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, December 1st, 2023. I'm Brian Pietrangelo, and welcome to the podcast. We were off last week, celebrating Thanksgiving with our families, so we hope that you had a great opportunity to spend the same time with your families and friends during the Thanksgiving break.
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. 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 Wednesday. 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 economic and market news, we have four economic releases we want share with you for the week to give you a pulse on what's happening in the overall economy. So let's start with the third quarter gross domestic product report, or GDP report, that came out this week as the second estimate for the quarter, which showed a 5.2% overall increase in real GDP for the quarter on an annualized basis. Now, this went up from the advance estimate we got last month at 4.9%, so generally speaking, you would think that this is good news. However, if you look at some of the underlying numbers, the revision upward occurred because of revisions to the overall pulse of government spending and specifically state and local government spending that had increased. On the other side of the equation, we see the revision for overall consumer spending actually was revised downward, indicating we're seeing some slowing in the quarter for overall consumer spending.
Second and pairing nicely with that report on GDP, we also had the Federal Reserves report known as the Beige Book for overall economic activity across the 12 districts in the nation, and the report was mixed, showing that basically four districts reported modest growth in economic activity, two indicated conditions were flat to slightly down, and six or half noted there were slight declines in overall activity.
And third, just yesterday, the report came out for overall consumer spending and personal income outlays for the month of October, which had a consistent theme of slowing where we actually see that personal consumptions expenditures for the month of October showed a 0.2% increase, which was good because it was still positive, but it is much less than the reports for August and September, again indicating slowing as we go into the fourth quarter.
Also, yesterday within the same report, the fourth item to share with you is the overall personal consumptions expenditures measure of inflation. That's important because it is the Fed's preferred measure of looking at inflation, and it showed a decrease in the overall year-over-year growth in terms of inflation from 3.4% in September down to 3.0% in the month of October. And if you exclude the volatile food and energy components, known as core PCE, we saw the number drop from 3.7% in September to 3.5% in October. So this sets up the opportunity as we look into the December Federal Reserve meeting that we are seeing inflation continue to slow.
And finally, on a sad note, one of the longest legends of investing passed away this week, Charlie Munger of Berkshire Hathaway, and so we'll ask our panel their thoughts on what a tremendous legend Charlie was. So George, let's turn to you for your thoughts, this week's economic data, and anything else you're seeing in terms of the economy. George.

George Mateyo:
Well, I guess the word of the week, Brian would be one of disinflation. We've talked a lot about inflation over the past several months, if not for years, but I think disinflation probably seems to be the new word of the day. And for those people that are maybe unfamiliar or not as familiar with disinflation, it's basically a reference to the fact that prices are rising but they're rising at a slower pace. And I think that's the takeaway for the week, that I think we've now probably pivoted pretty firmly to the camp of disinflation. Of course, there are going to be pockets here and there of other kinds of inflation, but overall, you mentioned the fact that PCE, the Fed's preferred measure of inflation, has slowed pretty much in the past couple months. If you look at year-over-year, month-over-month, you can continue to see some continuing to slow down there as well.
People kind of parked out numbers all kinds of different ways to look at other things as well. Year-over-year, I guess maybe one thing that I would focus on is the year-over-year numbers are still a bit higher than what the Fed would like it be at 3.5% roughly, but we're getting some more signs that things are slowing there too. Home prices have also fallen quite notably, despite the fact that there's been inventory issues and things like that. It's well documented. People are having a hard time finding a house and those type of things would suggest that prices should be right and all is equal, but home prices fell this past week, which also grabbed some attention also.
So I think it is kind of setting up an issue backdrop now that there are more and more people thinking that the Fed will start cutting rates, not so much because the economy is weakening, but rather maybe just kind of putting some insurance policy back into the tank, so to speak, so that they could use further stimulus if needed to try and keep the economy from really rolling over in a big way.
But I think the other thing that we can look at this past week, Brian, is that consumer spending, it did rise a bit faster than people thought. I think maybe a 10th of a percent faster, but it's slowed down quite notably there too in the sense that in the prior month, I think, spending was up 7/10ths of 1%. This past weekend was up 2/10ths of 1%, so you go down from 7/10ths to 2/10ths suggest that things are slowing pretty materially. Maybe, I don't know, Brian, maybe there's a phenomenon, the Taylor Swift tour ending here in North America and moving overseas, and I was checking this morning, she's not back here in the country into the States until sometime the end of next year, so we'll have to pay attention to that. Maybe she'll be back on tour sometime in the spring and, I think, provide some boost to the economy in the other part of next year. Otherwise, I think the consumer seems like they're finally slowing things down a little bit.
And then I think the bigger story also this week is the fact that the markets have kind of rejoiced this slowdown, at least for now. I mean it seems at some point, bad news might be good news for now anyway, but maybe bad news is bad news if things slow down in a material way. So equity markets, as you kind of close out the month of October, I'm sorry, close out the month of November rather, were pretty strong across the board. I'd be curious to get Rajeev's take on the bond market, because I think I read something this morning that suggested that the bond market had its best monthly gains in almost 30 years, which surprised me, but still it kind of shows you how much convexity there is in the bond market when people start talking about slowing economic data.
Equities are pretty strong as well. I think equity across the board up 8% or 9%, which is really, by all accounts, a pretty strong year in a little over a month. So I guess, Steve, my first question goes to you in terms of the equity market. What do you make of that this morning and what are your thoughts going forward for the rest of the year?

Stephen Hoedt:
Well, stocks responded to what happened during the month of November, George, and what happened during the month of November was we saw the largest single financial easing in terms of financial conditions in the last four decades. Let that sink in for a minute. It's pretty impressive. Stocks were up, rates were down, the dollar was weaker, and credit was tighter. So it shouldn't really surprise us in that type of an environment when you get that big of a magnitude of easing in terms of financial conditions that we had the ripper of a month that we did for stocks. You put that together with the fact that we were entering a seasonally strong period of the year, which obviously it played out again, and we're in a good place as we head into December.
Now, the question investors are asking today is how much good news was pulled forward from December into the month of November? Because we know December typically is a pretty decent month for the markets as well. I think that there has been a significant amount of good news pulled forward, but that doesn't mean that we won't continue to have a modest bias to the upside into year-end. We've got a ton of momentum behind us right now.
It's really hard to see what's going to derail the market between now and year-end. If you look at the typical seasonal pattern, you're up for a few days in the beginning of the month, weak in the middle, and then strong in the end, so a bit of a meandering path higher over the typical December period. I see no reason why we won't play that out exactly the same way again. Now, the market was up almost every day during the month of November. We were up 16 of the 21 trading days, so clearly best month of the year. That doesn't say anything about the 11% rally that we had in the Nasdaq-100 Index over the same period of time. So again, the mega-caps continued to show the way.

George Mateyo:
So at the same time, we said we had a lot of great news in the equity market. Rajeev, we had a pretty strong bond market, as Steve mentioned as well, with the fact that conditions have eased a lot, meaning that rates have come back down quite notably in the past few weeks or so. There were a lot of Fed officials also speaking this week that suggested that maybe things are done. In other words, we've been talking about this a while, but maybe they're done kind of raising rates, but what was your take on the weekend, the month of November itself, as well?

Rajeev Sharma:
Well, yes, George, it was quite a November, and it continues. We saw the PCE inflation data that you mentioned, and that was kind of a modestly dovish piece of data, and you would expect there to be a rally in the bond market yesterday on that data. We saw core inflation pretty much in line with market expectations, and overall data was a tick lower than the market consensus. But we didn't really see that rally yesterday, it was somewhat muted in the bond market yesterday, and a lot of that has to do with what we talked about right here. We've had quite a November, but a huge rally in the bond market. We haven't seen that kind of record month for decades, as you mentioned, George, and these are the best returns that we've seen. We were all poised to have a negative return for the aggregate index for the year, and now we're on the positive side again. So that feels really good for the bond market.
So I think maybe some of that inflation data, maybe it was the month-end, maybe we didn't have, it was kind of like the market taking a little bit of a breather after a pretty significant rally in November. But what I thought was really interesting is that inflation reading at 3.5% is right on target with the Fed's summary of economic projections that they released back in December 2022. They predicted the 3.5%, and it was right on that nail, so that was pretty interesting.
But where does all this really put the Fed? We've got a December 13th FOMC meeting coming up. Is there going to be another rate hike? In our opinion, the Fed is done. We don't think there's going to be another rate hike in December. Market expectations are also saying that there's going to be a pause for the December FOMC meeting. A rate hike for December's meeting is pretty much off the table if you look at probabilities, which are around 2% for a rate hike right now.
And these expectations, along with some dovish Fed speak that we heard this week, really led to this sustained rally in the bond market. Specifically we heard from Fed Reserve Governor Chris Waller, who made a speech this week titled Something Appears to be Giving. And in that speech, he said that even though inflation remains outside of their 2% target that the Fed has set for themselves, he's confident that policy is currently well positioned to slow the economy down and get to that 2% inflation target.
This is coming from a voting member and someone who has been somewhat viewed as a hawk pretty much throughout the entire rate hiking campaign. So when he comes out and makes the statement, the market reacted very swiftly to it. You saw the 10-year Treasury yield drop all the way down to 4.25%. Now if you recall the 10-year Treasury note, we were at 5.02%. Just back on October 23rd, we touched that point, and then we rallied after that. So we've come a long way, and there are other factors to think about here. Why are we rallying so much across the yield curve?
There's a couple of things going on here that should be noted as well. Hedge funds, they had all these steeper trades on, they put these extreme trades on short positions, they were shorting government bonds. Now, they're kind of being forced to bail out those bets, so that could have also added to some more of this movement that we've seen across the yield curve. We also had $139 billion in Treasury coupon supply that hit the market. That's out of the way now, that's in the rearview mirror, and there's been a slowdown in corporate bond sales as well.
So all of this has worked to move yields lower across the yield curve, and this has worked really well for Treasuries, specifically the bull steep in their trade. We did hear from some other Fed members this week that are kind of trying to reel back the market. They're kind of trying to say, "Hey, we're not talking about rate cuts right now. There's a lot of enthusiasm. Let's take a little bit of that away." We had Fed members Daily and Williams both come out and say that we need to be restricted for quite some time. They both pointed to another rate hike still being on the table. But right now, where we are right now, I would anticipate the ten-year to fluctuate between four and a quarter and 4.75%.
Today's going to be another big day for the markets. We've got Fed Chair Powell himself who will come out with two opportunities to speak to the market. I think he's going to come and reiterate that rate cuts are not on the Fed's agenda at the moment, so we're going to probably see some volatility after that. And all of this right in line with the ISM data that we just saw hit the wire, and that's bringing two-year yields down again, came in unchanged. Let's see if that rally continues before Powell's comments later today.

Brian Pietrangelo:
A great update, Rajeev as well as Steve in terms of your thoughts on the stock and bond markets. Let's turn back to George really quickly. We had some sad news this week with the passing of the legendary investor, Charlie Munger from Berkshire Hathaway, and so let's give some thoughts, George, on what you think and maybe also Steve as well.

George Mateyo:
Yeah, sure, Brian. I mean, I think for those who don't know him, Charlie Munger was a pretty influential guy in the last 60 years or so inside the stock market. He really, I guess, more efficiently was known as Warren Buffett's right-hand man and his key business partner. But much more than that, I think he was really involved in so many wonderful things and really shed light in many different areas.
And I think that if you want to read a really great piece, there's a really wonderful story written in the Wall Street Journal by Jason Zweig who talks about the man in life and kind of what he accomplished, but also more importantly, his outlook on life and how he shared that with so many people with others.
I unfortunately never had a chance to meet Charlie. I did have a chance to meet Warren on a couple of occasions, but like Warren, I think Charlie was really a person who was really keen and really passionate about getting rich, not for the sake of getting rich, though, but he often talked about the fact that when you accumulate wealth, whatever it happens to be, the point of that was really to develop your own sense of independence. And I think that's one thing that he was also really keen on that allowed you to think more independently as you came into wealth, which I think is something that anybody could probably relate to.
He also, I think, was pretty instrumental in really kind of shaping Warren Buffett's approach to investing. When Warren started out, he was really focused on, as they talk about, cigar butt businesses, meaning companies that really were really down in the luck so to speak and really deep value companies. What Charlie did was really turn the framework around to suggest that maybe you, instead of buying really crappy businesses at great prices, identifying really great business at a fair price. And that was really a really kind of seminal moment in terms of the way that Warren Buffet himself invested. So I think that needs to be acknowledged too.
And then thirdly, the thing that I really really admired about Charlie was his idea to think about things in different ways, and one of which is his favorite thing was that actually knowing what you don't know is more useful than being brilliant, which I think was a really interesting thing to think about as well. So I guess you are officially our Oracle of Ann Arbor, I guess, and as we think about the year ahead, I think it's probably important to think about your outlook for the market and what you see going on in the next 12 months, if you don't mind.

Stephen Hoedt:
Well, when you take a look at the forward view, George, I mean I think that the real question is do we get a soft landing or do we get this recession scenario that people have posited for multiple years? And the other question is do we get a re-acceleration of growth? And depending on which one of those scenarios is most closely fit for the template for the year, I think that should tell the tale. And when you take a look at the range of outcomes, the range of outcomes, if you have that bull scenario, you could be talking $5,000 in a new all-time high for the market. If you get the recession scenario, you could be looking at a 20% decline or so for the market.
And I think that our scenario right now we think is a base case is for the market to continue to muddle through and to head toward $4,700, which doesn't seem like a lot, given the move that we've had this year, but the move this year really was driven by those mega cap tech names, and it's going to be hard for those to replicate the exact same kind of performance, and sometimes stocks just have to mark time. And we think that really the most likely outcome, assuming that we hit a soft landing scenario, is that markets mark time next year. But you know what? That means that there's probably going to be a lot of opportunity underneath those mega-cap seven to try to generate returns. So we think it'll be an interesting year for the markets, no doubt, if not more of a muddle-through one.

Brian Pietrangelo:
And in closing, if you want to hear more, just a reminder for those that are listening in our audience, we've got our national client call where we're going to talk about our 2024 outlook with everybody on the podcast today that will be representing our outlook for 2024. So with that, George, you want to have any more comments? It is Wednesday, December 6th in terms of that date. If you don't have a registration, reach out to your financial advisor to be able to get one. Rather than that, George, if you have any closing comments, we'd love to hear them.

George Mateyo:
Well, we'll see everybody on Wednesday, hopefully, Brian, to talk about our outlook. I think Steve sounded pretty well. I think there are some things to be optimistic about in your head, probably some causes for concern, and I think we'll probably say more about that on Wednesday. But overall, I think the muddle-through environment probably is the one that we're going to probably maintain.
We kind of had a similar view this year as well as it came to 2023, a bit of a more muted outlook, and curiously, more people were pessimistic at the beginning of this year, and now there seems to be a fair amount of optimism. And Rajeev talked about that as well with respect to interest rate cuts and so forth, so I think it'll be a nuance year, for sure. And with that, we'll probably have to be very attentive to all the things that happen and take place on a week-by-week basis as we do on this podcast and in other places too.

Brian Pietrangelo:
Well, thanks for the conversation today, George, Steve, and 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 achieve your financial success.

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