Market Minutes Recap - Market Update (Perspectives on the latest economic reports, the bond and equities markets, next week's FOMC meeting, the US presidential election and proposed tax policies)
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, November 1, 2024. I'm Brian Pietrangelo, and welcome to the podcast. Well, we certainly hope that everyone had a safe and happy Halloween yesterday. It's always fun and interesting to see the cool costumes when you're passing out candy, but be careful that you don't have that excess amount of candy left over that you'll be eating for the next 3 to 4 weeks.
Brian Pietrangelo:In addition, today is sometimes celebrated as All Saints Day, and tomorrow is sometimes celebrated as All Souls Day, where many individuals take the time to celebrate and honor those that have passed away. So it's somewhat fitting that we take a pause to talk about 2 legends in the Cleveland community in the sports world that recently passed away in the past few weeks. 1st, we had Danny Coughlin, which was a legend in the sportscasting world and covered a lot of high school sports in addition to the pro sports in the Cleveland area. So, again, we, we our condolences go out to Danny Colligan's family and everybody that knew him. And second, just this past week, Jimmy Donovan, who was also a sportscaster and newscaster in the Cleveland area, was also legendary, had a tremendous following and fan base, also was the voice of the Browns and other Cleveland sports teams.
Brian Pietrangelo:And it's just a tragedy. Jimmy went too soon, was not able to beat cancer, and therefore, we take time to say, again, our condolences to the Donovan family. What a great pair of individuals to help our community and give us the update when we always look forward. But Jimmy, Danny, great people. With that, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more.
Brian Pietrangelo:Steve Haidt, head of equities, Rajeev Sharma, head of fixed income, and Joe Valcos, national tax director. 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 adviser. Taking a look at this week's market and economic news, we have a tremendous amount of information to share with you. We've got roughly 6 different updates, which is more than any other period we've had when we've been running the podcast.
Brian Pietrangelo:So we're gonna give you updates in each one of these areas. But before we do, we are also gonna bring in Joe Velkos, our national tax director, here at the end of the podcast to give an overview and update of the presidential candidate's tax policies. Now, of course, we've got the election coming up next Tuesday, right around the corner, and so it's really advantageous to share with some of our listeners what's happening in the potential proposals of each of the candidates. And then certainly sometime soon after November 5th, we'll find out who the actual winner is and then come back and have Joe give an update on those policies as well at some point in time after November 5th so that everyone has an idea of where the tax policy might in fact go. We'll also talk with Steve about some earnings reports that came out this week and how they might be affecting the overall markets.
Brian Pietrangelo:And finally, as opening remarks, don't forget to turn back the clocks this weekend as daylight savings time does end between Saturday Sunday this weekend. So let's turn back to our conversation and update on the 6 different areas of economic data that was released this particular week so you have a pretty good idea that there's a lot going on and what each of them might mean for implications for the Federal Reserves meeting next week as well and the overall economy going forward. 1st, from the Bureau of Labor Statistics, we have the job openings report, which showed the number of job openings posted by employers had declined from August at 7,800,000 down to 7,400,000 in September. Again, we watch this indicator to see if it's an upward or downward trend of employers willing to hire individuals and thus having job postings out there. And second, also from the BLS, we got the employment cost index report that comes out on a quarterly basis.
Brian Pietrangelo:So for the quarter ending September, we actually saw a decrease in overall wages and salaries from June of 2024 at a 4.2% annualized rate to September of 2024 at a 3.9% annualized rate. So the massive increase in wages that we had seen coming out of the pandemic has begun to normalize and get closer to annual historical trends with a little bit of a decrease in this most recent prior quarter back to 3.9% year over year. And 3rd, according to the Department of Labor, the weekly initial unemployment claims for the week ending October 26th fell to 216,000, down 12,000 from the prior week and down 26,000 from 2 weeks ago, but even more importantly, down from its recent peak a couple weeks ago at 260,000, which had spiked due to, some of the possibilities of hurricane related unemployment claims as well as some of the point port strikes. So good news to see that this number has receded and back to 216,000 as a nice stable state of the overall employment market as it is measured by initial unemployment claim. 4th, this week, we had the Bureau of Economic Analysis release the first or what is known as the advance estimate for 3rd quarter real GDP for the United States economy, and it came in at 2.8% annualized for, again, the Q3 of 2024, which was slightly less than estimates or expectations, still slightly lower than the Q2 at 3%, but above the Q1 this year at 1.6%.
Brian Pietrangelo:So, again, is this an indicator that the economy is beginning to slow with some of the after effects of the overall Fed rate increases that have been in play for a couple years now, or is this just an overall slowing in the economy related to other factors? We'll dive into that with our panel today, but that's a pretty key number for us to take a look at. And 5th, just yesterday, we received the Fed's preferred measure of inflation, which is also known as personal consumption expenditures or PCE measure of inflation, and the news came in a little bit hot. Specifically, when we look at PCE inflation excluding the volatile food and energy components, which is the Fed's preferred measure, we see the 3rd consecutive month, July, August, and September, where the number did not come down and held constant at 2.7% year over year for the past 3 months. And, actually, the past 4 out of 5 months going all the way back to May, the only exception was June when it dropped to 2.6%.
Brian Pietrangelo:So 4 out of 5 consecutive and 3 consecutive reads at 2.7% does not go in the right direction. Most people were looking for that inflation rate to decline and get closer to the Fed's target of 2%. That being said, this is one of the 2 critical reports this week will felt the Fed will take into consideration next month when they meet here on November 7th in terms of their next Federal Open Market Committee meeting. And our final or 6th data point for the week is the employment situation from the Bureau of Labor Statistics, which gives us the new nonfarm payrolls and the unemployment rate for the month of October, which is the second most critical item for the Fed to consider when they meet next week because we're always talking about the Fed's dual mandate of maximum employment and price stability, otherwise known as managing inflation.
George Mateyo:So let's take a look at
Brian Pietrangelo:the report from the Bureau of Labor Statistics today known as the employment situation just at 8:30 earlier this morning, and it has two components. New nonfarm payrolls created in the month of October were only a low 12,000. Now this compares to 254,000 from last month. There are some distortions in numbers relative to hurricanes and port strikes, but September August were also revised down by 112,000. So even though numbers are somewhat distorted, this may give the Fed some fuel to consider their rate cutting policy as they go forward next week and into the end of the year in December.
Brian Pietrangelo:Also within that report, the unemployment rate for September stayed at 4.1%. And, again, some of that is a little bit distorted because the employment rate comes from the household survey, and the new nonfarm payrolls comes from the establishment survey. So 2 different surveys give us 2 different results. Nonetheless, we take a look probably at the new nonfarm payroll as being the more important number for the fed. So that's a ton of information this morning for this week alone with 2 powerhouse reports back on Thursday Friday this morning.
Brian Pietrangelo:So we will turn to Rajeev to digest all this information for us, give an update on what this might mean for Fed policy, the bond market, and everything else going on in the economy. Rajeev?
Rajeev Sharma:Well, Brian, the, markets and particularly the bond market, you know, had to contend with that slew of economic data that you mentioned. And, to deal with this, the market's really trying to shape its expectations of future rate cuts. Let's start with the PCE inflation data. That's Fed's preferred measure of inflation. That was the biggest monthly gain that we saw since April.
Rajeev Sharma:But you would think that the market participants would pull back rate cut expectations for next week's FOMC meeting, but that was not the case. The market felt that the number was close enough to the Fed's target inflation goal of 2%. I know we've talked about being, steady at 2.7% for quite a while now, but, you know, as long as we didn't see this big uptick, the market was pretty much okay with, with that inflation report. And that's pretty much guaranteeing a, 25 basis point rate cut for next week. Right now, the odds of that 25 basis point rate cut for next week stand around 98%.
Rajeev Sharma:So you can just assume it's a 100%. Then we got the jobs data that, on the surface, seemed like a shock report with only 12,000 jobs being added. That's the lightest number that we've seen since December 2020. But the market is taking that report with a grain of salt as well, pointing to the numbers being a noisy report. It's a report that was affected by hurricanes and strikes.
Rajeev Sharma:And and it's also the markets really focused on that unemployment rate that's stuck to a 4.1%. So the market is holding firm on their, expectations for 25 basis point rate cut next week, and about a total of 3 rate cuts by March of next year. Now if you look at bond yields, we did see a knee jerk reaction after the jobs report came out. The 10 year yields fell about 6 basis points to 4.22%. And they're hovering around 4 a quarter percent right now.
Rajeev Sharma:The range on the 10 year treasury note yield should remain pretty tight, between 4.2 and 4.34 percent right now. If you look at the 2 year bond yield, we did see that the 2 year bond yield, which is most sensitive to monetary policy, did fall, from 4.2 to 4.11% on the release of the jobs report. Bonds are going to look over this and and not really do much, until, we get through next week's presidential election on Tuesday and then Thursday's FOMC meeting. However, looking into next year, the Fed's terminal rate expectations have added an extra 25 basis point rate cut at some point. So the terminal rate has fallen from 3.73% to 3.57% now.
Rajeev Sharma:Another impact to the market has been the quarterly refunding announcement, that we also saw this week, where the US Treasury trimmed its estimate for federal borrowing for the current quarter. It now estimates 546,000,000,000 in net borrowing for October through December, down from 565,000,000,000 I noted back in July. This is really due to a bigger cash stockpile that we see, that that is on hand for the treasury at the end of September. And the impact of this will be felt on how much the, the treasury keeps adding to these debt sales. We've seen a lot of auctions.
Rajeev Sharma:We've seen a lot of supply from the Fed come into the market. It's provided upward pressure on yields. We can anticipate that to continue into next year. So I think you're gonna have a a market where we're gonna see these treasury supplies come to market, but you're gonna see that investors are are going to demand higher yields to participate in these auctions. And I think that's gonna be a big point as far as upward pressure on yields.
Rajeev Sharma:So, again, Brian, we we really have to get through all the economic data that we saw this week has not really created much of an impact on the bond market, but what it has done is it's it's shaping the expectations for future rate cuts. The market is adding another 25 basis points of rate cuts for next for next year. If we do happen to see another jobs report that we like we saw today, which is not anticipated, but if we do, you're gonna start seeing a lot of market participants start saying, hey. Should we have 50 basis points of rate cuts at the next meeting? I don't at the, December meeting, I don't think, we should anticipate that.
Rajeev Sharma:I think the Fed's gonna stay steady. They're gonna go over 25 basis points next, month and and probably another 25 basis points in December. We end the year with an additional 50 basis points of break ins.
Brian Pietrangelo:Yeah, Rajeev. It's difficult when we talk about the dual mandate for the fed, and this focus has shifted. It used to be on inflation till it came down, then it was on the jobs market if it continues to remain stable. Now we've got some instability there, and inflation is going in the wrong direction. So a real dilemma for the fed.
Brian Pietrangelo:Any any final thoughts on the direction they might take?
Rajeev Sharma:I think the fed, kinda put themselves in a in a in a corner by doing this, 50 basis point rate cut, back in September. And, you know, if they would have done 25 basis points in September, they would have the optionality right now. By doing 50 basis points, many people are questioning, was that too aggressive based on the inflation report that we're seeing, the jobs numbers that we're seeing? Perhaps they, went a little too far, a little too quick in the beginning. The Fed certainly does not want to, signal a policy error.
Rajeev Sharma:If they pause next month, which is not expected, but if they do, that's gonna signal a policy error by the Fed. They've really put themselves in a corner now, and and they'd like to create a cadence of rate cuts with every meeting being a 25 base per rate cut, stick on the, cutting cycle that they put themselves on. Any change to that is gonna really reflect on how the economy is doing. When the Fed did 50 basis points in September, their biggest fear was they didn't want the market to feel that they were behind the gun. They didn't want the market to feel like things were so bad in the economy that they were forced to do 50 basis points.
Rajeev Sharma:With inflation, the jobs are number that are coming out. The market's starting to question that that were things a little worse than expected.
Brian Pietrangelo:Great. Thanks, Rajeev. So let's turn to you, Steve, on equity side of the equation. I know it was a pretty busy week with some earnings and also right in the middle of q three. What are your thoughts on what happened this week?
Brian Pietrangelo:Maybe some of your reaction to the markets.
Steve Hoedt:Yeah. You know? So, Brian, I I think that I would I would describe this kind of as a a choose your own adventure kind of market for this week, especially when it comes down to the economic data. You know, I I'm looking at my Bloomberg screen right now, and the thing that jumps out at me, not so much the reaction that the bond market had to the data that you and Rajeev were discussing in terms of the nonfarm payrolls report, which I think everybody expected to be weak. The the the real question to me is, like, what what economy do we have right now?
Steve Hoedt:Because ISM Manufacturing came in at 46a half, so that's well below 50. Just came out prior to us recording this podcast. The thing that jumped out to me in that report, though, was the prices paid came in at 54.8 versus 50 for expectations. That's the kind of a forward looking inflation indicator. Right?
Steve Hoedt:So, you know, it so if if the the ISM survey is expecting inflation to run hotter than expected and manufacturing is weaker than expected, you know, the Fed's really in a box. Like, how do you how do they thread the needle and give the market or give the economy what what it needs in terms of where rates go? How how do you how do you even consider cutting 50 basis points when you've got inflation coming in up or in forward looking inflation indicators coming in above expectations? But how do you not consider cutting when you've got manufacturing sitting where it is and where you've got, the employment situation possibly being weaker than what people expected. So a re really, really tough place for them.
Steve Hoedt:I had no change in expectations in terms of the the the the forward looking, 25 basis point next meeting. But, man, I'm I'm happy that I'm not a Fed governor as we run-in between now and to to year end. I I I think it's kind of a thankless job right now. As for the markets, you know, the market's really been focused on the fact that 5 of the Mag 7 reported earnings this week. In general, the earnings numbers were good enough, and, you know, we did see the the some some of them sell off a little bit yesterday on on a couple of the companies having a little bit weaker, idiosyncratic things going on.
Steve Hoedt:Apple, in particular, had was was a little bit disappointing, and so was Microsoft. But, you know, the other ones, came came through pretty well. So, you know, in terms of the impact of forward looking earnings numbers, they didn't really move much this week. So so not not much to see here. They were good enough.
Steve Hoedt:And the market really right now at this point looks looks prime in in our view on the launch pad for the for the move into the year end once we get past the uncertainty next week, of the of the election. The the market really historically does well once you get past the uncertainty. It doesn't care whether the blue team or the red team wins. It just wants somebody to win, and and it wants to know what the outcome is. Because once the market has the uncertainty lift, the historically, irrespective of what the result is, the the the run-in through November to to year end is historically pretty good after the election.
Steve Hoedt:So, I'll I'll be watching next week, Brian, looking for a conclusion to the election season more so than a specific outcome. Back to you.
Brian Pietrangelo:Well said, Steve, and, thanks always for your context. We appreciate it. And I know we're gonna go a little bit longer than our normal weekly schedule for the podcast today, and the reason for it is we've got an extra special guest joining us today given the time the concept of the election next week. So Joe Valcos, our national director of tax policy, is gonna give us a quick update in terms of what we might think in terms of proposals, what they might mean for investors, and then have a good conversation. So Joe, welcome.
Brian Pietrangelo:Thanks for joining us today, and let's start out with the first question. Give our audience members really a context of how legislative tax policy works and what the process actually sounds like, and then we'll go into the actual proposals from the 2 candidates and then end with what's going on from an overall investor perspective. Joe?
George Mateyo:Yeah. Thanks, Brian. Quite good to be here. So it's certainly a good place to begin. You know, it's important to start off right from the beginning that a proposal that's currently being discussed on a campaign trail doesn't necessarily guarantee it becomes law.
George Mateyo:There's quite a journey as you can imagine going for a proposal for it to become a law. So all tax legislation originates in the house of representatives in the ways and means committee. The committee receives recommendations from a variety of sources, including the president, the IRS, as well as other professional organizations, and then a formal proposal is written. Then the real journey begins. The full house then works together, which may be easier said than done at this point, and presents a tax bill to the senate for review and approval.
George Mateyo:The senate has a similar process. Their finance committee works with the full senate to approve their version of the bill of the bill. From there, the house and senate worked together, Brian, to create a compromised tax bill to present to the president more signature.
Brian Pietrangelo:Great. So let's dig in. What are the differences and maybe highlights of the Harris proposals and the Trump proposals?
George Mateyo:Yeah. As you can imagine, there's quite a bit of proposals out there right now. Let me highlight a few of them. You know, consistent with the Democratic National platform, vice president Harris's proposals are intended to meet 2 objectives. 1, reduce the tax burden for working and middle class families, and 2, to pay for this, increase taxes for corporations and wealthy individuals.
George Mateyo:The vice president is hoping to reduce tax burden by committing to couples with incomes below $450,000. They will not pay more in new taxes. And this is in response to the expiring 2017 Tax Cuts and Jobs Act. She's also looking to exclude tips from income tax, expanding the child tax credit up to $6,000 and providing up to $25,000 of tax credit to first time homebuyers. She's also looking to expand the deduction for start up costs from $5,000 to 50,000 for enterprising small business owners.
George Mateyo:Now to pay for these proposals, the vice president's looking to increase the top marginal rate to 39.6%. Currently, it sits at 37%, and this is for couples making more than 450,000. And again, this threshold represents a top 1% earners. Increase the long term capital gain rate from 20% to 28% for those making more than $1,000,000 of income and something new, impose a 25% minimum tax income, including unrealized gains for those with wealth greater than a $100,000,000. And on the corporate side, she's looking to increase the top US corporate tax rate from 21% to 28%.
George Mateyo:Now, Brian, on the other side of the aisle, former president Trump has made it clear that the centerpiece of his economic plan is to make his 2017 tax cuts provisions permanent. Making permanent includes, you know, maintaining the top individual rate at 37%, maintaining the 20% capital gain and qualified dividends rate, and then also maintaining the estate and gift tax exemption, which is currently at about $13,600,000. Now he's also floated a few new proposals. 1st, the blanket exemption from taxation for tip income, overtime pay, as well as Social Security benefits, reinstating the unlimited itemized deduction for state and local taxes paid, which is currently capped at $10,000, lowering the current corporate tax rate to 20%, and even lowering it to 15% for companies that make their products in the US. And then Trump is also focused on tariffs.
George Mateyo:He's looking to impose a universal baseline tariff of 20% on all foreign made goods and a 60% tariff on all imports from China. So, Brian, as you could see, there's quite a difference in approach between the two candidates.
Brian Pietrangelo:Great summary, Joe. Any final thoughts that you might wanna consider for our listeners that would be very helpful for them?
George Mateyo:Yeah. You know what? Despite despite the uncertainty, the reality is little changes from a planning point of view. You know, the best advice is always, you know, work with your advisers to model different scenarios. You know, the key is to help to try to anticipate any impacts from future law changes.
George Mateyo:And really, in short, be prepared to act when the proposals become policy.
Brian Pietrangelo:Great. So I hope to find out next, Tuesday or shortly thereafter who the winner might be, and we'd like to probably have you back, Joe, at some point in time in the future to give a little bit further of details once we know the candidate that has been selected and what their tax policy might be going forward. So thanks again, Joe. Well, thanks for the conversation today. Steve, Rajeev, and Joe, we appreciate your insights, and thanks to our listeners for joining us today.
Brian Pietrangelo: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 adviser 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.
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