Brian Pietrangelo:
Welcome to the Key Wealth Matters weekly podcast where we casually ramble on about important topics including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing.
Today is Friday, October 25th, 2024. I'm Brian Pietrangelo and welcome to the podcast. As you may have noticed on the calendar, next week is Halloween, on Thursday, October 31st and yet many people celebrate this weekend to get a head start on the overall holiday. According to the National Retail Federation, consumers will spend about $11.6 billion on Halloween in 2024, down slightly from 2023 at 12.2 billion. However, the big increase came post-2020 when the average was around 8 or 9 million, and now we're up above 10 approaching 11.6 billion again for the estimate for 2024. And what are the top Halloween costumes for children this year in 2024? Number one coming in at Spider-Man. Number two, ghost. And number three, princess. For children, so hopefully they have a lot of fun as the parents continue to walk around and help their kids consume and get that Halloween candy.
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. Steph 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 each week. In addition, if you have any questions or need more information, please reach out to your financial advisor.
Taking a look at this week's market and economic activity, we've got three key updates for you, beginning with the Beige Book report that came out earlier in the week, which is the Federal Open Market Committee's preview on what's happening in the economy for the upcoming Federal Open Market Committee meeting on November 7th. Again, the Beige Book comes out about two weeks in advance, and so here are the updates for the report. Overall economic activity was not changed that much in nearly across all 12 districts since the September report, although two districts did report modest growth. Most districts reported declining manufacturing activity. Reports on consumer spending were mixed and some districts did note shift in the composition of purchases mostly towards less expensive alternatives. In addition, the path of mortgage rates kept some buyers on the sidelines and the lack of affordable housing remained a persistent problem in many communities. And finally, the short-lived dock workers strike caused only minor temporary disruptions in the overall economy, so good news there.
Second, we've got the initial unemployment claims report that came in for the week ending October 19th, which was 227,000, which receded from the previous week ending October 12th. So a decline of 15,000 from the prior week was good news given that we've had volatility in this data point given some of the hurricanes that we had in Florida and the disruption in employment there. So good news is that we did see a pullback going back down to 227,000.
And finally, according to the National Association of Realtors, existing home sales declined a bit in September by roughly 1% coming down to 3.84 million in September. Also, year over year sales came down 3.5% from the previous year in September of 2023. And this is the constant issue that we've been talking about for some time now, given that the Fed did raise interest rates from 2022, which corresponded to rising mortgage rates, and again, locking up some of the inventory in overall existing home sales because people aren't necessarily willing to switch and sell their existing home, give up their 3% or so mortgage and get a 6% or so mortgage. So again, we continue to watch the overall housing market for reads into what's happening.
In addition, we typically cover what's happening in the overall earnings market after quarter end. So the first few weeks of October typically give us a read into what's happening in the overall third quarter earnings market. So we will begin our podcast today with Steph and I would be remiss if I didn't use the pun of whether we're going to see tricks or treats here in the overall third quarter earnings season, Steph, so what are your thoughts?
Stephen Hoedt:
Well, Brian, it's definitely been a tricky earnings season more so than a treat earnings season. If you were asking me, I mean if you take a look, what's crazy is that if you look at the S&P 500, over 12% of the S&P 500 docs over the last quarter moved more than 10% on earnings day. And to me, that is the true definition of a tricky market. And it doesn't matter whether it's up or down, it's just the fact that we've had these huge plus or minus 10% moves. It's created a situation where it's very, very difficult for portfolio managers to navigate. So that would be my first takeaway. When I think about earnings season in general, what we've had is we've had a continuation of the earnings numbers being good enough. So far we've continued to see the S&P 500 index aggregate earnings line moving slightly up into the right. Multiples this week have come back in a tiny bit after actually cresting above 22 within the last week to week and a half. We're just under 22 today, so still hanging out in the same neighborhood as the earnings line goes higher.
That has given the S&P 500 enough of a kick to continue to have us hold in the neighborhood of 5850 just south of 6,000. And we've kind of looked at that 6,000 as a big round number magnet for a little while. It's funny, we were, as a team, down in Cleveland this week, and I had an opportunity to sit down and spend some time with our equity trading desk. And the feedback that I got from them was really interesting, and that our head trader, who's been a trader for us for a very, very long time, she made the comment that she's never seen trading conditions like this as quiet as this outside of a holiday trading period in her entire career. And I would say the same thing, that for an earnings season and for a typical market period, we would be seeing a lot more volume right now than we are. And I think that's contributing to these outsized moves because market conditions are really thin and people really don't seem to be wanting to put major capital to work ahead of the election. It's like we want to get that out of the way before people really want to come in and commit to the positioning for the run into the end of the year, which we still anticipate is going to be pretty favorable.
Brian Pietrangelo:
George, we've got a light economic calendar this week, but a heavy one next week. What are your thoughts? What are you seeing that's of interest to you?
George Mateyo:
Well, I'll pick up on the theme that Steph talked about, Brian, which is everybody I think is a little bit frozen at the moment. I had a similar interaction with a group of people that suggest that business conditions are good, they're slowing a little bit, but everybody is really just trending in place a little bit, trying to figure out what might happen in the next, I don't know, 12 or so days. There was a report out this week that does deserve a little tension. It's mostly anecdotal information, so it's hard to get really too focused on it and really kind of hang your head on it in terms of a forecast. But the Fed puts out this report called the Beige Book. Not to say that is boring, like beige might be suggested, but I think it is kind of full of anecdotes that are kind of useful.
And one of our research providers that we pay attention to actually does some interesting analysis to kind of look at some of the key terms that were included in that Beige Book report. Of note in terms of read through to the economy, the term layoffs was only referenced five times, but all of that was a reflection of the fact that there were a lack of layoffs. So really don't see, again, the job market weakening too much. The term slowing or slowdown did actually have a significant number of mentions, but again, it was more of a slowdown than anything nefarious. And more specifically, the word recession did not appear in the report at all. And maybe if you look back, say a year ago this time, there were probably about more than a dozen mentions of the word recession. So we're clearly not in a recession. Things are slowing a little bit as a takeaway. Wage didn't seem to be mentioned a whole lot either.
But the big term I think that kind of caught, and maybe not people by surprise, but I think deserves mention, is the fact that the term election was mentioned over 15 times or so, which is up significantly from the prior reading, which is only about 5 times. So again, there's maybe a three times lift, if you will, or 3X delta between this report and the last report when they talked about the election. So again, we're not really seeing anything that people don't really know in the fact that the elections are kind of front and center in terms of people's minds in the near term. As we've suggested in the past, there might be some volatility in around the election and maybe even through the election knowing that maybe we won't know the outcome the night of the election on November 5th.
So I think we have to be prepared for that. Certainly the equity market is kind of prone to some volatility. We would suggest that people watch the VIX Index. We've talked about that from time to time as well. It's historically been a pretty good barometer in terms of maybe when you should add some exposure. Right now the VIX is roughly around 18 or 19 or so I think last time I checked. But typically if it spikes above 20 or into the 30s or mid 30s or so, while that might feel a little bit uncomfortable, that might be a time to consider nibbling a little bit and adding some exposure towards risk assets in general. So that being said, I think it is also something we suggested that people pay attention to the bond market. We've seen a lot of volatility there too.
And Rajeev, if I think about what you've seen in the past few weeks, it's been really interesting for me to see the bond market actually the bond yields take up in the phase of the Fed cutting. So since the Fed cut rates back in September, I think long-term yields are up something like 40, 50 basis points. What do you make of that? Is that something driven by the election or is it something else that's happening inside the bond market more specifically?
Rajeev Sharma:
Well, George, I believe the bond market right now appears to be spooked if you want to use the Halloween analogy. The issue really is that the Fed may not ease as much as anticipated back at the end of September. There's still a 95% probability that the Fed does cut 25 basis points next month, but the probabilities of the pace and the magnitude of cuts next year are starting to come a little more into focus by market participants. The Fed has penciled in four rate cuts next year in their last summer of economic projections, while the market at the end of September began to believe that we would get six rate cuts next year. Those lofty expectations are now coming down. And with that, the volatility in the bond market is going up.
Right now we've seen an upward pressure on yields predominantly in the front end, which is most sensitive to monetary policy. So we've seen yields move higher, as you mentioned, 40 to 50 basis points since where we were at the end of September, and the yield curve is actually flattened. So now we have talked about the VIX Index. If you look at the MOVE Index, which tracks volatility in the bond market through implied volatility of one month, treasury options option prices anticipate that treasury yields across all maturities will move about 18 basis points higher immediately after the election. Now, we've seen moves like that in 2022 and 2023 when the Fed was hiking rates, but it's unusual for the MOVE Index to anticipate kinds of moves. And you can see those kinds of moves when things happen, but the MOVE Index is actually anticipating them.
In the 2016 election, we did see a 37 basis point daily swing in the 10-year treasury note yield, and that was the biggest in the decade. So if you look at the bond market, there is a lot of uncertainty there. There's some uneasiness there. It has a lot to do with not just the election, but actual Fed policy. Where we go from here, does the Fed continue on their rate cutting campaign? Do some of the policies that we've been hearing on the election trails, some of those policies add inflation into the mix, which would cause the Fed to maybe not cut as much as anticipated. All of this is causing uneasiness in the bond market right now.
But if you look at credit spreads, you don't see any uneasiness at all. I mean, I think investment grade spreads had hit the tightest range that they've been in since 2021. And what we're seeing right now is maybe we widened a basis point this week, there's really no alarm bells that are going on in credit spreads right now. I think right now as investors, we should continue to focus on the MOVE Index. We should continue to focus on the yield curve. But I also don't think we should lose focus of where credit spreads are. We are extremely tight right now. Many would argue that is there any value in these types of spread levels for credit spreads where they are right now, but there's such an incredible demand for corporate bonds right now that spreads could actually go tighter. And if we see a slowdown in supply and anticipation of the election, you could see spreads go even tighter right now.
So it's been a very interesting bond market where you've got certain sectors that are doing extremely well and other sectors that are extremely uneasy right now where we are in the cycle.
Stephen Hoedt:
Rajeev, it blew my mind. I was just looking at a chart, BBB spreads have not been this tight since 1998.
Rajeev Sharma:
That's correct. That's correct. And BBB's are 50% of the bond market. So you can just see the indication of how much money and demand is still going into BBB's right now. You see the inflows into investment grade funds have not slowed down one bit the entire year.
Brian Pietrangelo:
[inaudible 00:13:58] final thoughts as we go into next week where we'll have a heavy economic report, we'll get third quarter GDP, we'll get consumer spending, we'll get PCE inflation, and we'll also get the jobs report, all that fueling the fire for not only the election the following week, but the Fed Reserve meeting on November 7th. Any final thoughts?
George Mateyo:
Well, of all those reports you mentioned, Brian, I think the jobs report is going to be the one that's really going to get the market's attention the most. I think we talked about the fact that GDP is an interesting indicator, but it's somewhat lagging. And probably more importantly, we've actually kind of seen continued revisions higher in the past few weeks or so coming into this print on GDP. So I suspect it'll be probably be a decent report, but again, it'll probably be backward looking, so we won't really be able to glean too much from that.
The big number though, again, is going to be the job number. And we've also talked about the fact that there's probably going to be some sloppiness around the number itself, given the fact that there's a few hurricanes going on that are having an impact on the economy. There's certainly labor strikes and other issues like that that could distort things too. And even more recently, the Fed has kind of thrown their hands up of it saying, hey, this could be a pretty soft number given the fact that there's a lot of these exogenous shocks and some other things too, that they themselves are having a hard time forecasting.
So I think we're going to have to probably, again, prepare ourselves probably for a bit of volatility as we try to really discern the noise from the news and vice versa. And of course, I think the bigger near-term event, of course, is the election and what that might mean. And I think, again, we've tried to suggest that that might be a thing to contend with. But if I look actually the one year following election, more specifically, if I go back 40 years, for example, every year except for one after the election in the last four years has been positive. And in some cases it's been profoundly positive. Now the one exception is the year 2000 where we were unwinding essentially the tech wreck and the tech valuation bubble that kind of preceded that election. So maybe that's something to note as well.
But I think overall, if people can be disciplined and be patient a little bit, and as I suggest maybe if things really become on sale a little bit, putting some capital work in the face of some volatility might be prudent as well.
Brian Pietrangelo:
Well, thank you for the conversation today, George, Stephen, Rajeev, we appreciate your insights and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results, and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist or financial advisor for more information, and we'll catch up with you next week to see how the world and the markets have changed and provide those keys to help you navigate your financial journey.
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