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, September 22nd, 2023. I'm Brian Pietrangelo, and welcome to the podcast as we head into the final day tomorrow of summer. Hope you had a good one as we transition into Autumn.
And with me today, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more. Rajeev Sharma, Head of Fixed Income, Cindy Honcharenko, Director of Fixed Income, and Mike Sroda, Senior Lead Equity Analyst. 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 news, the calendar was fairly light, so we'll give you three quick updates. First, in the area of housing. We have existing home sales were down 0.7% for the month of August. Housing starts were actually down 11.3% for the month of August from the prior month in July. Again, showing indications that increasing mortgage rates are having an effect on the overall housing market. And second, U.S. leading economic indicators were down by 0.4% for the month of August, which basically has been a consistent decline for the past 18 months. Finally, just yesterday, initial unemployment claims stayed very low at 200 and a 1,000 in terms of a decline of 20,000 from the prior month. So the week ending 9/16 at 201,000 is basically the lowest level going all the way back to January of this year in 2023.
We'll also take a look at the stock market with Mike later on in the podcast, but let's start with a recap of the news for the biggest event of the week, which was the Federal Open Market Committee meeting on Wednesday and the press conference from chair Jay Powell. So with that, let's start with a high level overview. Cindy, what are your thoughts?
Cynthia Honcharenko:
So the Fed opted not to hike rates at the September FOMC meeting, leaving Fed funds unchanged at the 5.5% upper bound, and that was anticipated. The 2023 median dot remained at 575 upper bound, but the 2024 median shifted 50 basis points higher from June landing at five and a quarter upper bound. The upshot is the committee is now projecting just 50 basis points of rate cuts next year compared to 100 basis points at its June FOMC meeting. The shallower path of projected easing corresponded to the summary of economic projections showing substantial upward revisions to growth in both 2023 and 2024, as well as downward revisions to unemployment for 2023 through 2025.
Even with the stronger growth in lower unemployment, the committee marked down its 2023 Core PCE inflation forecast and left its 2024/2025 core inflation forecast unchanged. I believe 2023's Core PCE inflation will realize below the Fed's current 3.7% projection, ultimately giving the committee an off ramp from implementing the further 25 basis point hike projected in the dot plot. I continue to think the Fed will reach the terminal rate at this cycle at the five and a half upper bound, and we will be on hold at this level until it cuts rates for the first time in June next year.
I think the weaker growth profile in the second half of this share, as well as faster deceleration of inflation pressures relative to the Fed, will give the policymakers who are clearly striving for a soft landing, the incentive to refrain from hiking rates further, and Chair Powell acknowledged a range of factors in his press conference that could impact the near term economic trajectory, including policy lags, potential government shutdown, strained consumer balance sheets, slowing job gains and rising gas prices. These are the main factors I see as reasons that will slow growth more appreciably and ultimately lead officials to refrain from further tightening.
I think the biggest surprise for me from the Fed on Wednesday was Powell's lack of confidence regarding whether the Federal funds rate is in fact in the restrictive territory or not. So with that, I think it would be prudent for investors to remain nimble for the remainder of the year due to the imminent government shutdown, upcoming economic data reports and two more Fed meetings. Rajeev, I'd be interested to know what your take on the Fed meeting and Powell's press conference was.
Rajeev Sharma:
Cindy, I agree with what you're saying and I really feel that the market was kind of spooked by the statement really. I think when the market saw that the Fed was taking two rate cuts off for next year, that really impacted the market. I really feel that we saw yields rise across the curve based on that. As we've always talked about, we've seen that the market expects rate cuts in the first quarter, maybe the end of the first quarter, early second quarter of next year, not seeing that in the summary of economic projections and seeing that two rate cuts were removed by the Fed based on what they told us back in June. That really bothered the market and they did not like it.
But they stayed paused. We all expected that we expected a pause by the Fed. We also saw a couple of other central banks this week, Swiss National Bank, Bank of England, they all paused. They all passed on raising rates. This all happened in the last 48 hours. With central banks on hold and market participants expecting higher for longer, we see bond yields headed higher around the world actually. And we did see Sweden and Norway, they hiked. Turkey hiked. South Africa Central Bank, they signaled that barring costs are going to be elevated. ECB is sending mixed messages on whether they're going to be doing any more tightening or not. But overall, global bond yields are moving higher and we continue to see the inverted yield curve and it may remain inverted for a while based on the Fed projections that we saw this week.
Currently, the 2s10s is inverted to the order of 66 basis points. The three month tenure is inverted to the order of 100 basis points. We've seen some really big moves in yields. In the intermediate and long end of the curve, the 10-year approached a resistance point of 4.5% just yesterday, and it's a level that we haven't seen since 2007. This did cause a little bit of narrowing in the 2s10s curve. But the next resistance points, if we could actually close above 4.5% on the 10-year, the next resistance point is 4.73%. So things are looking like the market is really not liking the fact that the Fed took away two rate cuts next year. They stuck with two rate cuts at the end of the year, and I think the market is really thinking that we're going to be higher for longer.
Now what's interesting is the Fed has repeatedly said that they're going to be higher for longer. They've kept the narrative that we're going to have one more rate hike this year. But as I've mentioned before on these calls, there's a big disconnect what market expectations is and what the Fed narrative is, and I think the market's going to start gravitating towards the Fed because you do not fight the Fed. We've talked about this before. It's very difficult to go against them. So the dot plots that you mentioned, Cindy, I really feel that that has really spooked the market and we've seen rates move higher across the curve.
Overall, the Fed, I feel acknowledged that there was a slowdown in job growth, but the Fed remains committed to keeping rates higher for longer. This is very important. I mean, they're really focused on the inflation target of 2%, and that 2% target based on their projections, we're not going to see that until 2026. So we can anticipate the Fed keeping rates higher for longer, and I think that that's going to add more volatility in the market.
Brian Pietrangelo:
So it was interesting. As I listened to Jay Powell speak, we've talked about it on our calls and we've written a lot of language in the articles that we've produced, that we've said higher for longer as well. But there was an interesting message, it seemed to me, that the market focused on the long-term 2024 rate cuts where if you think about it, the Fed has to get to its terminal rate first and then pause before it can begin cutting rates. When Powell talked about the fact that you know sufficiently restrictive only when you see it, and then also, "We're going to proceed very carefully," was said multiple times during the press conference. It seems to me that there's a now and equal balance between doing too much and doing too little as we go to the end of the year. What do you think that means for the near term outlook actually being somewhat positive that we're going to get to the terminal rate faster?
Rajeev Sharma:
Well, you definitely mentioned it. I think that Chair Powell in his statement, I think he really tried to create a balance and basically talked about trying to get to a Federal funds rate that is accommodative to the labor market. And the labor market is really strong right now. I mean, we haven't seen any snap in the labor market yet. I think what's really important is we're all data dependent and I think the dot plots that we've seen this week... You could give it a lot of credence. I mean, that is where the Fed is thinking. That's where their mind is at. But at the same time, dot plots change over time based on data. I think that a lot of investors are frustrated with the dot plots really. I feel that the Fed doesn't know where we're going to be. The Fed is data dependent, the market is data dependent, and it's how we see that. I think that that can change very rapidly.
So right now, I really believe that yields are going higher, but I do believe that investors are not really jumping in on these levels right now. They're going to wait to see where we shake out. A surge in yields is never good for investors. They never want to jump in when we see that.
Brian Pietrangelo:
Any final thoughts that you have on the fed meeting? And then we'll move on to Mike.
Cynthia Honcharenko:
I think that the markets are still banking on a pivot from the Fed, and I think they're kind of brushing things off and thinking that these current inflation pressures, that it's temporary. And I really think that they're banking on first quarter rate cuts and I think that they're very misguided right now. So as Rajeev has mentioned, we have this push and pull between the markets and the Fed and that disconnect, and I think that's going to continue.
Brian Pietrangelo:
Great. Thanks, Cindy and Rajeev, for your comments. Let's turn over to Mike now as we've seen a little bit of a pullback this week in the stock market. Mike, what are your thoughts and observations and what you're seeing?
Michael Sroda:
Hey, thanks, Brian. So yeah, as mentioned on this entire call so far, this week was all about the Fed and the general takeaway in the equity markets is no different and it's this higher for longer narrative. So ultimately, not surprisingly, this narrative resulted in stocks declining. So S&P 500 was down 164 basis points yesterday alone, which was the largest one day decline since March, with 92% of the names down just yesterday. I pulled some data since Wednesday, so since the Fed announcement, and all three major U.S. indices were down pretty significantly, S&P 500 is down 2.56%, the Dow 1.3% and the NASDAQ 3.32%, so by far the largest down of those three.
We continue to believe equities are going to remain choppy in the weeks ahead due to this Fed news. The market just continues to try and adjust to these new developments. The market is trying to figure out a couple of things, how long will rates remain higher now, and whether or not these are properly discounted into these stock prices. And additionally on top of this, stocks just hate confusion. And I think Fed Chairman Powell put a little bit of confusion in some of the comments yesterday when he mentioned the neutral rate comment. He said something to the effect of, "Neutral interest rate may be higher. We just don't know yet." Don't know is not exactly what the markets want to hear. So you're going to see some choppiness of them trying to figure that out. The big question is going to remain for the equity markets really is the soft planning obtainable with these new rate forecasts? I guess time will tell. That's the big question everyone's trying to figure out.
Shifting over to some technicals, I was looking at the S&P 500 chart and we had brought this up in the Key Charts this week earlier, I think last week before Steve's vacation, and it looks like we're really going to test that 4325 level in S&P 500. We closed at 4330 yesterday, so just right above it, and the bottom of that plus 5% range I talked about on Monday's call where we've really traded all summer at between 4325 and 4600. So any break of that 4325 level, it's going to present some near term downside. Looking at where we could stop after that, it looks right around that 4200 level. That's the prior resistance new support area, and also that's right around where that 200 day moving average level is at 4189. I could see if we break through that level, that could be the next resting point. On the flip side, if we do hold 4325, that should be viewed positively and bullish because that keeps us firmly in that plus 5% box that we've been trading in all summer. If we can hold that, maybe we can build some support and balance from there.
Finally, looking at some sector performance since the Fed announcement. Clearly, clearly the defensive sectors have held up the best. You've had healthcare only down 90 basis points, utilities only down 98 basis points, and Staples down 116. The worst performing sectors were some of the more cyclical growthier sectors. So discretionary was down 394, comm services down 340, and tech 326.
Just to wrap up, we're going to be looking ahead here. We're almost at the end of the quarter, so we're going to get some earning reports over the next couple weeks, month timeframe. So we should get some more clarity on what these companies are experiencing and kind of get a better, clearer picture of the state of the economy. Until then, though, we can expect these markets to just move choppy and try to figure out what kind of environment they're in and if these stocks are appropriately discounted with all this news. Thanks, Brian.
Brian Pietrangelo:
It's interesting, Mike. Yep. So we talked a lot a couple of weeks ago about seasonality and that September is not the greatest month during the year in terms of overall market performance, and now we're seeing it. You wonder sometimes if it's a self-billing prophecy and now Jay Powell and the committee are adding a little bit to the situation in terms of downside risk.
Well, thanks for the conversation today, Rajeev, Cindy and Mike. 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. And as always, past performance is no guarantee of future results, and we do know that your financial situation is personal to you. 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.
Speaker 5:
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