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, December 13th, 2024. I'm Brian Pietrangelo, and welcome to the podcast. And just a quick reminder for the remembrance of last week's December 7th anniversary of the attack on Pearl Harbor in December 7th, 1941, again a day that will live in infamy and always an important reminder of war, how devastating war can be, and as we try and live together on our planet in ways that are more and more collaborative. And again, thanks to all those in the military for keeping us safe and secure here in the United States. Again, thank you.
And on a much, much lighter note, I had an opportunity this week to be in Salt Lake City presenting at a conference for the Vistage Worldwide Economic Summit in Salt Lake City. A great opportunity to meet a lot of people at the event. Thanks for having me there and allowing me to provide our economic update, but also had the opportunity to meet a legend in the rock and roll industry, Sandy Gennaro. He is a famous drummer and you might not know him by name, but you certainly would note him with the bands that he played with and the songs that he played drums on. So what a tremendous opportunity, Sandy, great presentation. Enjoyed meeting you as well.
With that, I would like to introduce our panel of investing experts. Some might say we're a little band here within the chief investment office at Key Wealth, and we're here to share our 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 week. In addition, if you have any questions or if you 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 very light, so we only have two key updates to provide for you this week. First beginning with the initial unemployment claims that came out for the week ending December 7th at a level of 242,000 was an increase of 17,000 over the prior week, which was a little bit more than the normal increase that we see. However, that being said, 242,000 is still well within the range that we've been talking about for the last six to nine months so not much area of concern here, but we'll wait to see if this is just a week-to-week fluctuation.
And second, the bigger news for the week is the output from the consumer price index measure of inflation, and that will be considered by the Federal Open Market Committee at next Fed meeting as some possible implications. It may or may not change their decision, but nonetheless, it did come in hotter than expected. Now some may say hotter, some may say warmer, either way, the concept is that it did not come down and actually went up. So if we look at overall CPI for the month of November, it came in at 2.7% year-over-year as opposed to 2.6% in October. If you look at core inflation excluding food and energy, it came in at the same rate at 3.3% for November, which was the same as the month of October. Again, either way you look at it, it's not going down, which is what is the Fed had hoped for in terms of measuring inflation and getting it back to that 2% target.
In addition, on Thursday we had the PPI, which is the Producer Price Index measure of inflation, which also came in hotter than expected. So our panel will have a discussion on that and certainly we'll talk to Steve about what's happening in the stock market where the Nasdaq eclipsed 20,000. We'll have his thoughts on what that might mean and what direction things might be heading. But first, let's start with George on his thoughts on the overall economic data. George?
George Mateyo:
Well, Brian, there wasn't too much to report on this past week. I think you're right to call it inflation. I think it's going to be one of the things you're going to have to watch pretty closely next year, and that has implications for risk assets like equities and also fixed income and what the Fed may or may not do given the inflation situation. And I think the Fed's going to also have to start paying attention probably to policies out of the Trump administration as it's coming into focus a little bit.
When we've got together I think over the past few weeks, and I've talked a little bit about this setup for the new administration, I think it is fair to say that on the net it's probably slightly inflationary in terms of the overall package of things that's being bandied about by those in Washington. Tariffs is going to be front and center, of course. That to some extent is inflationary, but it's also probably more of a one-time hit than anything really sustainable. But still it caused some disruption there too. I think it might also probably suppress demand because it actually has a tendency to lower spending over the long term and I'd rather pay attention to that as a potentially growth outlook as well.
Also, on the growth side, of course, many people are focused on tax cuts and given the inflationary backdrop maybe with inflation being somewhat stickier, people might actually be less willing to actually take on new tax cuts. I think [inaudible 00:05:15] has probably seen an extension of the existing tax cuts. We've talked about those before as being a net positive, but would probably be even more positive to the economy if we saw greater tax cuts and given inflation pressures and so forth as being somewhat elevated, those additional tax cuts might be hard to come by.
And then of course deregulation, I think that's probably very sector specific and Steve talked a lot about that as it relates to certain sectors being beneficiaries of lower regulations. But not every sector will be treated equally as we think about deregulation. So I think net navigate, as we think about our outlook for this year, there are some pluses and minuses. They tend to cancel things out, but I think overall the backdrop is slightly one of higher inflation as opposed to something else, all things equal. At the same time, I do think the markets as we head into the end of the year here remains somewhat elevated. We've seen spreads come down quite a bit, meaning the premium that people are collecting on things like corporate bonds relative to other sectors of the bond market are somewhat narrow, so they don't have quite the additional compensation and equity valuations are pretty extended too.
We've seen a little bit of compression there recently, but equity evaluations overall are still somewhat elevated as well, so I think it's going to be a volatile first half of the year. We've talked a lot about that on these calls as well. Overall, I think we're still positive on the year as we thinking about next year, but it's going to be an interesting year to digest some of these new developments and if's nothing else, I think it's probably going to be one of these things we've talked about too as relates to the outlook is meet the new boss, same as the old boss, maybe not necessarily in the sense that this is the new administration. We're familiar with some of the things that Trump has done in his first administration as his first term as president back in 2017, but it's a different backdrop up to date too, and we have to be mindful of the fact that again, inflation this time is a little bit higher.
Interest rates are also quite noticeably higher than they were four or five years ago. I'm sorry, in 2016 rather. But nonetheless, I do think that we're going to see some continued momentum from the economy and probably a broadening out of the market. But again, as we think about heading into next week regime and what we have to navigate between now and year-end of course is the Fed. And I wonder your thoughts about whether or not the recent inflation readings we've seen maybe all through their thinking about rate cuts for the year ahead. What do you think Rajeev?
Rajeev Sharma:
Well, George, I mean the bond market is all set right now to see the Fed cut rates 25 basis points next week at the FOMC meeting. The CPI data came in, pretty much didn't surprise anybody in the market, pretty much gave the green light for rates traders to bolster the expectations of a rate cut. In fact, those expectations which were only 50% a few weeks ago, are not close to a hundred percent. So everybody's anticipating a 25 base split rate cut at next week's Fed meeting. What's important about next week's FOMC meeting is not only the rate cut, but also the Fed's release of their summary of economic projections. Here we're going to get a chance to see the Fed's dot plot and what that's going to do is give a sense of where every Fed member on the Fed is thinking about as far as the future path of rate cuts.
Those estimates have been pretty much all over the place. It's our view that the Fed will likely signal three rate cuts for 2025, 1 per quarter, March, June and September. Each rate cut next year associated with a new summary of economic projections by the Fed. So that's quite a change from where we were just a few months ago where back in September when we had the big jumbo cut by the Fed of 50 basis points, many people thought, oh, we're on a big path of rate cuts going forward. There were a lot of estimates that we did not subscribe to that called for about seven to eight rate cuts in 2025. We've pretty much stuck with our notion that the Fed's going to take a very cautious approach to rate cuts because now the Fed is not only considering data, they're going to consider fiscal policy as well, and we talk about tariffs, we talk about a lot of things that the new Trump administration may do that could stoke inflation, and I think that's something that's on the Fed's mind as well.
Maybe we'll get a glimpse of that in the next summary of economic projections next week. But when it comes to where we find our neutral rate or the rate that is considered Nirvana, where the Fed achieves this goal of price stability and maximum employment, that figure is still up for debate. Depending on what economic outlook you look at or which economists that you talk to, we are either close to the neutral rate or we're well above it. If we are close to it, then the pace and number of rate cuts is limited. If we're well above it, we should expect a lot more rate cuts. So again, this will not only depend on economic data going forward, it's going to depend on fiscal policy. Tariffs suggest that you could see some inflation pop up again. Inflation has remained sticky. Bonds continue to bear steepen as investors reprice inflation risks.
So there remains a bearish tilt on the curve right now, on the yield curve. We've seen some curve steepening as we enter the last few days of the trading year. The PPI number that we saw this week show that the US four cell inflation accelerated in November. Sticky inflation is something that the Fed does not want to see. Right now the difference between a two-year Treasury note and a 10-year Treasury note yield, it's around 14 basis points. That's the greatest spread we've had in over three weeks. So I think we're going to look at rates right now. We're going to look at the fact that the curve continues to bear steepen. We should see front end yields come down with the rate cut next week. But really what's going to be important is to see what the pace of rate cuts for 2025 is going to be, and we're going to get a glimpse of that in summary of economic projections.
George Mateyo:
Steve, what do you think this going to read through from the Fed is into the equity market? In particular you've always been really prescient when you think about certain sectors of the equity market doing better than others and maybe what that might mean for the broader outlook.
Stephen Hoedt:
Still think that what we see developing for next year based on what's happening with the Fed and the economy tells us that we should be tilting towards cyclicals and things that are going to benefit from deregulation. The financial services sector is front and center for both of those. The looser fed and less regulation are right in the wheelhouse there. The market seems to smell that out though, so how much of the returns have been pulled forward into the back end here of 2024 is yet to be determined, but still seems pretty clear to us that that's going to be the way that it is. And it's been interesting here lately, George, to watch how the market's been behaving because we are starting to have what I would call a breadth problem for the market again. So if you take a look underneath the hood, we've had nine consecutive trading days now where breadth on the S&P 500 has been negative, but yet we've continued to churn near the highs for the year.
It seems to me like we're probably going to consolidate between here and the end of the year. I don't think the market's just going to go rip-roaring off into the sunset. Maybe we drift a little bit higher with the seasonal bias because we are in one of the best two-week periods of the year as you run into year-end, and then you've got the first couple weeks of next year is also one of the best seasonal periods of the year. So there's a big tailwind there. But the other thing that's caught my attention is the fact that if you look at the Mag Seven, they're up to 33% of the S&P 500 now, and the performance there has really been picking up again lately too. So you've got the market benefiting from this idea that there's this concentrated group of stocks that's performing well, and that's a bit of a change from what we've had over say the last three to six months. So something to watch as we head into next year.
Basically these Mag Seven names have been on pause since June. If you pull up a chart of the market leading Nvidia, Nvidia hasn't made a new high since June. So if we start to get significant leadership out of those names again the market could surprise people there, and I'll tell you, I think most people are thinking that we are going to see this broadening out in this rotation. So it could be one of those conundrums where if the Mag Seven start to exert leadership again, people end up chasing their tail around to get exposure. So that's something to watch as we head into the new year.
Brian Pietrangelo:
Steve, speaking of the Mag Seven, the Nasdaq Eclipse 20,000, now sometimes that's just a number, sometimes it's not. What do you think of that interpretation for the investors in the market?
Stephen Hoedt:
Well, I'll tell you, big round numbers are always attractive when they get breached, and I don't know about you, I don't have a Nasdaq 20,000 hat. Maybe we need to order our Nasdaq 25,000 or 30,000 hats now.
George Mateyo:
It's an early Christmas present for you, Steve. We're going to see [inaudible 00:14:44]-
Stephen Hoedt:
Exactly. It seems to me that that S&P 7,000 might be one of those hats we should be ordering for 2025, I don't know. But look, the returns that have been generated by the NASDAQ since the trough in 2009, I mean, I saw a report this week. It's over 2300%. It's just mind-boggling, right? So truly to some of the commentary that we're favorable of making on these calls, the NASDAQ truly does represent American ingenuity or human ingenuity. And if not anything else, American exceptionalism because the technology elsewhere around the world doesn't seem to be leadership, but it's leadership here in our markets. And that's also part of what drives the capital flows into the US because if you want to participate in these stocks, this innovation, you've got to invest here.
So I would tell you that that's the takeaway from me on this is that there's this tremendous flow that continues to come into the US markets because of the performance of these companies. And it doesn't seem that there's any other place in the world that is capable of doing that right now. So kudos to us, I guess as we head into the end of the year.
Brian Pietrangelo:
Well, thanks for the conversation today, George, Stephen, Rajeev, we appreciate your insights. And before we close the podcast today, just a few reminders of some content available on Key.com. First, we've got our 2025 Investment and Economic Outlook where George, Stephen and Rajeev give their thoughts on 2025. So take a look at that or take a listen if you want to in terms of finding that on key.com. And also, we've got a few articles for year-end financial planning by our Wealth Institute, which shares opportunities to think about for both individuals and for business owners.
So 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 that 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 navigate your financial journey.
Speaker 5:
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