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, July 26, 2024. I'm Brian Pietrangelo, and welcome to the podcast.
As most of us know, today marks the opening ceremony and the competition for the Olympic Games in 2024 in Paris. As we go back, this has a history going back to something in the vicinity of 500 B.C. as our athletes compete against other athletes all across the world, representing over roughly 200 countries. As we think about a modern version more so than the ancient Greeks, the first modern Olympics were basically held in Athens Greece back in 1896 and began to gain significant favor around the world as a world event in roughly 1924 when the games were held in Paris. So, here we are a century later in 2024 in Paris again. So, we again wish all of those athletes, especially those in the US, good luck in all of their competitions throughout the next few weeks.
With that, I would like to introduce our panel of investing experts, some would say all worthy of gold medals in their specific fields of expertise. 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 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, we've got three releases to share with you beginning first with earlier in the week, existing home sales declined 5.4% in June, as we've continued to talk about this imbalance in the inventory market where prices continue to rise and overall sales continue to decline because there is that hesitancy to take on a new mortgage at a much higher rate than those in the existing mortgage environment have. So, from that perspective, we'll continue to watch this dynamic, but overall, we've seen prices go up to roughly 426,900 as the median price across the US and overall inventory continues to be on the market at 4.1 month supply relative to the current monthly sales pace.
And second, just yesterday, the real gross domestic product, otherwise known as GDP, came in for the second quarter of 2024 as the first estimate, and it came out at 2.8% on an annualized rate for the second quarter of 2024, which was higher than expected. Overall, the major drivers of the components of GDP continued to remain resilient, number one being consumer spending as it is the lion's share of the overall GDP report, and it continued to remain stronger than expected. Overall inventories and business investment remain positive. And the other item is a slight negative with regard to overall net exports. And following the last is government spending, which again remained positive. So, net net overall, stronger than expected, including that rise over the net export's negative read to give us an overall rate of 2.8% real GDP for the second quarter.
And third, just this morning, the overall rate for PCE inflation or personal consumptions expenditures inflation, otherwise known as consumer spending, that inflation read very important because it is the preferred measure for the Federal Reserve to make its decision, and the Fed meets next week. So, we'll have a conversation with our panel how these numbers might affect their overall outlook. But in general, overall personal consumptions expenditures inflation year-over-year declined from 2.6% in May to 2.5 in June. However, PCE core otherwise known as excluding food and energy, again, which is the preferred measure, stayed constant from May at 2.6% year-over-year to June at 2.6% year-over-year. So, the good news is it isn't going back up. The moderate news is it's staying equal, and we'll continue to look into our panel for the discussion around what this might mean for the economy and the Fed. But first, let's turn to Steve to get his reaction to some of the volatility that we did see in the week with regard to the stock market, and also, his take on earnings. So, Steve, what are your thoughts?
Stephen Hoedt:
Brian, it's been an interesting week for the markets, if not a interesting couple of weeks because the S&P 500, clearly we've had a fairly significant pullback. It's the worst short-term run for this market since April. And what's also been interesting is if you look across the board in areas like commodities and currencies, it's been an incredibly difficult market to try to navigate because it has this feel like nothing's working other than small caps lately. And what we're thinking is when you look at the seasonality into the election season, it's not telling you that you should be aggressively buying the pullback right now, to be honest. Now, when you think about the backdrop though, as you head deeper into the second half of the year, we'd argue that maybe pessimism doesn't necessarily square up with where you should be. Think the markets, the market right now from both a growth perspective and an earnings perspective is digesting a couple things.
One, if you look at what the second half of year last year was, the economy was growing a little more than 4%. And right about now, if you look at what people are forecasting for economic growth, and I think we would agree, it's right around, say, two, two and a half percent for the second half of the year this year. So, that's a significant deceleration and growth while at the same time, you've got earnings forecasts up around 9% this quarter and continuing to be fairly aggressive in the back half of the year. So, it's not a terrible surprise when you've got a deceleration in growth and you've got expectations that are maybe out of line with that to see the market have to digest some things.
That said, while 2% growth is still pretty solid growth and you're in a situation where the Fed is likely going to deliver cuts into a growing economy, so you put those things together, and it is a pretty solid base for equities to improve from as we head deeper into the second half of the year. Near term though, I would tell you looks like, anything can happen, right? Because things are, to put it mildly, politically noisy. And when you think about the valuation backdrop, we're extended, positioning from the perspective of being long a lot of the Mag 7 things. It's very concentrated.
And then, you've got notably less liquid markets as we move into late July and into August. All the things are there continue to line up for there to be some continued back-and-forth action in the tape between now and, say, sometime in mid-September when maybe we'll start to get some things clearing up a little bit more. So, we continue to push on the idea that investors should remain diversified and tilt toward quality and place your bets where you've got the highest level of conviction in your portfolio as opposed to maybe not having an emphasis on those kind of conviction areas.
George Mateyo:
Steve, I'll kind of pick up where you left off a little bit and on the comment on political noise, I think to some extent, we got one significant hurdle or uncertainty, I should say, maybe better said, we got one certainty out of the way last week, right? There were some concerns or questions about who would actually be at the top of the ticket for the Democrat party, and that seems to be resolved. I guess it's still not a done deal just yet in the sense the convention, rather, hasn't happened, but that process now is moving forward. But yeah, I think there's still probably some noise to clear yet for sure.
Back on the earnings side though, Steve, probably more importantly because I think ultimately, we view that the markets are going to do what they're going to do, the elections is kind of a sideshow, and the markets will eventually resolve themselves higher once the fog of uncertainty lifts. But I'm curious, Steve, as you think about earnings so far, and you're right to point out that the overall economic backdrop is slowing a little bit, but inflation has been a big driver of overall profitability and certainly pricing power. And I'm curious to get your senses, and it's still early, I know it's the quarter's only kind of halfway through in terms of earnings reports, but are you seeing any slowdown with respect to pricing power from major companies?
Stephen Hoedt:
We haven't heard that yet, George. Really, it feels to me like the real issue this earnings season is whether these mega cap tech companies are going to be able to provide the ballast for the earnings numbers that they have over the last few quarters. If you were to decompose the contribution of the Mag 7 to the S&P 500 earnings year-to-date, it's been a massive contributor, right? The two numbers from those companies that came out this week, Google and Tesla, they did not impress the market. And I could argue that if you go back and look historically, those two don't have a really good track record of impressing the market. So, maybe we shouldn't be hanging our hat on those two alone.
But very clearly, next week, you've got Microsoft, Meta, Apple, and Amazon all reporting. And I feel like next week is a really important week for the market in terms of earnings because if we don't see these companies able to provide that kind of ballast to their earnings numbers being able to go higher here, it's going to be a drag on the overall expectations for the market, I feel. So, I'm really focused like a laser on those four sets of numbers next week.
George Mateyo:
Well, the key to life is low expectations, right? If you can meet your expectations or exceed them, you're probably in a better place. And you're right to point out the fact that some of these companies, the expectations have gotten really inflated. And small caps, to point out the expectations are a lot lower. So, there might be a sense of this rotation continuing. Well, I guess we'll see. It's kind of caught me by surprise how strong the movement's been. We've been overweight small caps for quite some time, thinking that they'd be due for a rally. We kind of thought the economy would be doing okay, and in that backdrop, small caps would catch up and they'd started to show those colors, if you will.
I think, Rajeev, in terms of expectations too, there's been a lot of the conversation about what the Fed might do, their meeting next week. There was some commentary out this past week from a notable Fed head, I think a former Goldman Sachs official, Bill Dudley, who's now really in charge of a pretty big portfolio at the New York Fed. And he's talked a lot about this thing called the Somerall that we've talked about as well in the sense that the overall level of inflate, I'm sorry, the level of unemployment is starting to rise a little bit. And typically, when you start to see unemployment pick up, it picks up at a fairly rapid pace. It hasn't really materialized just so far this cycle. So, we haven't, to be sure, haven't really triggered that rule. But again, expectations are such that the Fed might consider actually lowering rates sometime in July. I think that's a bit of wishful thinking, but what are your thoughts with respect to the Fed and their expectations for rate cuts in the back half of this year?
Rajeev Sharma:
Well, George, yeah, the bond markets, they're really starting to really look at the data that we're seeing in the market and painting a picture for the Fed to cut rates soon. The bond markets are viewing today's PCE data as bullish. They suggest that maybe there could be a soft landing. Not only that, we do see that the yield curve continues to steepen with the front end of the yield curve moving lower in anticipation of two rate cuts for 2024. So, the yield curve is moving lower in the front end. You're getting closer to un-inverting. So, the 2s10s curve has less than 20 basis points of inversion in it right now. Now, for the FOMC meeting next week, full attention is going to be placed on the statement. It's going to be placed on the press conference. There are some market participants that are looking for Fed Chair Powell to not only hint at the September rate cut, but even hint at maybe up to three rate cuts for the year.
I still feel the first rate cut will be in September. The second would more likely be in December. But as I mentioned, the market is really stringing together data points, and they're doing it for the Fed to argue for more rate cuts this year. Now, you mentioned former Fed member, Bill Dudley. He did come out and say that the risks have shifted away from the Fed's inflation target, and now, are moving more towards increasing labor market slack. He feels the Fed should cut rates next week, which is very unlikely. But either way, there is this galvanizing force really for more rate cuts for 2024 than what the Fed has talked about in their past FOMC meeting. And there's also going to be more opportunity for profit gains in Treasuries.
What's keeping us Treasury yields from going even lower than they're going right now is the Treasury auctions that we saw last week. Most of these auctions did pretty well. However, investors are demanding higher yields to participate in the auctions, and that is keeping pressure on yields from going much lower than they are right now. Next week, we also have not only a Fed meeting, but we also have the quarterly refunding announcement by the Treasury Department. Estimates are calling for $530 billion in funding required for the quarter and maybe even slightly more for the fourth quarter. So, that's going to also have an impact on yields next week. It's be very important to see that.
And meanwhile, if you look at credit spreads, they continue to remain very well-behaved. They're at the tight end of historical ranges. We've seen a robust amount of new issuance in the market, and it's been met with really strong demand for this corporate credit. It's possible that we don't get that slowdown that we generally get for new issuance in the summer months. And this is because borrowers, they're looking at their borrowing costs and saying, "This has moved lower. We might as take advantage of this. Let's take advantage of the investor demand, and also, try to get in there to the market before the elections to avoid any volatility that we might see in rates."
George Mateyo:
Well, I'm glad you pointed out the refunding announcement, which is something a little bit more in the esoteric realm of data we have to watch out for. But again, it does speak or tie to the theme that maybe rates might be moving for reasons other than what the Fed is doing, and that's something we have to pay attention to as well. But I guess from where I sit, I think the overall backdrop is still pretty decent. Things like the near-term indicators we watch are in kind of the okay territory, meaning that they're not doing anything terribly, but they're not really re-accelerating either. So, I think it's going to be a churn kind of a moment for a while in the market.
And as Steve pointed out, I think we want to be really focused on quality, so up in quality, maybe down in cap a little bit. So, we've talked about being a little bit underweight, some of the Magnificent 7 names and maybe underweight some of the overall market cap of the market itself, but certainly up in quality is going to be one thing we're going to continue to focus on as we think about positioning for the back half of this year.
Brian Pietrangelo:
And thanks 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.
Speaker 5:
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