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, March 22nd 2024. I'm Brian Pietrangelo and welcome to the podcast. This week begins an exciting time if you're a basketball fan. As the NCAA Men's and Women's Basketball Tournament kicks off, otherwise known in the industry as March Madness. We already saw a couple upsets yesterday. So in a parallel universe, as we talk about the markets in the economy, we'll be asking our panel a simple question. Will PCE inflation pull an upset over the Federal Reserve or will Jay Powell and the team find Cinderella's slipper and pull off a soft landing on the way to victory over inflation? 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/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 news, the economic calendar was fairly light, so we only have two updates for you this morning. First, existing home sales surged 9.5% in February, which was basically an important increase since we haven't seen that type of increase since February of 2023, basically seeing that for the last 12 months the existing home sales market has been in somewhat of a freeze given when mortgage rates are.
So seeing some of a little bit of a thaw is a good indicator and we'll see where that goes for the remainder of the next six months. And second, the conference board's leading economic index indicator showed that there was an increase of 0.1% in February, which was basically a very good sign since we go back to the last time there was an increase. We haven't seen one in basically two years since February of 2022, where the index has been in a decline for, again, almost 24 straight months. So it's a nice glimmer to see a little bit of a reversal and a positive way for this economic indicator.
And the big news for the week was the Federal Open Market Committee or the Federal Reserve Board's Committee meeting on interest rates and overall monetary policy, which occurred on Tuesday and Wednesday of this week, ending with Jay Powell's press conference. And basically the Fed decided to continue to keep rates where they are, started to talk about whether or not they'll cut rates in the future for the remainder of 2024, and what's going on with the overall economy. So with that let's turn to Cindy to understand what did the Fed say, what did the Fed do and what does it mean for investors, Cindy?
Cindy Honcharenko:
So the Fed left all target and administered rates unchanged as expected. The federal funds rate target range remains at five and a quarter percent to 5.5%. There were no descents, and this marks the fifth consecutive pause in this titanic cycle. The only change to the policy statement was to a phrase of the second sentence from "Job gains have moderated since early last year, but remain strong," to "Job gains have remained strong." Moving over to the dots in the summary of economic projections, a few things to keep in mind. The dot plot is formed through 19 different forecasts from 19 different individuals and their staff. There's absolutely no coordination process that gives the Fed a mechanism to send a message to the market beyond the possibility that forecasters come to the same views organically through collaboration. And as the dispersion of the dots shows, the views are diverse.
So the changes to the SEP and dots, the March FOMC communications conveyed a dovish lean and the markets responded accordingly as policymakers stuck to a median expectation of three cuts for 2024 and Powell cautioned against overreacting to the two months of sticky inflation data. There was a modest generalized upward drift of the dot plot, however, with one participant projecting more than three cuts this year compared to five in December. There was a modest... Going forward, it will now require a move of just one participant into the two cuts camp in order to shift the median.
In addition, there were sizable upward revisions to the Fed's economic growth projections for 2024, and these were much more than what economists were expecting. So they moved real GDP estimates for 2024 from 1.4% to 2.1%. That's seven tenths. Most economists were expecting an increase of 1.8%. They also moved real GDP estimates for 2025 and 2026, both to 2%, which is higher than the longer run forecast of 1.8%. In addition, the longer run median dot moved up to 2.56 to 5% from 2.5% prior. This is its highest level since 2019 with three participants now seeing a 3% longer run rate versus one in December. Powell noted the shift, but he didn't attach any meaning to it. He only emphasized the wide uncertainty bounds around neutral rate estimates. He did, however, offer that it appeared more likely for rates to remain above pre-pandemic levels going forward.
Core PCE inflation was revised up to 2.6 year over year from 2.4%, and the headline PCE was revised up to 2.2%. These revisions did not appear to affect the expectation that the Fed would hit the 2% inflation target in 2026, but they did help explain why policy rate expectations were modestly higher over the forecast horizon. While Fed policymakers need more evidence and greater confidence before they're ready to start rate cuts, they do remain confident in the broad direction of the travel.
As far as the press conference, Powell was careful to maintain a balanced approach to the policy outlook and he avoided any specific guidance or comments toward future moves. Powell also confirmed that the policymakers took time at the meeting to work out details of the upcoming QT taper. While no decisions were made, Powell indicated the plan will be fairly soon, and I suspect a formal announcement will happen at the May 2nd meeting with an implementation in June. The bottom line is we didn't really learn too much this week that we didn't already know. The Fed is maintaining a vigilant and agile approach to policymaking that will be dictated by the data and the outlook for the data still remains highly uncertain. I think at this point investors should be patient on adding duration and use the ten-year treasury as a proxy. Rajeev, I'd be curious to know what your take is on the FOMC this week.
Rajeev Sharma:
Well, I really agree with your insights there, Cindy, and I think the dot plots and the summary of economic projections, that's what was really closely watched by the market. I would add that it was a sigh of relief for the market when they saw that the Fed decided to stick with three rate cuts for 2024. Without that, I think the market would've really reacted differently, but just knowing that, okay, status quo, we're still on those three rate cuts and I really don't think the market's thinking about anything else but focusing on that issue and the summary of economic projections. But I would add that the Fed meeting press conference gave Fed Chair Powell an opportunity to speak about the Fed's balance sheet and how they plan to reduce that $7.5 trillion balance sheet. So shrinking the balance sheet is known as quantitative tightening. As you mentioned, Cindy, the QT program and the Fed has, they've been letting treasury and mortgage-backed securities mature each month rolling off the balance sheet.
Now the Fed is going to start thinking about this QT program and considering slowing the pace, that could be a market mover. The Fed is going to be in-depth discussions about their balance sheet. These will include how to slow the pace, how to roll this balance sheet off, and exactly how long this will take. Ideally, I think when Fed chair Powell was asked how he would like to see the balance sheet of the Fed, he would really love to see a balance sheet that's completely treasuries at some point, but it's going to take a while to get there. If you look at the market reaction to the FOMC, it was pretty swift. We immediately saw the yield curve steepen, that's what the front end, namely the two-year treasury note yield moving lower by three basis points. We saw the 10-year and 30-year bonds moving higher on the day.
This has a lot to do with the front end being influenced by monetary policy and those three rate cut expectations, the long end focused on higher policy rates for 2025 and 2026, and the longer run. So the knee-jerk reaction to the policy statement was dovish. It caused the front end to rally. Investors know that slow and steady is the pace of the Fed. We started the year off with market expectations of seven rate cuts this year. It took a while for the market to get back in line with Fed expectations of Fed narrative of three rate cuts. Now, I think we're pretty much aligned with that. The market's aligned with that, the Fed's aligned with that. We've seen the impact on the yield curve to get there, but I think right now it's going to be very important that we maintain this expectation in the near term.
So we should continue to see the front end of the yield curve drift lower in the near term. But we do have a disruptor coming up, and that is the PCE Deflator report, which is going to be released on March 29th. Now, that's a holiday for the bond market. So the earliest investors be able to react to that would be Monday, but that's Easter Monday, and that's a holiday across UK and most of Europe. So it's going to be interesting to see how impactful that PCE report will be, how many eyes will be on it, and what the impact of the market will be, how the volumes will be. If we look at the demand of investment grade corporate bonds, we switch gears there. I really think that that demand continues. We've been seeing a lot of new issuance in the corporate bond market. This has been met with strong demand for these deals.
These deals have been priced to perfection, so they're not coming out with a lot of concessions, but it's a great opportunity for corporate borrowers to come to market, issue debt and then see and push back their maturities and their maturity schedule. One other thing I want to highlight is that the foreign demand for corporate debt has been strong. It continues to remain strong. In 2023-three foreign investors bought $343 billion of corporate bonds, investment grade corporate bonds. That demand was a record, and I don't anticipate that to slow down anytime soon. So we're going to have to see the impact of that on the credit markets, and we're going to have to see the impact of the FOMC and how long that lasts in the next week or so.
Brian Pietrangelo:
So George, what are you seeing in terms of your comments on the Fed or anything else from your seat in the market?
George Mateyo:
Well, Brian, I think the Fed missed an opportunity a little bit to try and talk about this thing called the wealth effect, or at least maybe reference that, which is this notion that rising stock prices and home prices and everything, prices feed their way into consumer spending, and that's been feeding its way into inflation. And for some reason or another Chair, Powell decided not to really make those connections and dismissed the inflation boogeyman for once and said, "Well, these two-hundred and expected inflation prints that we've seen this year, they anomalies that we should discard them." I think Rajeev rightly pointed out that, I guess it's April 1st, April Fools, we'll talk about inflation again and the reaction when we get this PC report later next week. But I think it does suggest that the Fed is right to talk about growth and maybe not too concerned about the outlook for inflation, but I think that's probably the biggest risk in the near to medium term where there is some re-acceleration in the inflation numbers or at least they continue.
So they've not run away, and we're not talking about inflation where it was last summer, last year and the prior year, but I think it is sticky and it is coming down slowly. At some point, they might have to readdress that too, but for now, it seemed to be pretty supportive for risk assets. Overall, equity prices took the news very well as Rajeev and Cindy mentioned. Some of the more speculative names even did better, and we've been asked a couple of questions, what could stop this run? I think one thing we have suggested is that there are things that are exogenous inside outside the market's control with respect to things that dent the tech trade more specifically. And one of those things is antitrust, and we saw some evidence of that yesterday in the form of a pretty big announcement.
I'm not sure if it's going to be anything that's going to be a problem for Neutron events, but I think it is some of the Bears monitoring that we have to get our heads around that there are real concerns out there that could actually, maybe, take the window out the sails a little bit. But on the other side, we saw the resurgence of the IPO window for the first time in many months where a really well-known company came public the other day, stock price shot out like a rocket. And that's reminiscent of the good old days, I guess from the late nineties. That's just one example of many.
But I think overall it does suggest that risk assets are in favor right now, and that continues to be our case, that we want to be balanced towards risk in the sense that valuations are getting a little bit pricey. But at the same time, I think there are opportunities that we want to be mindful of too. And the market rally seems to be broadening out, which again is supportive to our view that some small exposure towards small caps and other things can be beneficial to a portfolio as well. So Steve, I'd be curious to get your take given what's happened in the equity market this week, again in response to the Fed, again in response to some of these other forces as well.
Stephen Hoedt:
Yeah, George. Good morning, everybody. So when you take a look at the market, the S and P so far through last night's close is up over 2%, this week closing in on 2.5, and it's 10% move year to date. So it's been a good year through the first three months. It's all driven by this dovish Fed thing, given that we have a pretty solid macro picture and underlying the economy, and then you've got these slightly warmer than expected CPI ratings that we've had lately. So you put all this together and you really do get demand for risk assets. And when I'm saying risk assets, I don't just mean stocks. I mean, if you look at the rally that we've had lately, it's basically been anything that has risk attached to it. I mean, you can take a look at Bitcoin for example. You can look at gold clearing $2,200 this week.
You can look at equity. So basically anything that's not bolted down that you can buy with money has been going up in the last couple of weeks. When you take a look at how this plays out from here, we continue to look at the underlying growth projections for this year and think that the consensus is going to continue to be wrong to the downside as it has been for the last 18 plus months. And given that you'll see earnings continue to move to the upside which they have post-reporting season, and that bodes well for equities. Now, the other thing that's boded well for equities this week is we've definitely started to see the broadening and the rally, the S and P 500. If you take a look at S and P 500 constituents just within the last couple of days, we've seen almost 25% of the S and P 500 hit a new 52-week high.
That is not a bearish scenario when you take a look at breadth broadening like that. So you can look across the board. Yes, it's been driven by tech. There's been really strong moves in technology, but we're also seeing things broad now within industrials. Don't look now, but if you look at over the last 12 months, banks are up 43% while the S and P 500s up 33%. So we've got a whole bunch of things in this market that are working right now. And right now we don't see anything that's really going to get in the way or get in the way of derailing that, given that the Fed is most likely going to cut in June and put itself on a path to put a couple more cuts in place between now and the end of the year, and even when you're in a high growth, modestly higher inflation environment, that's bullish for stocks.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Steve, Rajeev and Cindy. We appreciate your perspectives. 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. Next week, we'll be off for Good Friday. So we'll catch up with you in two weeks 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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