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, January 19th, 2024. I'm Brian Pietrangelo, and welcome to the podcast.
This week there were a lot of experts and notable personalities providing their opinions at the World Economic Forum in Davos, Switzerland. So, you might want to check out a few of the interesting storylines. Back here in the U.S., 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.
Taking a look at this week's market and economic news, we've got four data points to share with you for the week, beginning with first, retail sales, which came in again about $710 billion for the month of December, 2023, which was a positive increase of 0.6% month-over-month from November and above expectations. So, that's good news in terms of what we're seeing in overall retail sales around consumer spending in the United States. We'll see if that continues into 2024.
Second, we've got the overall report on industrial production in the nation, which showed a +0.1% increase in December, which was great in terms of a preliminary read. We'll have to take a look at that as those numbers do regularly get revised going forward, but the positive nature of it is because 0.1% growth differs from the 0% or flat percent number we see in November, as well as the -0.8% decline we saw in October of last year. So, on the uptrend, but again, we'll have to see how this favors what we're seeing in 2024 on industrial production.
And third, the Federal Reserve's Beige Book report came out this week, which is always coincident with the upcoming Federal Open Market Committee Meeting that we've got at the end of the month, which provides activity for the 12 districts across the nation. Basically, the report showed that there was a majority of no change in economic activity. Basically, two-thirds or eight out of the twelve districts reported little or no change in that economic activity since the prior period.
Of the four districts that did have some type of change, three reported modest growth and one reported a modest decline. An interesting note within the report is that all districts cited one or more signs of a cooling labor market, such as larger applicant pools, lower turnover rates, or more selective hiring by firms and easing wage pressures. So, we'll give you some updated data that continues to be mixed around overall economic activity.
And finally, as an example of that mixed data, we've got the overall initial Unemployment Claims Report from the Department of Labor for the week ending January 13th, which actually slowed to a decline in overall initial unemployment claims to 187,000, which again is a good news story in terms of what we're seeing for those folks that are losing their jobs and their ability to get a new job in terms of the overall initial unemployment claims reading that we get each week. So, George, let's turn to you for your thoughts on economic data and whether you think the economy might stall a bit, like starting your car engine in the cold weather, or will it continue to hum along. George?

George Mateyo:
Well, it is wintertime here in the Northeast, and I guess it's fair to say that it has been kind of a sloppy start to the year as well. And I think it's probably typical that this time of year we always have some [inaudible 00:03:55] data, and some numbers that get a little bit distorted either way because of seasonality, and some other things that make it hard to get a really true sense to where things are.
We also have this idea that things are transitioning a little bit, where there's been a lot of restrictiveness, if you will, or a lot of tightening with respect to monetary conditions, and that just makes things kind harder to really understand where we're going. Where we probably are downshifting, to play after your metaphor, Brian, in terms of the economy and its trajectory, I think it is stalling out a little bit. I don't think it's going to completely stall out, but I think it's slowing more than else.
But the overall numbers aren't too bad, really. I think this we've seen probably more signs of strength than anything else. We got some stronger information, as you mentioned, with retail sales. So, the consumer still feels pretty good about him or herself. Housing is still chugging along, and of course, as you mentioned, unemployment claims continue to find new lows or so. So, we've made some pretty good progress there and the overall labor market is still pretty healthy.
So, I think if you add all those things up, in my view I still think that it's probably a decent economy right now. The Fed is probably thinking about cutting at some point, although I think we've seen many people and heard many people suggest that maybe those cuts might be coming a little bit later than initially thought. But I think they do want to start perhaps normalizing policy to some extent, not really cutting rates because the economy's in a recession. And as we said before, it's not so much how many times they cut this year, but why they're cutting I think is the bigger issue. And if so, so long as the economy is performing well, and because the Fed is cutting because they want to take away some of the tightening that they did last year to really essentially recalibrate policy, then I think things are okay.
So, I think from our perspective, it still kind of feels to me like we're on this path towards the old normal, as we've talked about now for the past several weeks. To put the old normal into some kind of context, we had a chart in our investment briefing this week that talked about how we've gone through this period of time where essentially Covid was the epicenter for this and really the linchpin to get this new economic regime underway.
And so, when that happened, we saw essentially all these lockdowns take place, and at that time massive increases in unemployment for a really short period of time, but it was this big burst of unemployment that kind of caused everybody to freeze in March of 2020. So, the overall size of the unemployment numbers went from 6 million to about 23 million in a matter of weeks, and then it gradually declined a little bit, and now we're seeing unemployment kind of hover around where it was pre-pandemic. So, the unemployment situation, as I mentioned, is in good shape, the labor market's in good shape, and we've kind of normalized that.
Secondly, within respect to Covid and what happened at that period of time in 2020, because of the people being locked down, they couldn't really spend their money, but savings went up a lot. So, stimulus just also spiked massively. The numbers that I guess you could kind of look back and calculate are roughly $1 trillion of stimulus was kind hanging around, if you will, if you look at $1 trillion as kind of the number that I think about in terms of overall savings rates and saving levels, and that spiked over $4 trillion. So, again, in a matter of months we went from $1 trillion of excess savings to $4 trillion, and frankly, that was just kind of the impetus for the inflation that took hold, and now we're starting to continue to see inflation normalize a little bit.
So, again, you put these things together, and from my perspective things are slowly reverting back to the old normal. One way I guess we can look at that regime is what's happened within the overall fixed income market. Rajeev, you've talked a lot about this notion of an inward yield curve, the fact that long-term rates are actually lower than short-term rates, which is somewhat abnormal, but now that relationship is normalizing again, too. So, what do you make of what's happening in fixed income, and how do you think about that, and how do you think the Fed is thinking about that as they go forward?

Rajeev Sharma:
Well, George, I think that the market has been anticipating up to last week six-plus rate cuts for 2024, and the Fed has projected three rate cuts. So, I think what the Fed is trying to do now with their Fed members and their Fedspeak is to come out and talk with the market and kind of reel back some of this notion that we're going to have so many rate cuts this year.
So, we had Governor Christopher Waller speak this week, and he talked about, "Let's be very methodical. Let's be very careful. The economy is strong. We don't need to really be rapid with our rate cuts right now," and I think the market did not like that, really. They did not like the fact that the notion of a March 25 base point rate cut is not really on the Fed's agenda.
So, I think after that we did see yields move higher across the yield curve. After Fed Governor Waller's comments, and as you mentioned, that the retail sales numbers were very strong, that also promoted higher anticipation of maybe a later rate cut, not March. So, when we started the year, March rate cuts were around 80% probability or the odds were 80% for the market. Now they're about 50/50. So, you've seen a big change, and you've seen the impact on the yield curve. You've seen the two-year move higher. You've seen the ten-year yield also moved very higher. And I think what's happening right now is the market is kind of trying to adjust to how maybe they were too aggressive with their speculation of rate cuts in March.
And I do think that, as you mentioned about the inverted yield curve, the two-ten curve, it's about 20 basis points of inversion right now, and this past Tuesday we saw that at 16 basis points. I think that's very important because 16 basis points has been the resistance level that we saw back in October of last year. Do we get to the point where we actually have a positively-sloped yield curve and we finally do not have an inverted yield curve? A lot of factors have to come into play to make that happen.
I think what's going to have to happen is that this notion of rate cuts to bring the front end of the yield curve down and kind of have a positive slope of the yield curve, that's going to take a little bit of time. So, we may stay in this range right now, but 16 basis points is the resistance point, and I think we're around 20 right now. So, we might stay inverted for a little longer than we expected.

George Mateyo:
Well, Steve, the stock market seems to be kind of humming along. We've had some fits and starts there, too, this year, but the last few days anyway we have seen a boost of momentum. What do you make of it?

Stephen Hoedt:
So, George, it strikes me that you were mentioning in 2020 a little bit earlier... I was just scanning through this morning that we're within spitting distance of another all-time high. And it's fascinating to me, January 3rd, 2022 was the last time we made a new all-time high in the market. 746 days ago, 511 trading days. So, it's been a while since we've been here. And when you look at how we're setting up as we come through earnings season, it's been interesting from that perspective, too, because I think a lot of people were looking at earnings as being something that could help to propel the market through to a new all-time high.
It's really a tale of two years as we're going through earnings. If you look at what's happening to the fourth-quarter numbers, actually the revisions are running much worse than they typically do during a quarterly reporting period. So, the numbers for the current quarter are not coming in great. And that doesn't really matter which sector you look at, whether it's the ones that have already reported from financials, banks, things like this, or some of the other early reporters across the board.
But what's fascinating is that the 2024 numbers at the same time are running 250 basis points ahead of where they normally would during the same quarter. So, fourth-quarter numbers getting marked down by over 400 basis points relative to average while the 2024 numbers are getting marked up, that's really the conundrum. The market's really more willing to focus on that forward look than whatever happened in the fourth quarter, and that tells me that there's kind of a bias to the upside or a bias to be optimistic about what 2024 holds relative to whatever has happened in the near-term past.
But absolutely super short term, we've got three and a half trillion dollars worth of options expiring this afternoon. And the reason why I point that out is that there's a ton of "funny business" quote/unquote that goes on on trading desks on Wall Street when you've got a large options expiration happening. I point this out because once you get those options out of the way today, that kind of frees the market up to move. And I believe that given the positive bias that we have set up here, that as you get this OPEX out of the way today, it likely frees us up to move up and to take out those all-time highs.
The pain trade to me really does seem higher for stocks. Whether it's news articles or what have you, it really seems to me like we're at a place where fear of missing out could start to kick in yet again, and we could end up having that melt-up that people have talked about for quite a while. It may start to manifest itself in the not-too-distant future.

George Mateyo:
Is there a point, Steve, or is there an indicator you're watching to suggest when things get a little bit too hot or a little bit too excited? People get over their skis in the wintertime, and that usually leads to bad things. And I wonder if the same thing could happen in the stock market where things get a little bit out of hand with AI, or as you mentioned, the fear of missing out syndrome, where's the tipping point or what things will you be watching to try and think that might occur?

Stephen Hoedt:
What's funny is if you look at fund flows, George, like right now, there's a ton of bearishness in fund flows. So, that actually has been running counter to this argument that we're frothy. Some of the more traditional sentiment indicators do show that we've had a rebound from some fairly significant pessimism late in the year to optimism today, but we're not extended quite yet. I would continue to look at market internals to give us clues there. That's things like the percent of the market that's trading at a one-month high, percent of the market that's trading above its 50-day or 200-day moving averages. You can look at different aggregate indicators like this to give you an idea of how quote-unquote "overbought" the market is in the current environment.
Right now we don't see the market as overbought yet. So, that kind of again lends itself to this idea that the pain trade near term is higher. And in my view, once we take out those highs, it's going to be important to see what the market does. And if we start to get some kind of acceleration or momentum, then I think that you would be right to start to think about taking some risk off the table. Because as you look at the Fedspeak, it to me is not a hundred percent clear that the market's going to get what they want out of the Fed in the first half of the year.

Brian Pietrangelo:
So, George, to finish today's podcast, I thought we'd throw you the question on an article that you wrote this week, which I thought was very timely and very relevant always to remind our listeners and investors in general on how to invest. So, you wrote the article that was basically entitled, Is Today a Bad Time to Invest? What are your thoughts on that?

George Mateyo:
Well, I think there's always a lot of worry that we talk about that investors have to climb over, and I think to some extent it always feels like a bad time to invest, right? Which is, there's always something going on in the world that makes us pause or makes us reflect on things, and it makes us probably pull back a little bit.
And I guess if I take a look back at some historical perspective, 50 or so years ago we had just an awful situation in the Middle East, which unfortunately we're still seeing evidence of that today. We had a crisis of confidence in Washington that was known as Watergate, and it was a really rough time for the overall psyche of America. And at that time, the S&P was in kind of a free-for-all, and we had a really bad recession as well. But if you look since then, I think we've calculated that if you invested $20,000 in January of '73, which is right before all these things I just mentioned really happened, your portfolio would've shrunk by about half.
So, you would've lost about half your money, or maybe I should say your portfolio would've declined by half. You wouldn't have necessarily say lost that because hopefully you wouldn't have realized that that loss. But nonetheless, since then, the market is up some 35 times since then. So, we've had this amazing recovery, and that's really just a reflection I think of the overall stick-to-it-ness and the overall ingenuity around the American economy that really should be emphasized.
So, the idea that I think everybody feels like it's always a bad time to invest needs to be put aside, and you have to really think about why you're investing, and think about the idea of trying to earn a fair return to really meet your obligations. So, for that reason I think it's always probably a good time to invest. So, I would take the opposite of that trade.
Now, we of course make sure you do that in a risk-controlled way. You think about your liabilities, you think about really what you need the money for, and you account for that appropriately. But the idea at this time where we're in right now, I think it is important to note that there probably is a lot of quote/unquote "cash on the sidelines". A lot of people have been tempted to actually probably overinvest in money market funds, because frankly it's been an attractive place in which to invest. You could earn roughly 5% on a money market fund.
But I still think there's probably attractive opportunities, and we continue to think that people should modestly extend the duration of their portfolio, think about high-quality fixed income and short-term fixed income instruments that Rajeev and his team manage. And I think also inside the equity market, Steve and his team have done a great job of thinking about active strategies and active management portfolios that can provide some really enhanced returns, too. So, I think it's fair to say that there's always risk out there somewhere, Brian. It's our job to try and manage that appropriately and to keep people focused on the long-term.

Brian Pietrangelo:
Well, thanks for the conversation today, George, Steve, and 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 achieve your financial success.

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