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, August 30th, 2024. I'm Brian Pietrangelo. Welcome to the podcast. As we finish up August and move into September with the unofficial end to summer, we talk about Labor Day. Hopefully, all of you have an opportunity to celebrate Labor Day with family and friends. Possibly have a cookout with hotdogs, apple pie, and everything else American, from the perspective of celebrating Labor Day.
As it is observed on the first Monday in September, Labor Day is an annual celebration of the social and economic achievements of American workers. The holiday is rooted in events dating back to 1882, when labor activists pushed for a Federal holiday to recognize the many contributions workers have had, in terms of of America's strength, prosperity, and wellbeing. On June 28th, 1894, President Grover Cleveland signed a law making the first Monday in September each year a national holiday.
With that, I would like to introduce our panel of investing experts. Three individuals who continue to work hard every day to keep us informed as to what's going on with the markets and the economy. 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 four key updates for you. Starting first, with the S&P CoreLogic Case-Shiller Home Price Index that hit a new all-time high for June 2024. That continues to show escalating prices. However, the good news is that when we look at month-over-month increases in terms of annual amounts, for June it reported a 5.4% annual gain, which was down from 5.9% for the previous month. Again, we'll look at the two sides of the equation. Prices still high, but the overall price increases are slowing.
Second, the weekly initial unemployment claims stayed very stable, so no update there in terms of movement or impressions.
Third. Just yesterday, the Bureau of Economic Analysis provided its second estimate for gross domestic product for the second quarter of 2024, and showed and upside revision for an annualized rate of 3% for the second quarter of 2024. Which was up from 2.8% for their prior first or advanced estimate for the quarter. The revision was primarily related to upward trajectory in increases in consumer spending, so we'll have to continue to talk about that with our panel with regard to what's happening in the overall consumer spending environment within the economy.
Fourth, just out this morning at 8:30 from also the Bureau of Economic Analysis, we get information on personal consumption expenditures in two ways. First, the overall spending did increase in a good way in the month of July over June, with regard to personal consumption expenditures, at plus .5%. Overall, that's a good year-over-year number, but it is a month-over-month number that we continue to watch with respect to the annualized trend.
The second part of that report, probably the most important number for the week was the read on PCE, or personal consumptions expenditures inflation measures. For the month of July from the month of June, the numbers stayed constant. Overall inflation on a year-over-year basis for July was 2.5%, the same as June. If excluding food and energy to be less volatile, the overall personal consumptions expenditures core inflation stayed at 2.6% for July. Again, the same as June.
We will certainly talk with our panel about what that inflation read means for the Federal Open Market Committee meeting, coming up here in September, where we're talking about rate cuts. We'll go straight to George, to get his commentary on what the overall numbers mean for today, as well as the week's information, to be able to pull together an entire story of where we think they might go, in terms of the Fed and rate cuts in September.
George, let's start with you.
George Mateyo:
Well, Brian, we'll keep it short and simple today, since it's on the eve of a holiday weekend. I think it's probably fair to say that inflation is cooling and the consumer is holding in pretty well. By all accounts, it seems to me that things are in decent shape as we get ready for a long weekend.
The inflation reports were pretty much as expected, so no true surprises there. Spending was actually a little bit better than expected, as was overall GDP, which you mentioned. The great part of GDP that got people's attention, again, was the spending. The consumers' spending money and holding in pretty well. A lot of that I think really hinges on the labor market. We talked about the fact that the job market last month was a bit soft. But in perspective, it's slowing but it's not falling apart either.
I think we just have to keep a balanced perspective as we get ready for the second push through the rest of this year. But overall, it seems like the Fed is pretty much convinced that inflation is behind them, which is good to see. They are noting, again, that we're starting to see some strains in the labor market, some cracks, but it's not really fully cracking, I guess. Maybe I can put it that way. Overall, it seems like the Fed is going to be at our back now.
Just two years ago, Rajeev, it's curious to see how far we've come. But two years ago, I remember pretty distinctly, Jay Powell going in front of us at Jackson Hole, and talking about the fact that he had a lot of work to do. He almost was suggesting that a recession needed to be actually achieved for him to actually get coupled with the labor market and the inflation situation coming back into balance. The S&P back then was around 4000 right before he made those remarks in August 2022. It fell about 10% in the preceding month. Now we're at about 5500, so we've gained almost 60% if my math is right. The market's come back a long way. Of course, we've seen a lot of positive developments since then. But I think if you just invested just based on [inaudible 00:06:29] headlines, you probably would have been disappointed because you probably would have sold out at a really bad time.
Irrespective of that, again irrespective of where things are going right now, I think the overall notion is that the Fed is cutting and more cuts are on the way. Rajeev, as we think about what the Fed might be doing, how do you think about this, as we think about what happens next in September and through the rest of this year?
Rajeev Sharma:
Well, George, I think we are seeing a consistent sentiment right now of that 25 basis point rate cut for September. You mentioned Fed Chair Powell's speech at Jackson Hole. He pretty much confirmed that the Fed is ready to cut, and they're ready to cut in September. Today's inflation data pretty much solidifies that 25 base point rate cut. Nothing that Fed Chair Powell said last week, or any Fed members that said last week, or that PC print that we saw today, nothing points towards a 50 basis point rate cut. Some investors may be disappointed by that.
As the data continues to come out in line with expectations, that 25 basis point rate cut is pretty much priced in. You can see that on the yields, on the yield curve. The point to note, however, is the market still expects a total of 100 basis points of rate cuts by the end of the year. How do we get there?
The only way to do that, we've got three meetings, September, November, December. The only way to do that is a 50 basis point rate cut at one of the November or December meetings. What you need to get there is you need data that points towards disinflation moving at a greater pace than its already moving. Or more importantly, in my opinion, would be that you would need to see a significant cooling of the labor market. From Fed's speak, we not that jobs data has taken on a greater importance than inflation, as you mentioned. That's a greater importance not just for the Fed, but for the markets as well.
If you look at this morning, at the yield curve, the slope of the curve has hardly moved based on the PCE print. That's because the two-year and the 10-year treasury note yields are moving in tandem. The 10-year treasury note yield expected to stay in a range, I would say, in the near term. That range is going to be around 375 to 392 on the 10-year. The twos, 10s curve remains inverted, but now we're only inverted by five basis points. If we look at where we were at the start of the year, the twos, 10s yield curve was inverted by 40 basis points, so we've come a long way. The expectation is that, as we get closer to that first rate cut, the yield curve will dis-invert. Investors and traders are now positioning for a steeper yield curve.
That's been the pain trade all year. Investors have been waiting for this normalized yield curve, a steeper yield curve, and we haven't seen it. But now, as the Fed starts its great cutting cycle, the expectation is the front end of the yield curve will move lower and that will result in a steeper yield curve.
Why are we not already there? It has a lot to do with some of the treasury supply that we've been seeing coming to market. We've had these treasury options by the Fed. As yields move down, finding buyers that are interested in participating in these treasury options has also been a big challenge. We see a two-year treasury option had some decent investor demand, but this week's seven-year option did not find any real investor reception.
You have these falling yields. You have the treasury market is set to have its fourth positive monthly returns in a row. Last time we saw the treasury market have four consecutive months of positive returns was back in 2021. If you want to look for five months in a row, you would have to go back to 2010. This is what happens when you get so close to a rate cutting cycle. You start seeing interest rate sensitive sectors start to really outperform. Now all eyes are really on the jobs data that's coming out and the eventual rate cut by the Fed.
George Mateyo:
Let's pivot and talk about stocks for a second, because it seems like Powell delivered, I guess you could say. But Steve, as we think about probably the stock du jour that everybody's focused on, it's Nvidia. We're not going to get into specific recommendations on the stock. I'd be curious to know, from your perspective, did Nvidia deliver or not?
Stephen Hoedt:
That depends on whether you're a bull or a bear, George. To be honest, it's kind of funny. But the report had pieces for the bulls and for the bears, quite honestly.
When we look at the report, and granted, look, we're doing that from the position of somebody who we have long exposure to this name in our strategy, so full disclosure for everybody on the call. When we're looking at this, the company came out with a beaten raise again. They beat expectations on revenue and earnings. You see their earnings line go up. But if you look at the trajectory of that, over the last few quarters, we've seen the beaten raises get progressively smaller. That means that the bar continues to be very high for this company on a quaterly basis.
You could argue that this quarter was really the first quarter where we had a mixed result since we've had the AI theme come into prominence, I would say about 18 months ago now. Gross margins, which are a piece of information that investors pay a lot of attention to, gross margins came down to just north of 75%. A couple quarters ago, they were 78%. The bears are pointing at the gross and saying, "Hey, look, peak gross margins, the story's over." I think that Jensen Huang did a really good job of talking about the challenges that they've had with Blackwell, which is their next generation AI chip. Which is likely going to ship for, what the company's saying, are a few billion dollars worth of revenue in the fourth quarter. That's the next leg to the AI story next year, is how much Blackwell will take off, and what it will do to both revenue and earnings as we get into the second iteration of this AI cycle, for lack of a better way to put it.
I think the takeaway from us is that this isn't a name where it's now, instead of being just a secular straight up and to the right story, we're going to get into a battleground phase with it. Where, on a quaterly basis, you're going to puts and takes because we're not having massive step functions in surprise anymore. Now we've got debate about how much is data center demand going to grow in 2026, relative to what current expectations are. That's a totally different game than we were a year ago, where people didn't even know what a data center was. They were like, "Oh, wait." You're talk about billions and billions of dollars in revenue, compared to what you had before. It's incremental change at the margin now, instead of step function. That's a different game.
I think the positive thing for the market is that you did not get earnings numbers to go down on this. You've had earnings numbers from the analyst community going higher. This has been a huge driver behind the thick red line moving up and to the right for the earnings line for the S&P 500 over the last year-and-a-half. That trend continued post earnings. We're seeing that help to push the market up.
This week, we experienced the lowest volume full trading day of the year this week for the market. It is sparse, in terms of participation. We'll see, once we get everybody back after Labor Day, and we get the jobs number next Friday, if that starts to goose things up a bit. But we're just hanging out right now, just below the all-time high. It does feel like it's inevitable that we're going to push through, as we head into this easing cycle in September. Nvidia didn't say anything in their call that takes that off the table, from a market leadership perspective.
George Mateyo:
Well, thanks, Steve. I guess to summarize, I think we've got three things to think about then, as we go forward from here. We've got earnings, that you mentioned continued to be pretty decent. The employment situation is probably going to take center stage next week, so when we get together a week from today, we'll be dissecting that. Because I do think really, I think that'll be a key thing to watch going forward. The labor market, again, as we talked about it, it seems to be slowing down a little bit. Whether it slows down materially, as you pointed out, Rajeev, will essentially dictate what the Fed does for the rest of the year, I think. Next week is going to be a pretty key week. In the meantime, we've got earnings that are back.
The last thing I just want to point out is the elections. Of course, it's on most people's minds. We've got a call coming up to talk about that in detail. A few people have already asked a couple questions. One of which was, "What's the best now we can do now to hide out in cash?" When do we get into the market, was kind of the question. And, "Maybe we should just wait for the election to be over." I think that's a failed strategy. That's introducing this notion of market timing, which is something that I really would advise against.
If you look back over a period of time, I went back actually and looked at the election cycle in 2016 and in 2020. In both times, we actually did see the market sell off a little bit around this time of the year. Between September and election day, markets were down in the mid-single digits. Irrespective of who won, we had one Republican win in 2016, we had a Democrat win of course in 2020. Both times, actually after the election took place, after the results were known for the most part, stocks were higher by north of 10%.
I think the timing notion is going to be really hard to get right. Again, I think it's just best to strap on your seatbelt, maybe get a bag of popcorn, and watch what happens. Over time, I think the markets will continue to move higher, as long as we have a strong earnings backdrop, and a strong employment situation as well.
Brian Pietrangelo:
Well, thanks for the comments today, everyone. Before we close today's podcast, we want to provide our final reminder for our listeners for our national call on Wednesday, September 4th, next week, at 1:00 PM Eastern. Where George Mateyo will be joined by a very special guest, Libby Cantrell from PEMCO, to discuss the upcoming presidential election, and what it might mean for the markets and the economy. Again, Wednesday, September 4th at 1:00 PM Eastern. You won't want to miss this call, and it should be very informative. If you have not already received the invite, please reach out to your Key Bank contact.
Thanks for our conversation today, George, Steve, and Rajeev. We appreciate your perspectives. 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 not guarantee of future results. We know your financial situation is personal to you. Reach out to your relationship manager, portfolio strategist, or financial advisor for more information. 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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