content is available on key.com/wealth insights, including updates from our Wealth Institute on many different subjects, and especially our outlook for 2026 as we just posted it, and take a look to see what we have to say about the upcoming year. 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 activity, the economic release schedule on the calendar was fairly light this week as we continue to have various delays due to the lapse in information gathering from the government shutdown a few months ago. As an example, on a delayed basis, we will not get the all-important employment situation from the Bureau of Labor Statistics for the months of October and November until next week on the 16th.We're also still waiting for the first estimate of the third quarter 2025 GDP report, and that won't come out until the 23rd of December. So let's turn to data that we do have. And this week we came out with the unemployment claims on an initial basis from the Department of Labor for the week ending December 6, and the number was 236,000, which was an increase of 44,000 from the prior week, which looks pretty big. However, let's diagnose the numbers. The week ending November 29th, the prior week, was the week of Thanksgiving, so the claims are going to be lower due to that fact that there was the Thanksgiving holiday. So if we go back to the week ending November 22nd, when the numbers were 217,000, this week's increase only really is about 19,000 on an increase, which doesn't sound as bad, but we'll continue to watch those numbers on behalf of our read on the economy. But net numbers are still pretty low, which is a favorable sign. And second, we got the job openings report through the JOLTS report, as it is known from the Bureau of Labor Statistics, where we got two months in one, and that came out earlier this week for the months of September and October, still delayed from the government shutdown. And we did see a little bit of an increase from August in those numbers for September and October at around 7.7 million job openings. So fairly stable there, not too much change in the news, but generally an increase is possibly systematic for the seasonal updates or it's just a decent read. Either way, we'll continue to watch that number going into the new year. And third and most importantly, the big news for the week was the Federal Open Market Committee for the Fed that occurred on this past Wednesday with the press release and the decision to lower rates. Now, this is the third consecutive meeting that the Fed has lowered rates for a total of three times this year in 2025, but the meeting had a lot of more content to it and a lot of deeper discussion that we will cover during today's podcast. So, as it is very important, we'll get right to Cindy Honcharenko to give us a recap of the FOMC meeting and the implications for the markets and the economy. Cindy?

Cindy Honcharenko [4:02]
The committee cut the federal funds rate by 25 basis points, bringing the target range to three and a half to three and three quarter percent. This marks another step in the Fed's gradual easing cycle as inflation continues to move lower and the labor market cools. But the real story isn't the cut itself. It was the three dissents behind it. Two officials thought the Fed shouldn't cut at all, and one argued the Fed should cut even more. And that kind of split is rare, especially on the rate-lowering decision. So let's unpack it. Austan Goolsbee and Jeffrey Schmid dissented because they preferred to hold rates steady. Their concern is that inflation progress, while real, may not be durable enough to justify easing at this stage. They worry about cutting too soon and risking re-acceleration in prices. On the other side was Stephen Myron, who dissented for the opposite reason. He actually wanted a larger 50 basis point cut. He argued that the labor market has cooled significantly and that inflation is steadily drifting toward target, so a faster adjustment was appropriate.
Taken together, these three dissents mark the most fractured vote we've seen in years, and they tell us something important. The Fed's no longer aligned on how restrictive policy still needs to be and the center of gravity inside the committee is widening and that will shape the policy debate into 2026. So what did the Fed say? The Fed acknowledged continued disinflation, noting inflation was eased over the past year, even if the progress has been a little uneven. Policymakers also said the labor market has shifted from hot to balanced, with job growth moderating and wage pressures cooling. They described policy as restrictive, but less so than earlier in the year. And now they see the risk to inflation and employment as more evenly balanced. We also got a new economic projections. The SEP and the dot plot shows the Fed expects only one rate cut in 2026. That's a slower, shallower easing path than markets anticipated. The committee also announced a restart of the U.S. Treasury purchases to modestly expand the balance sheet. Importantly, policymakers frame this as performing a technical reserve management adjustment. It's about maintaining ample reserves as the balance sheet runoff tightened conditions in the money markets. What did Powell say? Well, he struck a thoughtful but cautious tone. He said that the committee felt a modest adjustment was appropriate given the combination of easing inflation and cooling labor market. He emphasized that the Fed is not declaring a victory on inflation, that there's more work to do, and they need to see continued progress before moving more decisively. He also addressed the usual pattern of dissent, describing them as genuine differences in interpreting the data. He portrayed the committee as unified in goals, but wrestling with timing and magnitude, which is exactly what you would expect at this late stage of the disinflation process. As far as the balance sheet, he was extremely clear. This is about ensuring adequate reserves, not about stimulating the economy. And when asked about the single 2026 rate cut in the dot plot, he stressed that it's not a commitment. Future policy will depend on the data, especially inflation's path and how the labor market evolves. So, what does this all mean for next year? Now, the Fed's baseline is just one rate cut in 2026. Additional cuts are possible, but they will require either cleaner disinflation or a more noticeable slowdown in employment. The split vote underscores the uncertainty, the officials disagreeing on both sides, some worries about inflation, others concerned about growth. The path of rates in 2026 is far from settled. So, markets should expect higher policy volatility, more debate inside the committee, and a very data-dependent Fed. Rajeev and George, I'd love to hear your take on this week's FOMC meeting and announcement.

George Mateyo [08:18]
Well, Cindy, first and foremost, happy anniversary. I'm not going to say what year it is, but happy anniversary to you. And thanks for all your great years of service here with us at Key Private Bank and Key Wealth.

Cindy Honcharenko [8:28]
Thank you very much.

George Mateyo [08:30]
You're very welcome. I'm going to look back and say the Dow was probably, I don't know, maybe a few thousand points lower maybe. But anyway, we won't go down that path. But nonetheless, thank you and congratulations and happy anniversary.

Cindy Honcharenko [8:42]
Thank you.

George Mateyo [08:42]
In terms of the Fed, though, I guess we should pretty much say happy anniversary to Jay Powell soon, too. I think his term is coming up to an end sometime relatively soon. And this could, in fact, be his last rate cut ever, maybe. I think there's a strong likelihood that they might not cut rates again as his term is chair anyway. And of course, he could stay on his governor for a few more years, but it seems like we kind of have this thought that maybe there'll be a new chair sometime in the spring of next year. And as you suggested, maybe the Fed will be on hold until then, or maybe even longer, potentially. But I think the overall tenure was a pretty growthy outlook in the sense that they did lift their growth forecast in their projections. And I would probably say they're probably being a bit too cautious on the inflation side, where maybe there's some chance that maybe inflation runs a little bit hotter than what they're thinking if those gross numbers come to fruition. And frankly, the division is probably not a bad thing either. It’s probably a clear example to the administration that this is not just one person that can control what happens with interest rates, which, of course, is what some people might like, but I think it might be more complicated than that to actually achieve. So if nothing else, the Fed probably fades into the background a little bit as we shift the discussion to other things in the first half of this year, including the AI trade that we've talked a lot about and other things as well. But I think we'll probably have to, of course, navigate the uncertainty which comes with the new Fed share. I mean, that announcement could, of course, come any day. I guess, Rajeev, if you're looking at the overall appetite for risk markets, it seems like credit spreads continue to be well contained and pretty well behaved. We have seen some yields kind of pop up other parts of the world, though. I’m not sure if you want to comment on either one of those two things, but that would probably be something to pay attention to, in my view, in terms of the appetite for risk and also what's happening overseas. What do you make of that?

Rajeev Sharma[10:26]
Well, it's a very good point, George. The overall sentiment after the Fed was that yields are reflecting the fact that maybe we don't get the three rate cuts that the market anticipated for next year. And so the market is right now at a 25% odds of a rate cut in January, at the January 28th meeting, which is quite significantly lower than what the market was thinking before the Fed meeting. If you look at credit spreads, they've been very, very contained. We had a lot of supply this week before the Fed. Market digested that, and...investment grade and high-yield spreads are both pretty much where they started the week at these almost a few basis points away from multi-decade tights that we saw in September. So credit spreads haven't really reflected the fact that we've had so much supply this year. And I think that it's very interesting that so much demand continues to be for credit. Especially investment grid credit, very high quality credit that you're getting very good yields at. And it's an income play, really, for the market right now. And I think that's going to continue into next year. I do think that the market is anticipating maybe two or three rate cuts next year. I think the credit markets are also anticipating that. If we don't get those, then I do think that high yield could come under some pressure, especially the lower rated bonds that have to go back into the market to refinance their existing debt. And that's going to be tough on some of those triple-C rated bonds out there. And that's going to be something very important to monitor.

Brian Pietrangelo [11:57]
You know, George, you've said many times that it's not as important as to when or if the Fed is cutting rates, but more important as to why the Fed is cutting rates, whether it's part of the dual mandate on inflation coming down or jobs market suffering. I was a little surprised that I haven't really heard Jay Powell talk about the fact that he thinks some of the jobs data may be overstated and therefore weaker than expected. Do you have any thoughts on that?

George Mateyo [12:21]
I don't, Brian. I mean, I think we all kind of acknowledge that the data is a little bit fuzzy in general, and it's probably even fuzzier given the government shutdown essentially negated some data. In other words, there are some surveys and some data that just wasn't collected because of the shutdown, and it probably won't ever be collected. And we're still getting data that actually was, you know, a few months delayed. So I think that might be some out of it. But I don't think there's anything untoward in the sense that the data is bad data. So in other words, we have to catch up from this period of the shutdown and get behind us. And then maybe sometime next year, we can restart the clock and getting things a bit more on a clear footing. But I do think it is true to say that what you pointed out with respect to it doesn't matter if they're cutting as to why they're cutting. And I think what we've suggested is that these rate cuts for the last several months anyway, have been more focused on just preserving and maintaining economic growth as opposed to try and restart it. And that's a key difference in the sense that sometimes when the Fed is cutting rates, they're doing so because the economy is contracting, frankly, and they've got to find a way to kind of resurrect growth. And we don't seem to have that right now. But Steve, maybe to get you into the conversation, one thing that's also apparent right now is that the US dollar has been under some pressure. And I don't know if you've got any views on that, but I think that's another tell we have to watch in terms of what the overall market sentiment might be with respect to risk. So any thoughts on the dollar, Steve?

Stephen Hoedt [13:44]
I mean, I think, George, it's one of those kind of wild cards as we head into 2026.If you look at it historically, large moves that happen very fast in the currency markets are the thing you need to be afraid of. If you get slower adjustments on a quarterly, half yearly, whatever basis, corporations are able to hedge out whatever the impact is, and it doesn't really have too much of a positive or negative impact on earnings for corporate America. When you get fast moves, though, those are not hedgeable and it can create impact. Lately, obviously, we've seen a dollar have about of weakness. We’ve seen commodities across the board, again, start to reflect that. Commodities are priced in dollars, so when the dollar goes down, commodity prices go up. The one exception to that has been oil for a host of reasons, but basically all metals and base metals have had a great last couple of months. The other question is, as we go into next year, are we going to see acceleration in this? I think that our point of view is that the dollar has migrated to a lower trading range, but that we don't see some kind of imminent collapse. And basically, you're going to see it move around here and using the dollar index as a kind of a proxy. There was a period of time where the dollar was well above 100 over the last few years. And lately, I think the view is from our shop that 95, 96 to 100 is probably the new trading range that's going to be established. We don't see some kind of imminent collapse to like 80, which would cause, again, problems for corporate America in terms of hedging.

George Mateyo [15:45]
Steve, I think we should probably get your thoughts on AI, right? I mean, that's one thing that many corporations are talking about. There was an interesting survey that came out just a few weeks ago that suggested those companies that actually talk about AI have seen their stock price actually outperform those companies that don't talk about AI. But at the same time, the market seems to be rotating a little bit away from that in terms of some of the recent underperformance by some of these major tech stocks. Do you have any thoughts on what's happening inside the market on the AI theme?

Stephen Hoedt [16:15]
It's been an interesting week there too, George, with two big news reports from companies involved in the AI ecosystem. You had Oracle earlier this week and Broadcom last night, both of which are, maybe they're not in the MAG7, but...But they're certainly mega-cap tech, right? So when we think about it, if you look at the Oracle news, the market was a little bit surprised by the magnitude of investment that Oracle stated that it was going to continue to make. I think that the feeling is that we're getting to a point with this where the market is discerning some winners and losers, the OpenAI, Oracle, NVIDIA ecosystem has been kind of on the outs lately, and the Google, Broadcom, Celestica ecosystem has been on the rise. And the fact that Oracle was talking the numbers that they were, I think the market was a little bit taken aback by it again. Then when Broadcom comes out last night, though, and Broadcom kind of threw some cold water on people's expectations for the Google Broadcom ecosystem, because they again talked about, they refused actually to really give guidance on how much we could see in terms of sales over the next 18 months they've got lead times of 6 to 12 months. So the fact that they're not willing to give guidance out to 18 kind of made the market go, right? So we've got that stock down today, a similar amount that Oracle was down yesterday. So both ecosystems took a hit this week. I think that the message for me on this is that as we head into 2026, I really do think it's not so much a AI trade as it is a differentiation of the potential winners and losers in AI, number one. And that could be the AI stocks and companies themselves. But more importantly, I think it's the companies that are going to be able to figure out how to leverage this technology to increase productivity. And that's a...a very clear thing that we're starting to see, but I don't really think we've seen the labor market impact in the economy yet. Maybe we start to see that dig in a little bit next year. I think it's still to be determined.

Brian Pietrangelo [18:41]
You know, Steve, we were talking earlier this morning with George and everybody on the team about maybe a flashback to the 1990s and a comment that you wanted to make as we go into the end of the year. What are your thoughts on that?

Stephen Hoedt [18:52]
Yeah, it wasn't lost on me that this week. Cisco Systems reached a new all-time high. And the last time it had an all-time high was in March of 2000. And at that point, I think I mentioned it to George a little earlier this morning, that the earnings forecasts necessary to justify the valuation exceeded 5% of GDP for the US economy at the time. I mean, the scale of the bubble back then was just mind-boggling. And, you know, I think it's kind of brought into focus again. You know, there's a lot of talk about bubbles right now. It feels like there are things that are similar to '99 to 2000, 2001, but there's also a lot of stuff that's very different. So, you know, I think it gives us pause though to think that it took almost 25 years to get to a place where we have that stock at new highs. And the thing that I would like to highlight for everybody is, look, Cisco has been a real company with real earnings and real products and all that for the last 25 years. But yet, because the valuation got so overcooked, you could not make money as an investor in that stock until the last few years, as we've seen things kind of improve there and grind its way higher to a new all-time high. So I'm sure there are some folks who are doing cartwheels because they can finally unload the stock they bought at the peak for a measly gain after 25 years, Brian.

Brian Pietrangelo [00:20:38]
Well, thanks, Steve. That's a great segue to go back to George to finish up our year. As we get towards the end of the year, George, any great reminders for our investors and our listeners out there on topics of concentration and diversification and valuation?

George Mateyo [00:20:51]
Shun, shun, shun, right? A lot of things there, concentration, valuation, and so forth. I think, well, look, I think, first of all, I wish everybody a great holiday. Take some time to relax and just be with family and friends and turn off the TV for a while. Markets will still be there when we come back. And it could be a little choppy next few weeks or so as liquidity dries up and other things maybe take center stage. But I do think that we are still really bullish on the long-term outlook of our economy, big believers of human ingenuity. And I think irrespective of political noise and other things like that will be better off for it.

But I do take your point, Brian, very seriously as well to the point, which is being diversified. And as we've said many times on the last few calls and for much of the podcast this year, we've talked about the fact that the market has gotten pretty concentrated, which suggests that there's probably been this dominance of one theme kind of taking over the market. And we think it is important to diversify and having some exposure there, but being measured in your exposure, knowing what you own, knowing why you own it, and really trying to make sure your portfolio is diversified as possible, knowing that we just don't know what's going to happen next.

So we wish everybody a great holiday season, a happy, healthy new year, and we look forward to turning sometime in early January with you on this podcast. So thanks for listening. Happy holidays.

Brian Pietrangelo [00:22:09]
Well, thank you for the conversation today, George, Steve, Rajeev, and Cindy; we appreciate your insights. And as we said earlier, this is the last podcast for 2025. So on behalf of our Chief Investment Office here at Key Wealth, as well as our colleagues across the nation at KeyBank, we would like to wish you a very happy holiday season and a very Merry Christmas. 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 in the new year to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

Disclosures [00:23:01]
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