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, November 10th, 2023. I'm Brian Pietrangelo and welcome to the podcast. As you might know today, we observe Veterans Day with the actual holiday being tomorrow, November 11th. So if you happen to take the time to see a veteran, thank them for their service because of the great sacrifice they used to put their life on the line for us as we went through many centuries of wars. And if you're wondering why Veterans Day is actually observed on November 11th, it goes back to the history of World War I and the celebration of the ending of World War I in 1918 where the mark for the official end of World War I was on the 11th hour of the 11th day of the 11th month in 1918. And that's why we celebrate it on November 11th. So again, on behalf of myself, my colleagues here at KeyBank and everybody else, we want to say thank you for your service. In addition, as we think about some of the turmoil across the globe, it's even more important to thank those that are currently serving for us to help and protect our USA. Thanks everybody.
And 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.
As we take a look at this week's economic and market news, there were no major economic reports to share with you this week, which is quite unusual. However, we did have some comments from Chair, Jay Powell, yesterday, which we'll discuss with Rajeev. So let's turn to Steve to get his comments on what happened in the stock market this week, which seemed to be quite a nice rally, and what other observations he might have in terms of what he sees in the markets. Steve.

Stephen Hoedt:
Well, Brian, we did come into the week on a hot streak and we did make a high earlier in the week. But the rally seems to have stalled out a bit here as we head in toward the close of this particular week. And when I look at the market, I see a couple things causing us to stall out right near again that 4,400 level. And was flipping through some charts this morning. And it's fascinating to me that we've crossed back and forth and hung out at this level in June, July, August, September and October.
So here we are back again crossing through familiar territory and sitting right below 4,400. And we've got this weak 30 year bond auction, which I think Rajeev may address a little later. And we had some kind of hawkish commentary come out of Chair Powell, which kind of reinforced to the market that there's no Fed put there, meaning that the Fed isn't going to be there to bail out the equity market if the equity market goes lower. So I think that kind of brought the winning streaks to the end in terms of consecutive days that we've been up.
The truth is when you look beneath the surface of this market, there has been some kind of deterioration over the last few days and that's been masked a bit by the fact that the magnificent seven stocks have continued to do very well. And in fact, if you take a look at a popular tracking index for those stocks, it did make a new all time high this week. So we've kind of got this tale of two markets going on. And I think that when you look at what's been going on in oil, the action there has been a bit concerning because it makes you wonder whether there's a broader economic message being sent or if it's just a realization that the geopolitical premium that maybe was built into the market in the wake of the situation with Israel and Hamas maybe has come off the boil a little bit in terms of market, thinking that that could widen out.
So basically, we saw the market make that new swing high, but we have yet to see it follow through. We've seen these types of rallies before in this downtrend. Each time, they have failed. So I think the onus is on the bulls here to really try to push us through this 4,400 level decisively if we want to take advantage of the bullish seasonals into year end.
The market feels like it may want to try to do that, but when I think about earnings, the earnings numbers have been okay so far. But the one thing in there that concerns me a bit is the fact that revisions have been heading to the downside is we've come through earnings season. And that means that the 2024 numbers, which everybody's been kind of hanging their hat on in terms of holding up as maybe some of the economic data has gotten a bit squishy in the geopolitics and politics in general have come back to the fore. Don't forget, we're less than a week away now from the next shutdown discussions. All this kind of stuff is there, and I'm still skeptical that we just have a rip-roaring rally into year end. Maybe we just meander around this 4,400, give or take a percent or two around it.

George Mateyo:
It does kind feel like a meandering kind market to me as well, Steve. I'm kind of curious to know if you think about the next, call it, I don't know month or so, things will probably slow down mid-December on, are there any [inaudible 00:06:33] that you're looking for, any company earnings, any corporate events that really would be noteworthy as we think about where the market could go in the short term?

Stephen Hoedt:
Again, the big one for me is November 21st with Nvidia reporting. So I think if there's any kind of a major surprise out of Nvidia, either positive or negative, it could help to put a jolt into the market directionally. Either way. I can't tell you what the reaction's going to be. They've reported bang up numbers each of the last couple of quarters, just surprised massively to the upside. So I think the market probably already thinks there's going to be a positive surprise. So the question will be, will the positive surprise be positive enough?

George Mateyo:
And based on your history, when you see a stock like that, that becomes so prominent, you're right that they put up numbers that are just extraordinary and I think that really was the catalyst to try and get this AI spark lit earlier this summer, or maybe late spring. In your experience, even history of markets, how many times or what percent of the time did things, do you think that just get way ahead of themselves? Are investors, do they tend to over-extrapolate things like this? Or how do you think this is going to play out based on the expectations being so high to begin with?

Stephen Hoedt:
Well, look, I think that the comp for me having been a technology analyst back in the 2000s is Cisco, right? So you've got a key enabling technology for the internet that the company is still around today. They were a great company. But the stock was trading at such a point where basically their revenue had to get to be 6% of GDP to justify the valuation. And if you bought Cisco stock at the peak in 2000, you still haven't broken even yet. So I look at Nvidia today trading at north of 20 times sales, and it's tough for me to talk about that as being not hearing echoes. I don't want to want make recommendations here or not make recommendations because we don't do that on this call. But I tell you, I hear echoes when I see things at 20 times sales. That said, it was at 40 times sales a few months ago. So it's kind of grown into its valuation a bit.
So there is this kind of what I call the infinite TAM problem that people are trying to get their arms around, and that is when you've got a new technology and you've got a new thing going on this, you can have a real problem trying to understand what the total addressable market that the company is trying to hit is. And right now ai, it's viewed exponentially, so it's really hard to put a number on it. It's going to be a really interesting call on the 21st in low liquidity conditions in Thanksgiving week.

George Mateyo:
Yeah, I'm glad you pointed that out, Steve, so thanks for sharing that. Other things we see in terms of maybe catalysts between now and year end, probably have to go back to you in terms of what the Fed might do when they get together once more before the holidays. Again, it's about a month away and this week it suggests to me that maybe they're not quite yet finished or maybe decided what they're going to do. What'd you make of the week that just took place from the Fed's perspective?

Rajeev Sharma:
Well, George, Fed Chair Powell, he somewhat pushed back on the market sentiment that we saw on November 1st on the FMC meeting. I think the market looked at Fetcher Powell's testimony yesterday and viewed it as a hawkish one, but I really don't think he said anything different from his press conference on November 1st. Maybe the market got a little carried away, maybe you could say that the market initially was oversold and now it's overbought. But at the same time, I think that Fed Chair Powell's comments yesterday, he's pretty much saying what he said in the presser, that he's looking at that 2% inflation target. They would not hesitate to tighten more if appropriate. We heard that in the press room, that they're going to look at the data and they're going to work on this and they're going to decide whether one more hike is necessary or not.
But the market certainly did not view that as a dovish comment. They viewed it as a hawkish comment and we saw the two-year treasury note yield move to 5%, right on his comment. The two-year treasury note yield is the most sensitive to Fed policy, and we saw a move to 5%. Fed chair Powell is keeping the bias of another rate hike on the table. And if the data does not support a slowing down of inflation, if we see a surprise next week, I think the fixed income market is going to see yields start moving up, especially in the front end.
Fed chair Powell did say that we don't want to go too far, but the biggest mistake would be to not defeat inflation. And all of this was viewed as a very hawkish statement by the Fed, but there were other issues that were hitting the market yesterday as well. We had a really ugly 30 year treasury auction. It was a $24 billion, 30 year new bond auction that tailed more than five basis points. Dealers had to eat it, and basically the bond market did not like this at all.
So there was a large tail in the 30 year, and we haven't seen that for a very long time. Last time we saw such a bad 30-year auction was back in 2011, when SAP downgraded the US, from AAA to AA+. So I think all these factors yesterday really played a lot into the fixed income market, and I think that just keeping the Fed in play and keeping them on that thought that maybe there'll be one more rate hike is going to cause volatility in the market. We had got to 5% on the two year before the FOMC meeting and now we're right back there again.

Brian Pietrangelo:
That's interesting, Reggie, when you talk about that parallel back to the downgrade, so when we think about Washington, DC, we had elections across America this week. George, maybe you've got some thoughts on what's happening in the election cycle and what investors should think about.

George Mateyo:
Well, Brian, this isn't a political show, so we won't get too much in the weeds about which candidate did better or worse or whatnot because I'm sure we could probably spend more time than we probably should. But yeah, it is kind of election season. I guess like it or not, we're less than a year away now from the big presidential election, of course, next year. And I think it's fair to say that there is a lot at stake, right? The presidential election is going to garner the most attention, as it always does. But there's also 435 seats open in the house and there's 33 seats open in the Senate, or at least they're up for election, I should say. They're open, but they're up for election. And there's also some really narrow margins for both chambers of Congress that suggest that there's going to be a lot of back and forth and a lot of rhetoric, frankly, as people try and get their opinions known.
I often think, I guess, Brian, that people always characterize this as the most consequential election in history. And I guess you could always make that case, but I think that's a little bit of hyperbole. And I think in terms of the market's perspective, and Steve taught me this a long time ago when I think when I first came here to Key, actually, we were right in the middle of that period of time when 2016 was ending. And he often used to say, "Markets, they don't pick sides. They don't pick teams. They're not here to decide if it's the red team that's going to win or the blue team that'll win." They frankly don't care. I think Steve, you often just say that markets just want clarity, right?

Stephen Hoedt:
They want the removal of uncertainty.

George Mateyo:
There you go. So perfectly said. And I think that's going to be unfortunately kind of an overhang for a while. And if you look back at that moment, I'm not going to talk about 2020, I think 2020 was an interesting year for a lot of reasons. But Covid essentially was kind of moving the markets in different directions. But 2016 was kind of interesting in the sense that the market had a pretty good first quarter, if I recall. Kind of went sideways most of the summer. I think it got a little sloppy and maybe kind of slid back a little bit coming to election.
But to Steve's point a minute ago, after the outcome is known, stocks recovered and started to move higher again. So we wouldn't want to make too much of one period of time, but I do think that people probably place an over amount of importance on the outcome. Sometimes they let their political views taint their investment objectives, and that's a mistake in my view. So we're going to be focused on probably the bigger picture. We're going to be focused on the economy, focused on earnings and fundamentals and things that are probably more central to the market in the next 12 months, Brian.

Brian Pietrangelo:
Great. Thanks, George. Any other thoughts on maybe portfolio positioning that we should consider for our listeners?

George Mateyo:
Well, I would say I think that if you think about where we are right now, again, we've been kind of balanced towards our risk positions, meaning we're trying to keep a balanced approach with respect to how we want to think about portfolios. We've also been suggesting that, as Rajeev pointed out, there are yields that are somewhat attractive again, and there's income and fixed income, as we've been saying for quite some time.
So when I think about it, if you have excess cash, I think it's probably not a bad time to consider dollar cost averaging into bonds a bit. There's also somewhat of an asymmetry there between your portfolio. So if rates go up, for example, that's typically a time when your bond prices go down. And that would happen again, if rates moved up suddenly. But I think over time, given the fact that there's coupons that are in the 4 or 5% range, that'll compensate you and you can kind of make that up over time. So I'm not saying that I'm the biggest bond bull right now, but I do think bonds actually present in [inaudible 00:16:13] of opportunity. Stocks aren't really cheap, but they're not expensive either. So to Steve's point, we probably meander around a little bit. And I think for those reasons alone, just keeping that balanced approach towards risk overall feels right to me.

Brian Pietrangelo:
Well, thank you for the conversation today, George, Steve and Rajeev. 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 very 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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The Key Wealth Matters podcast is produced by the Key Wealth Institute. The Key Wealth Institute is comprised of financial professionals representing key entities including Key Private Bank, KeyBank Institutional Advisors, Key Private Bank, and Key Investment Services. Any opinions, projections or recommendations contained herein are subject to change without notice and are not intended as individual investment advice. This material is presented for informational purposes only and should not be construed as individual tax or financial advice.
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