Brian Pietrangelo [00:00:01] 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 5th, I'm Brian Pietrangelo, and welcome to the podcast.
As we all know, earlier this week on Monday we celebrated Labor Day, which is a great national holiday, but I'm not so sure most people know about today's celebration, which is National 401(k) Day. The first observance began in 1996 and is credited to the Planned Sponsor Council of America and it is the first Friday after Labor Day. The day promotes retirement savings education, and the PSCA encourages companies to give their employees information about 401k so that they can get a great start on saving for their retirement. For a large portion of my career, I consulted with corporations and employees regarding 401(k) benefits and also personal wealth planning, and although not perfect, I believe both are essential for retirement success for most Americans.
And speaking of success, 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, and Rajeev Sharma, Head of Fixed Income. 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. 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, we have four major economic releases to give you an update on for the week. First, we'll talk about the Fed's Beige Book Report, which comes out two weeks in of the upcoming Federal Open Market Committee meeting on September 17th. Three key points to distill from that report were eight of the 12 Federal Reserve districts reported little or no change in economic activity since the prior report, and four districts reported only modest growth. Across many of those districts, there was reports of flat to declining consumer spending because many households' wages were failing to keep up with rising prices, and various context cited economic uncertainty as negative factors. And almost all, or 11 out of the 12 districts, described little or no change in the overall employment levels, while one district described a modest decline. So net net, the Bieige report gives the Fed the opportunity to distill that data in its decision-making policy, but overall it does look like the economic scenario is slowing in terms of activity.
Now the next three updates are all employment data related, so we'll go through them very quickly so you can get a pulse of what's happening. We'll begin first with the unemployment claims data that came in for the week ending August 30th and showed that initial claims were 237,000, just a mild increase of 8,000 from the previous week. That number has remained very stable and is still a positive indicator in terms of the employment market in that it has not gone up significantly. Also this week we had the job openings and labor turnover survey report which showed that job openings in the month of July fell to their lowest level in the past 10 months at $7.18 million and more importantly, with the exception for September of 2024, they fell to the lowest level since the post-pandemic peak of $12.1 million back in March of 2022. Also part of that report, quits and layoffs were relatively unchanged in July.
And finally, probably the most important report for the week just came out earlier this morning at 8.30 from the Bureau of Labor Statistics that gave us the employment situation, which has a number of components to it, the most notable being new non-farm payrolls. They came in for the month of August only up $22,000, which was significantly below estimates, and over in that month, gains in healthcare were partially offset by losses in federal government. Also, as is normal... The revisions for the prior two months in June and July were reported and showed a combined 21,000 less than previously reported. So net net, the month of August up 22,000, prior two revisions, down 21,00, so basically zero creation for the last three months. Now that does not include the actual numbers of increases that did incur in June or July, It just includes the net net in terms of revisions together with August Also, as part of that report, the unemployment rate for August ticked up one-tenth of a percent to 4.3 percent. This had been bouncing around from 4.0 to 4,2 percent for about 14 months and hadn't been at 4,3 percent since October of 2021.
So we'll continue to look at this data as it has implications for the Federal Reserve policy and the overall growth of the employment and labor markets. So we'll catch up with Rajeev and Steve as part of our conversation today, but we will begin with George to tee up the conversation around what's happening in the overall reaction to that economic data and the thoughts on what's happening for the remainder of the year. So George, what are your thoughts?
George Mateyo [00:05:21] So Brian, I think the big story economic wise this week, of course, is the labor market, the job market. We've been talking about this now for several months. It's kind of a key driver of what happens with policy. It's been a key drive with what happens, with markets, because of policy changes. And today's report probably didn't disappoint in that regard. Kind of coming into this expectations were kind of mulling around and the conviction was getting higher by the minute that the Fed would actually start, maybe resume, I should say. They're the cutting cycle by lowering rates sometime later this month at their scheduled meeting. And today's weekly expected report that you previewed just solidified that all the more. Question probably I'll ask Rajeev to talk about a minute is whether or not this actually suggests that there are more cuts coming later this year versus one or two initial cuts for the expectations anyway. So we'll see. But I think it's fair to say, as we've been talking about for quite some time, that things are softening, but they're not to the point of really deteriorating too much in the sense that we've seen some stability underneath the hood a little bit. But again, you have to recognize and call this what it is. It was a softer report. And that was maybe somewhat surprising.
I'm actually pleased we got the report. I think there were some headlines just prior to the release around 8.30 this morning. That suggested that the Bureau of Labor Statistics, the group that actually puts out this data, was having data problems. And that would have been a real disaster, I think, had they been delayed somehow, or maybe there's an issue with getting the report out of time, given what happened last month. So we won't go into all that right now, but I think that the key takeaway, for me anyway, is that yes, things are slowing a little bit. Wages are actually kind of hanging. They're pretty okay, which is good to see because that's essentially another person's paycheck. And that actually leads to further spending down the road. So I think earnings were pretty good. At least wages were pretty good. But you have to recognize that the employment rate is going to tick a little higher. We actually saw some other things that suggest that the labor force is actually growing a little bit, which was good news as well. So net net, I think was probably a pretty okay report. Probably not much more than that, not much worse than that either. And the market seems to be taking that as maybe good news, maybe bad news is good news overall.
I think a bigger question we still need to wrestle with is the fact is, I don't know if the stock market's worried about the economy or the economy's worried the stock market. To me, it feels like it's the ladder where the economy is a little more worried about stock market and the stock market has become the economy just based on the size. And that's not just a glib statement, it really is a reference and a nod to the fact. But I think there is this thing called the wealth effect that when people who are in case and their savings accounts have been rising as they have been for much of this year, so after, of course, even the sell off in April, but you know people I read something today that the number of 401(k) millionaires is at a near all time high and you reference the 401k day so I'll kind of give you a nod to that. But I think what it recognizes is that we have this kind of wealth effect where things are doing pretty well because people feel pretty good about things overall. Now, there are some bifurcations around that. There are people, unfortunately, that don't have foreign case or maybe their foreign case aren't as fortified. And they can they continue to struggle. So we have to acknowledge that this is kind of a K-shaped economy where the upper end is doing quite well and the lower end is struggling. And that's not going to be something that's going to fixed by that policy. So I guess overall, it kind of feels like to me that things are kind of lumbering along. I think we're not really on the verge of recession. And in that environment, it seems like risk assets can kind of enjoy the ride.
I guess, Rajeev, now turning to you in terms of what you kind of saw from the report, I'm curious, as I said earlier, to get your take on whether or not this actually opens the door for additional rate cuts later this year, or maybe it's kind of one and done. What are your thoughts about where the direction of travel is right now with respect to rates going forward?
Rajeev Sharma [00:09:01] Well, George, with the jobs number pointing to further cooling in the labor market, and we got unemployment hitting the highest level since 2001, traders are really looking that they're even more emboldened right now that the Fed will cut rates on September 17th at the FOMC meeting. Treasuries have rallied after the jobs report. Some are calling this a jobs recession. The immediate impact can be seen on the 10-year treasury note yield, which is eyeing around 4% right now. The only reason that we're not going lower on the 10-year, in my opinion, is that we still have inflation data to deal with next week. But mid-week, we did see traders start to bet against Treasuries, and that resulted in forced short cover as the jobs report was released today.
The debate now is how large will a rate cut be, and should the Fed start thinking about maybe 50 basis points. Details of the August jobs number are pretty dismal, and June was also revised to a of print. The labor market has lost steam, as you've mentioned, but now traders are seeing a small possibility of perhaps opening the door for a 50-base point rate cut later this month. It's not our opinion that the Fed will do that, but it's interesting because if you have the Fed, right now you're talking about swaps market pricing in about 26 basis points of rate cuts for September, so obviously a little more than 25 basis points, so that that means the door is open. For a larger jumbo rate cut, but again, we don't have any recession alarm bells going on right now.
And right now, I think right now you should look at the two-year yields. They're back on track to the lowest level since we saw since 2022. That's a signal that the cutting cycle will perhaps be faster and perhaps deeper than previously anticipated. If you look at long end of the curve, that's also rallied, but not as much as the two year. So, again, we see the steepening of the 5-30 curve. It's on pace to be the widest spread since 2021. And this is a direct reflection of increasing inflation expectations. So essentially you have a job sprint that is weak enough to cause a rate cut, but not weak enough to cause economic worries, not weak to take people away from risk related assets.
Brian Pietrangelo [00:11:20] So Rajeev, as we talk about Fed policy, let's also talk about Fed independence, and we talked about the Lisa Cook situation last week, so there's no material developments this week to discuss, but more importantly, we've got Stephen Miran going through the process of appointment, and we've also got the potential, as rumors have talked about Scott Bessent beginning to start interviews for the Fed chair today. So what are your thoughts on all of this?
Rajeev Sharma [00:11:43] It's a great question, Brian. I mean, as I mentioned before, there's a bullish sentiment on bonds right now. You know, it's sending a yield lower than we've seen in the last four months. But you've got other things influencing the bond market, as you mentioned. You have White House economic advisor, Marin. He had his confirmation hearing for a Fed governor post this week. And he stuck to his script pretty much on his prepared remarks. But what's interesting is the odds of him being nominated for the position of Fed chairman have started to increase. In fact, if you look at some polling platforms like Call Sheet, he had the biggest one-day increase in wagers for Miran getting that position. He's now only second to Fed Governor Chris Waller. So the speedy confirmation of Miran intensifies some of the concerns about Fed's independence. We talked about Lisa Cook last week.
There is this notion out there, this sentiment out there right now in the bond market that if you get a Fed makeup that is much more dovish than we've seen in the past. It adds fuel to the argument for more rate cuts in 2026. Again, I think right now the market is anticipating one rate cut per quarter for next year. You also had Scott Bessent, he's come out pretty strong and said we should have more rate cuts. Chris Waller has said the same thing. And Scott Bessent is planning to have a blitz of interviews for the next chair of the Fed. And I think this interview, the interview process probably lasts about a week, and there's about 11 contenders for this job. But if you look at most of those contenders, they are really dovish speaking contenders. That's been their narrative. They've talked about the need for multiple rate cuts. So you may get a situation where the Fed independence starts to get a little muddy with the fact that the White House really wants more rate cuts, and I think that's gonna be a big, big issue as far as. Volatility that we see in the bond market and especially on the treasury curve.
George Mateyo [00:13:43] Let me get you in this conversation too, because it's kind of curious that, you know, as Rajeev pointed out, there are some things that would give some people some concern or some pause anyway about the veracity or the strength of the economy. And yet we see cyclical stock doing pretty well today. And how do you try to square that circle with respect to cyclical stocks, which are normally associated with more growth and probably a better economic backdrop against the fact that the labor market seems to be cooling pretty rapidly?
Stephen Hoedt [00:14:11] So I think you've got two things at play here, George. The first is if you take a look at the setup of the market, clearly we've been dominated for a good while now by the mega cap tech stocks and that's driven market multiples, right? And market multiples remain in pretty extended territory but we're moving into a environment where you likely are going to see nominal GDP run fairly hot. And that's due in large part to the fact that we're going to have relatively loose fiscal policy combined with relatively loose monetary policy in the not too distant future. And, that is a recipe for equity markets to outperform. So, what you've started to see over the last few weeks, in our opinion is a fairly significant rotation toward cyclicality, that's old economy stuff and financials, so it's industrials, energy materials, and fins, and a bit away from the tech stocks. Tech stocks have kind of paused here. Earnings have been good enough. They haven't collapsed for sure, but certainly haven't seen those stocks take another leg higher. And when you look at the market. There are interesting things going on there.
You've seen the two-year yield drop to a hunt over 100 basis points relative to the current fed funds yield. Typically when you get that large of a gap, you've got a fairly significant cutting cycle coming. The market is seeing that. And truth be told, when you get a move to a new nine month low and your yields. 22 out of 25 times six months down the road, the market's been higher and it's been significantly higher. It's been typically 10% higher over that six month window. So like, this is a significant thing that I think equity market investors and market participants are looking at.
You know, you're seeing a loosening of monetary policy, short end yields are gonna come down. How much? TBD, market thinks probably, I mean, equity market thinks probably more than what the Fed Fund Futures guys are thinking right now. And we're, I think, set up to see the cyclicals lead this rally that we're likely going to see. And I know it's hard to get people uber bullish on stocks when you see stocks trading at 22 times earnings, but I think it's possible that we could see the headline index maybe underperform that call for a 10% move over a six month window because of those valuations, but see significant outperformance in the cyclical portion of the market due to market rotation.
Brian Pietrangelo [00:17:10] Steve, we'll ask you a question that we've been talking about within the Chief Investment Office about what's going on in small caps.
Stephen Hoedt [00:17:16] Brian, when you look at small caps, small caps from my perspective are just another way to get cyclicality into your portfolio. They tend to perform similarly to those sectors that I mentioned earlier in a scenario where you have an accommodative Fed and a loose fiscal. So I think it's just an extension of that. Part of that is because if you look at small cap balance sheets, they tend to have a lot of leverage or more leverage than large cap balance sheets do. So, you know, you can draw the conclusion that that theoretically should benefit them more than it should benefit large cap stocks. Historically, that's how it's worked. Whether that'll play out this time or not is still, again, to be determined, but certainly over the last month or two, we've seen small caps rally. There have been rallies in small caps over the last few years that have kind of gotten started like this and then fizzled out. So we'll see if that's the case again this time. But given the cyclical backdrop, I think it's likely that the performance is probably going to have at least a little bit of legs.
Brian Pietrangelo [00:18:26] Great. Thank you, Steve. And we'll give our final question to George to close the podcast. George, I think tariffs have taken a back seat due to the uncertainty around it relative to the economic news taking a front seat. But what's your latest update on the court hearings and everything going on with tariffs?
George Mateyo [00:18:45] I think your description is right, Brian. I think it has, I think tariffs have somewhat faded a little bit because other things have just kind of taken and taken so much oxygen out of the room, so to speak around that independence, other conversations around tech companies and antitrust issues, immigration, of course that kind of leads to today's employment report, but they haven't gone away. In other words, tariffs are still kind of looming out there. I also think that's, you know, something we have to contend with. There's still, frankly, a lot of uncertainty, right? Because when we got together... Last time this week, we had just, I think, got the news that some of the tariffs were actually being struck down or maybe the policy for being called a question by some of the courts. There are other measures that the administration can take to implement tariffs. They have other frameworks they can use. And I think they'll probably use them if they need to, but this will probably be litigated and it'll probably take at least a quick month. Who knows how long it's going to take. No one really knows, but I think it could take... Some time before we really kind of see where this all leads to.
So I guess given that the market is just going to compartmentalize that for lack of a better term and as we said kind of focused on things. Not to say that investors shouldn't focus on that, but they should kind of keep an open mind. They should stay flexible, stay adaptable. And we think this is just a great environment to be really diversified. As Steve talked about having a good balance between cyclical and some of those more defensive growth stocks is important. We still think that international markets are a good diversifier and that's actually kind of taking hold today with the dollar still under some pressure. And that's been also building up the price of gold and other things that can be also into a portfolio. So in that environment, and Steve talked about rightly so, that maybe this is kind of an inflation-led growth kind of story. If that persists, then I think overall risk assets could be okay, but I think you really want to be diversified and be disciplined in this market environment going forward.
Brian Pietrangelo [00:20:38] Well, thanks for the conversation today, George, Steve, and Rajeev. We appreciate your insights. And as we have a program note for today's podcast to remind everybody that we've got a national client call coming up on September 18th. We will have the call at 1 p.m. Eastern and the title of our program is Artificial Intelligence, everything you're afraid to ask but need to know. We'll have a number of experts in the tech industry and artificial intelligence joining us for the overall national call, so please. Reach out to your relationship manager or financial advisor if you haven't received an invite to that call so you can sign up. We expect really good attendance. Again, September 18th at 1 p.m. Eastern. So 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.
Disclosures [00:21:47] We gather data and information from specialized sources and financial databases, including, but not limited to, Bloomberg Finance LP, Bureau of Economic Analysis, Bureau of Labor Statistics, Chicago Board of Exchange Volatility Index, Dow Jones and Dow Jones NewsPlus, FactSet, Federal Reserve and corresponding 12 district banks, Federal Open Market Committee, ICE Bank of America Move Index, Morningstar and Morningstar.com, Standard & Poor's, and Wall Street Journal and wsj.com. Key Wealth, Key Private Bank, Key Family Wealth, KeyBank Institutional Advisors, and Key Private Client are marketing names for KeyBank National Association, or KeyBank, and certain affiliates, such as Key Investment Services LLC, or KIS, and KeyCorp Insurance Agency USA, Inc., or KIA.
The Key Wealth Institute is comprised of financial professionals representing KeyBank and certain affiliates, such as KIS and KIA. Any opinions, projections, or recommendations contained herein are subject to change without notice, are those of the individual authors, and may not necessarily represent the views of KeyBank or any of its subsidiaries or affiliates.
This material presented is for informational purposes only and is not intended to be an offer, recommendation, or solicitation to purchase or sell any security or product or to employ a specific investment or tax planning strategy. KeyBank nor its subsidiaries or affiliates represent, warrant, or guarantee that this material is accurate, complete, or suitable for any purpose or any investor. It should not be used as a basis for investment or tax planning decision.
It is not to be relied upon or used in substitution for the exercise of independent judgment. It should not be construed as individual tax, legal, or financial advice. Investment products, brokerage, and investment advisory services are offered through KIS, Member FINRA, SIPC, and SEC-registered investment advisor. Insurance products are offered through KIA. Insurance products offered through KIA are underwritten by and the obligation of insurance companies that are not affiliated with KeyBank. Non-deposit products are not FDIC-insured, not bank-guaranteed, may lose value, not a deposit, not insured by any federal or state government agency.