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, February 2nd, 2024. I'm Brian Pietrangelo and welcome to the podcast. As you might know, today is Groundhog Day, so the question for our panel is going to be, do we have six more weeks before the Fed cuts rates or will it be longer? As much, I'd like to introduce our panel of investing experts, here to share their insights on this week's activity and more. George Mateo, 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 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, there were two big categories of information to share with you this week. The first is all related to the jobs market and the second is related to the Federal Reserve's meeting and press conference on Wednesday of this week.
Starting with the jobs related information, the first report earlier in the week was his job openings and labor turnover survey report, which showed that job openings across America were at about nine million, which was fairly unchanged from the prior month and is indicative of the willingness of folks to look for and hire talent across the country.
In addition, just yesterday we had the initial weekly unemployment claims report that came out and showed that initial claims are 224,000 for the prior week, which is basically a tick up from the prior week. At the same time, it's still in that quarter of roughly 220,000 claims, which has been consistent for roughly the last six to eight months.
And finally, the big news for the week just came out this morning with the new non-farm payrolls from the employment situation report from the Bureau of Labor statistics, which showed that there was an unemployment rate of 3.7%, which has been the same for the fast few months. And the big number is the new non-farm payrolls came in at 353,000 for the month of January 2024. In addition, as is normal, the prior two months get revised, and in this case the numbers were revised upwards by a total of 126,000 for the month of November and December in 2023. So that's well above expectations on all accounts and does require us to look a little bit at some seasonality data as well as the revisions. But overall, that number significantly exceeded expectations.
The other major category for the week was the Federal Reserve's Federal Open Market Committee meeting and press conference held on Wednesday of this week where Jay Powell and the team talked about what they were doing with interest rates, which was keeping them constant, but the forecast for the future might remain a little bit higher than most people anticipate. So with that, we'll turn to Cindy to get our update on what did the Fed say, what did the Fed do and what are the implications for investors, Cindy?

Cynthia Honcharenko:
So the Federal Open Market Committee left the target range for the federal funds rate unchanged at 5.25% to 5.50%. The statement was changed significantly in many ways, including a stronger description of economic activity, acknowledging the strength of the quarter. The fourth quarter GDP print. The committee dropped the tightening bias language in the policy guidance as reference to, "Any additional policy guidance" was replaced with, "The committee judges that the risks to achieving its employment and inflation goals is in a better balance."
They also deleted the language that highlighted potential economic damage that could be caused by more stress in the banking sector, and they provided some forward guidance with, "The committee does not expect it will be appropriate to reduce the target range until it's gained greater confidence that inflation is moving sustainably toward 2%."
Chair Powell leaned firmly against the prospect of a March rate cut in his January post FOMC press conference. However, he did signal that the committee was nearing the confidence level necessary to justify the start of the cutting cycle. Powell repeatedly cited the need for more resolute confidence in the inflation trajectory as a critical precondition for rate cuts.
I view the January FOMC communications as reinforcing our expectation for the first rate cut to occur at the May meeting. Solid growth, continued rebalance in the labor market and inflation consistent with an average pace over the last several months should be sufficient condition for the committee to gain confidence to start dialing things back. The probability of a cut at the March meeting is low, but not zero. For this scenario to transpire, we would need to see a sharp deterioration in the data. Similarly, low but not zero is the probability of a scenario, which the committee delays the first rate cut beyond the May meeting. That would likely require sustained reacceleration and price growth over the next several months.
Powell also suggested the committee was prepared to engage in a robust discussion of the balance sheet policy at the March meeting, which will most likely result in QT taper starting in April. Finally, the most remarkable part of Wednesday afternoon from the markets was Powell's somewhat unprovoked statement that he didn't think the committee would have the necessary level of confidence to cut rates at the March meeting. Until that point, the statement and press conference appeared to be going to lengths to preserve flexibility, making Powell's apparent willingness to sell the option somewhat surprising.
Between now and March 20th, we have the CPI for both January and February being released and we'll also have a better handle on Q1 growth. Right now I think investors can trade with a bullish bias while tactically managing duration, and a regional bank commercial real estate malaise would definitely dampen the current euphoria.
George, Rajeev, I'd love to hear your thoughts on the FOMC meeting and Powell's press conference.

Rajeev Sharma:
Well, I agree with you Cindy. I mean regarding the details of the FOMC meeting, I think you really outlined that well. In particular, I found the statement itself to be moderately hawkish. It suggested that the Fed will remain methodical in their approach in respect to rate cuts. And the resiliency of the economy kind of gave the Fed the cover it needed to be able to wait a little longer for rate cuts, more longer than the market was anticipating. The statement contrasted market expectations, which had a probability of 60% for a March rate cut to begin, and as soon as the statement was over, that probably fell drastically as it should have. But that disconnect between how many rate cuts we're going to get in 2024, how the pace is going to be, when it's going to start, that disconnect between the Fed narrative and the market expectations, I think that will continue over the near term term and it's going to add to volatility in the near term.
Every single piece of economic data is going to be extremely important. Today's labor data that we saw showed a very strong jobs market. It takes some of that steam out of the recent bond rally. And why is that? Because this report and the lower than expected unemployment rate, it kind of makes Powell's pushback against a March rate cut justified. This is bearish for the bond market. Now we're seeing it today. We're seeing the yields move higher along the yield curve. We saw the front-end yields move higher. In fact, the jump in the two-year yield, which is most sensitive to monetary policy, is the biggest move we've seen since March. And now you have the 10-year Treasury note yield moving towards that 4% resistance point. If you add onto that a $121 billion of the Treasury supply that's expected next week, we could see elevated yields for longer.

George Mateyo:
I guess I would add just not too much really because I think you guys covered really well, but I think without sounding kind of harsh about it, I do think that the Fed is a bit of a communications problem now. I mean, they kind of signaled that back in December that things were getting, I guess appropriate for them to start cutting rates and the market started to really hang on to that notion. There was a bit of a rally before that that really kind of frankly wanted to overdrive around that same time and now they're walking that back. And as you pointed out Cindy, it seems that the chair decided to be pretty aggressive about really not March. Now he's been vindicated I guess this morning in the sense that the overall economic data, as you pointed out, Rajeev, was quite strong. And I think we're just going to be in this kind of environment for a while where we're data dependent.
We're going to be kind of whipsawed back and forth. Markets are going to be pretty volatile, probably not catastrophically so, so I wouldn't make it sound too dire, but I do think that it's going to be kind of a frustrating market for a while until we really get some resolution. The market clearly wants rate cuts. I mean, the market has been saying this all year and even leading up into this year that they wanted what reduced? Six or seven rate cuts I think at one point, and now they've walked that back to maybe four or five, I'm guessing. But those numbers are going to continue to oscillate pretty wildly, so investors are going to have to probably just stay put. Frankly, the idea of putting risk on and taking it off is really hard to do. So I think the appropriate level of, I guess, optimism is there in the sense that the economy is still going quite well.
That should be good for Main Street, probably good for the administration too to some extent, but we won't go down the political rabbit hole necessarily. But I do think that the fact that markets are going to be going back and forth for a while suggests that we're going to have to focus more on active management. The idea of thinking about how to be tactical, as Cindy pointed out, is going to be important. The idea of trying to be nimble in these markets is going to be important, and I think security selection is going to be more important than has been in the past. In the past, you could actually just kind of press a button and be exposed to the market and get that exposure pretty cheaply. This market to me feels like it's going to be one more of stock selection, security selection and being somewhat nimble and flexible with your approach.
Steve, given that backdrop we've kind of seen earnings come out this week in a pretty big way. And there been, in my view, let's look at the high level, in my view, there's been kind of a lot of, I guess puts and takes and some winners and some losers. But how are you thinking about the setup? How do you think about processing earnings that have just come out this week?

Stephen Hoedt:
You know George, this is one of the two biggest weeks for earnings. We've got, I believe the number is 100 and 107 companies reporting this week and 104 next week. So fully 40% of the S&P 500 needs two weeks. Numbers have been, I guess the best way for me to put it is good enough. I mean, when you look at the overall index aggregate earnings we're back within a hair's breadth of hitting a new all-time high in terms of index aggregate earnings for the S&P 500, but it's been choppy coming through earnings season.
I tend to rely on price action to tell me how the market is feeling about this. And if you look at companies that beat on revenue and EPS, they're going up 1.6%. Companies that miss are going down 4.1%. The historical averages for those two are double beats, typically go up 1.7. So 1.6 and 1.7, I mean, we're in the same ballpark there, right?
So for companies that win, companies that typically the typical performance for double misses is down minus 3.1, so down minus 4.1 is worse. So basically this quarter, if you're having a good quarter, you're being rewarded about as much as you usually are, but if you're having a bad quarter, you're getting gobsmacked. And I think that that's kind of the way that I look at this market. If you're doing well, it's good enough, but if you're not, you're really getting penalized. And you can see that in the reactions to various earnings. And frankly, the big tech earnings this week have offered us information on both sides of that, with wins and losses. So I think we came into the year thinking that this was going to be a year where active management was going to be beneficial because we expected there to be a broadening out of performance.
We expected the mega cap names to have some, let's say, just say digestion issues given the performance that we had last year and I think a little bit more than a month into the new year, that's kind of what we're seeing. Although I'll be honest, I'd like to see a little bit more performance out of the non-mega cap seven. We haven't seen really a lot of great performance from those names yet, even though quite honestly, when you look at the underlying economy there's no recession bells ringing when you've got 335,000 jobs coming in on a month when the market thought there was going to be 180 something 1000. So we're far away from having that recession argument come to the fore. So it's more about trying to pick and choose your spots with the economic strength that we have.

George Mateyo:
Yeah, I agree with you, Steve. I think we probably would want to see more participation from some of the small cap part of the market, and we've been kind of thinking that would come for a while. I mean, frankly, the valuation difference between small caps relative to large cap stocks is really almost at record level wide. So we have to respect that and at some point we'd see that reversion close a little bit, maybe at some point we'll get that later this year. But the fact that the economy is doing quite well would suggest that you'd see more of these domestic companies actually participate in that too. That hasn't happened so far, but we've seen some days of that, but it hasn't been that much of a trend that really would maybe support that.
I think your point about the asymmetry of returns I think is also important. And I think Rejeev and Cindy, we're probably seeing that in the bond market too, where I think the Fed is probably not really inclined to act if the economy weakens a little bit. I mean, if things get really weak we'll probably see that to some extent in a bigger way, where the Fed gets engaged. But if things kind of meander moderately lower a little bit, I wouldn't think the Fed would do much.
But conversely, if we see the labor market really pick up even more so from here, and particularly the wage numbers, I think were ones that probably are going to get some attention. Wages actually jumped about six tenths of 1%, which doesn't sound like a lot, but it's a pretty big number relative to the expectations. And I would suggest that if the Fed sees more of that, they might actually re-engage at some point this year. Again, that's a big if at this point, but the point being, I think the Fed is somewhat asymmetrically positioned too. Would you agree with that Rajeev?

Rajeev Sharma:
Yes, I would agree with that, George. I think that the Fed is looking for cover to kind of give themselves the luxury of having as much time as they need. They don't want to create a scenario where they cut too soon. And then as you mentioned, if we continue to see a strong economy, a strong labor market and inflation stays sticky, then the Fed's got to re-engage. And I don't think the Fed wants to go through that. Neither the market, want to see that either. So I really do feel that each data piece is going to be extremely important. The number we saw today I think solidifies the Fed's standing right now that we can wait a little longer and we have that luxury.

Brian Pietrangelo:
So George, if we think about it, we've got a bevy of data that came in recently, including the 3.3% fourth quarter GDP. Steve talked about earnings. We got the jobs report, inflation has been coming down. You put all this together as sort of a big bang to start the year in 2024 with a lot of information. How does this remind us as we oftentimes give our thoughts on portfolio positioning for our listeners, what are your thoughts and has that changed much or is it similar to what we've been saying?

George Mateyo:
I don't think it's changed too much, Brian. I mean, you're right to kind of point out that it's a pretty full pot of soup right now that we're trying to stir around a little bit and trying to process a lot of this information. That's probably a bad metaphor. You're better at this than I am, your coming up with metaphors on the fly. But I would suggest that overall, I think the overall backdrop is still kind of aligned with our thinking. I mean, we've talked about this now this morning a little bit to some extent to say that things are going to be kind of choppy, maybe it's a bit a rates bound kind of market action for a while. Probably the same thing on rates too. I mean, the one thing that we have to keep in mind in my view is that there may be other forces than the Fed that could move rates this year, and that could provide some volatility in the bond market, which could then ripple through to the stock market too.
So we overall, I think want to still stay somewhat balanced towards risk, but there are little things that we can do in a portfolio that can provide some value, I think. For example, we've been emphasizing quality. I think quality is actually still outperforming this year, and I think that's going to be a continued theme of ours. So really leaning to quality.
Steve talked about the words active management, and I think there's a lot of interesting opportunities there too. Small caps, as I said, we've been positioned thinking that they would actually recover and probably participate more than they have, but I still think there's some optionality there too. So I think there's a lot of smaller bets that can be added. But from a big picture perspective, given some of this churn and given the fact that we're going to start talking probably about elections more this year and some other geopolitical events, it's important to really stay balanced toward risk in our view.

Brian Pietrangelo:
And thank you for the conversation today, George, Steve, Rajeev, and Cindy, 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.

Speaker 6:
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