Key Wealth Matters Podcasts

October 16, 2026

Brian Pietrangelo [00:00:00]

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, October 16th, 2026. I'm Brian Peterangelo and welcome to the podcast. This past week I had an opportunity to be with a few clients as well as a number of meetings with our colleagues as we continue to serve and try to figure out ideas of how we can help our clients navigate the markets and the economy. So quick shout out to my colleagues for the meeting this week. With that, I'd like to introduce our panel of investing experts here to share their insights on this week's market activity and more.

George Mateo, 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. 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 activity, we've got four key economic releases for you this week and we will begin first with the existing home sales report from the National Association of Realtors, which showed that there was a 1.5% increase in existing home sales for the month of September.

Now this follows 2 negative months in the prior two months, but overall it's been a little bit choppy for the last couple years in addition to the fact that yields continue to correlate with mortgage rates rising, which again has the ability to stifle a little bit of the existing home sales report and activity. And second, earlier this week on Wednesday, we received the Federal Reserve's Beige Book report, which comes out two weeks in advance of the upcoming Federal Reserve meeting. That is a two-day meeting on October 27th and 28th. The report provides an economic update for the activity in the 12 districts of the Federal Reserve across the country, and the summary for the period since the last Fed meeting talks about two of the 12 federal districts reported moderate growth, three reported modest growth, four reported slight growth, and three reported no significant change.

So albeit on the side of positivity, That was fairly decent relative to the activity we've been seeing in the 12 Federal Reserve districts. As far as consumer spending goes across the districts, most saw that there was little to no change in activity from the prior period, however, did make the observation that that spending has been accumulating by high income earners. Lastly, with regard to the labor markets, there was a pretty consistent no change in economic activity on the labor side of the market across most, if not all, of the districts. And speaking of consumer spending, third this week we got the update for the advanced retail sales report for the month of September and it was a positive 0.8%.

which follows August report, which was up 1.3%. So some pretty strong consecutive numbers over these past two months in terms of the consumer spending engine. And again, as we report this to you every month, I always remind everybody that this number is a nominal number, which does include both volume increases and price increases. So a little bit of the inflationary tale of paying more at the pump and elsewhere does contribute to this higher number. But we also talk about the consumer spending engine as consumers continue to spend. As a specific example for that, if you take the report excluding gasoline at gas stations, the monthly update was only an increase of 0.2%.

So a little bit softer, again exemplifying the increase that we're paying at the pump. So we'll continue to watch this going forward in terms of a key indicator of consumer spending engine in the United States. And finally, or 4th for the week, the biggest news item on an economic scale was the CPI inflation report, also PPI in terms of producer price index. We got both reports this week and they were both hotter than expected. And from the CPI Consumer Price Index inflation measurement for the month of September, the all items number was 0.6% for the month, which was fairly high, in fact significantly high. If you take core excluding food and energy prices, it was only 0.3%, but still elevated for the month, well above where the number needs to be to get this materially down towards the Fed's goal of 2% year over year.

And speaking of the year over year numbers for the report ending September, again, all items up 3.7% year over year, excluding core up 2.6% year over year. Again, going in the wrong direction in terms of our help to try and get the inflation numbers down to the Fed's 2% goal. We've got a long way to go, folks. Now looking inside the report, we make 2 observations. One on shelter, which we continue to report has been declining in a good way on a year-over-year basis each month. But for September, the CPI inflation year-over-year for shelter went up from 3.0% last month to 3.2% this month, so increasing some of the rental and overall home equivalent pricing.

And that's really important because shelter is one of the largest components of CPI, so again, going in the wrong direction. And finally, one additional category or subcategory, I should say, was interesting in terms of sporting goods and recreational hobbies. One was up 0.4% in the month, the other up 3.5% in the month, which is a pretty significant increase. Not so sure if that's camping materials or not, but it has been somewhat of an inflationary pain in the rear view mirror for the last few years with inflation in general as we continue to talk about this as a major topic within the economy. So with all that, let's get right to George to get his reaction on the economic data and a conversation with George and Rajiv about what that might mean for the Fed and also with Steve on what's going on in the stock market and earnings.

So George, let's start with you.

George Mateyo [00:06:14]

Well, Brian, I think the inflation numbers were certainly attention grabbing this week. And suffice to say, inflation still is an issue, a major issue for the markets to contend with. We've been arguing for quite some time now that we're in this old normal where inflation is stickier, interest rates are likely to be a bit higher as a result of that. And it's just taking much more time than expected to try and get both of those things back to what people would probably feel more comfortable with. But I think it is still fair to say that this is a regime that we've been in for quite some time. It's likely to persist.

It doesn't mean, again, that inflation is likely to spiral back to 7% or 8% or 9%, hopefully, but it does mean inflation's gonna be somewhat stickier. The numbers, as you mentioned, were pretty broad-based and across the board. It was not just confined to the energy sector, although certainly that was the big house for the jump in prices last month. I think it's often kind of interesting to think that I think AI is somewhat artificial intelligence is somewhat of a factor in pushing up the inflation numbers. You can kind of see that in certain components. And we've talked a lot about this on this call as well, where AI at the buildout stage anyway, is likely to be inflationary before it can become something more disinflationary later.

But for now, it certainly has pushed up inflation that's again causing rates to move higher. And when interests move higher, we start to see this week actually some stress in the overall credit markets and also the capital markets as it relates to AI companies that are dependent upon interest rates. That's really kind of a cost of their capital going higher, which actually kind of makes their business probably more difficult to actually achieve. So it's interesting that we've had this kind of moment where I want us in a circular way, AI is pushing up inflation, inflation pushes up interest rates. Interest rates kind of causes those companies to suffer a little bit.

And now we actually saw some of those stocks come down. The broader market seems to kind of like that because the market suggests maybe forward-looking on a forward-looking basis rather, that maybe we actually see inflation come back down again if the build out of AI is probably less inflationary, if you will, than previously expected. So it's an interesting kind of moment. This market's been a pretty wild market this week, I think, Steve, and we've seen moves up and down in different directions. it relates to the same companies, the same themes. I'm curious to know how you're thinking about this. I'm curious to know if we think that the AI trade is entering perhaps a new phase and how do you think we should probably be positioned going forward if so?

Steve Hoedt [00:08:37]

Well, I think to your point, George, it clearly is entering a new phase because the market to us this week has a bit of a different feel. Very clearly, the semiconductor stocks have come off the boil. We're perched just above the July lows both on a relative and absolute basis compared for the semiconductor index, the SOX, relative to the market. And it's been largely on the back of a stock that our listeners probably haven't heard much about, which is Core Weave. This is one of these neo cloud companies that is a large customer of Nvidia and other semiconductor manufacturers to provide cloud services to these AI companies. And CoreWeave has had to use debt and a whole bunch of other financing in order to try to put their business model together.

It's been dubious to a number of market participants for a while how this company was ever going to figure out how to make money, right? I think like everything else with this AI build out, it's been kind of the not to throw back again to our nineties or eighties movies kind of references from the last couple of weeks. But, you know, this goes back to Field of Dreams. If you build it, they will come. Right. And like if you look here at what's going on with Coreweave, you've seen their CDs credit default swaps blow out this week to new all time highs. And the market has really taken notice of this.

And I think that the fear right now is that it could spiral and pull in some of these, pull in some of the other companies, because if you look at who is the largest customer for one of the largest customers for Nvidia is Coreweave. And they've provided a bunch of vendor financing for them to be able to put some of their infrastructure in place. And with the CDS blowing out, it's very clear that the open market is not going to be very amenable of financing core weave from here. So that means

Nvidia itself going to have to step in and quote unquote bail them out. I think Jensen has been public and saying that they are, you know, kind of alluding to the idea that they're not going to have to do that. But like, I don't know that that's the case. And if you've got Nvidia stepping up to potentially bail out Coreweave, I think that that's going to make people a lot of people go and start to think about where this goes. And like, that's why you've seen the market week this week. If you look at The NASDAQ 100 index, it's pulled off materially on a relative basis compared to the S&P 500. As I mentioned earlier, semiconductor stocks have been heavy. I look at my screen today, some of the worst performers are these memory and AI levered names that have performed so well year to date. I'm not telling you that it's over here, but I think it gets more difficult here. That seems to be very, very sure.

George Mateyo [00:11:59]

Yeah, we've argued, I think, as early maybe as sometime about a year ago that the AI trade itself had actually kind of taken on a new direction in the sense that many companies that were, again, responsible for the build out of this had actually seen their CapEx exceed their borrowing basically, or maybe the other way, their cash flow rather. So in other words, they've actually been dependent upon more on borrowing and other things to try and finance the CapEx. And that was not a It wasn't meant to be a good or bad statement, but it just meant it's changing. And as you pointed out, when you have actually this extended nature of internal financing, vendor financing, or circular financing, we've also talked about it does become problematic if things slow. And indeed, Steve, I was kind of curious to see and get your take on the news that Anthropic and AI, OpenAI rather, the two big poster children of this AI revolution.

also suggested that maybe adoption is becoming a little bit more problematic. It's still growing, to be clear, but maybe less so than people expected. And what was it? The numbers came in, what, $20 billion worth short on the revenue? Yeah, what's a billion here or a billionaire? And the thing that really is

Steve Hoedt [00:13:12]

going to be curious about this is right. We've got both of these companies trying to get IPOs out the door. And when you've got numbers that are causing people to know, I think start to look, I think that AI is here to stay. Right. And I think we both are in agreement on that. But that at the end of the day, it's it's never clear when you get these these revolutions who the winners on a long-term basis are going to be multiple years down the road. And very often, the ones that are at the forefront at the beginning are not the longer term. And I think that's where we sit with a name like Anthropic or a name like OpenAI today, because you look at it and it's like, man, they're spending a lot of money here. And the revenues are not what people had expected at this point in time. And it makes you question

what the business model is. Like if you look at the token pricing, token pricing has collapsed, George. Like we can stare at token prices on Bloomberg and that is as straight a downtrend as what you would ever want to see. And that's not what these companies wanted to have happen when they're going through the process of trying to convince investors to pony up cash for an IPO. So it's going to be

George Mateyo [00:14:36]

It's going to be an interesting couple of months, that's for sure, to see if they can get that paper out the door. Indeed, it will. So, Rajiv, I guess if we sit up late last night to listen to Venture Kevin Wersch, we probably would have been disappointed because I don't think he said too much. But he did suggest that maybe he's a believer anyway of the productivity boom associated with AI. I mean, that was I think one of the readouts that I saw this morning, at least. And to Steve's point, I think we are probably constructive on a long-term basis that AI can be very

beneficial to our economy. We've talked a lot about some of these short-term headwinds that we're facing that now seem to be increasing a little bit. But Rajeev, if you think about this as you think about the Fed, you think about credit markets, and Steve mentioned, how does AI factor into your thoughts about positioning portfolios and thinking about your future outlook for markets and rates more specifically? Well, we finally, you know, George, with all the AI news out there and some of the topics that Steve talked about with Coreweave

Rajeev Sharma [00:15:35]

We finally saw a strong week for U.S. Treasuries this week. In fact, we are on track for the best performance for Treasuries since mid-February. It's been a long time since we've seen a one-way direction for Treasury yields moving higher. But with the news on AI and the news about some of the jitters in the market because of Coreweave, we did see investors start to step into Treasuries in a meaningful way. The yield curve steepened meaningfully, the long end leading the rally. Specifically, we saw the 30-year dropped about 14 basis points during the week. The two year only dropped around yields of only dropped around two basis points. So this again reflected that safety haven play for treasuries over a shift in near term Fed policy expectations. So what's really driving the move right now are these topics about AI. It's the safety haven play was a key theme in the week for the bond market. AI related equity saw a sell off earlier in the week and that really drove investors into duration.

Now, this is even in the face of the hotter than expected CPI and PPI prints that we saw, as well as strong retail sales numbers. So you would expect with those kind of prints coming out, you would expect yields to move further higher. But inflation concerns did take a backseat this week, and we did see other pockets of fixed income really start to outperform as well. We saw municipal bonds, they saw their 10-year meaning yields fall by 32 basis points in one week. to 3.8%. In fact, Thursday was the largest single day drop since April 2025 for munis and muni yields. And the muni treasury ratio also tightened to about 74%. So there's some movement in the markets of fixed income. But if I could go back to the hotter than expected CPI print, what the print really did do is shift some of these rate hike expectations for the October 28th FOMC meeting.

These expectations for what the Fed's gonna do at that meeting are pretty much, in my opinion, all over the place. They've been that way for a while. Two weeks ago, the market was putting 70% odds that we will have a rate hike in October. Those odds dropped to 17% last week. Then with the CPI print, those odds went back up to 30% and today we're back down to 17%. So the base case for the October FOMC meeting is a hold for the Fed. December right now looks like a near certain for a 25 basis point rate hike with odds hovering around 90%. And right now the market is looking at another 50 basis points of further tightening through the mid part of 2027. So you mentioned it about Warsh. I mean, the Fed enters this media blackout period every time right before their FOMC meetings. So the blackout period starts on October 17th. That means that the Fed members cannot be going out to the media and making public statements.

Before that, we did quite a bit of Fed speak leading up to this blackout date. We had Richmond's Fed Bargain calling that the CPI print was higher than he would have hoped for, but he needed more data to make a hike decision. You had San Francisco's Daily come out and say that rate hikes are needed, but maybe not immediately. And then, as you mentioned, George, we had Fed Chair Warsh here at the IMF annual meeting. And Warsh stayed pretty true to his aversion of forward guidance. He really made no comments on near-term policy outlooks. Besides sticking to the message that the Fed will deliver on price stability, his silence on policy was actually taken as a signal by the market. And that's what dropped rate hike expectations even further for the October meeting because it didn't seem like he was being hawkish. But the bulk of his messaging, to your point, George, was around AI and productivity.

Walsh did call AI a huge benefit to the US economy over the horizon. And again, that may have tempered some of the market fears that we're going to have a deep rate hiking cycle and the Fed's going to really start to aggressively raise rates because he really is a proponent for AI and what the benefit could be for the economy. Now, how all of this impacted credit spreads. If you look at overall investment grade high yield spreads, there wasn't really much movement. Investment grade spreads were marginally wider, practically unchanged, High yield was marginally tighter, again, practically unchanged. Spreads have pretty much decoupled themselves from rate volatility. What we did see, however, was that for investment grade companies that were supposed to come to market this week and issue new bonds, they decided to step aside given the CPI print. So the new issue volumes were lower than syndicate estimates had expected.

And in fact, this is the third week in a row where the syndicate desks have missed the mark on how much new issuance we're going to get for the investment grade market, which again provides some stability to spreads and keeps them tighter in this tighter range pattern that we've seen ourselves in. Now, if you look under the hood, however, we have to talk about the AI companies within investment grade and high yield. And obviously the week's dominant credit story was Core Weave. Those bonds collapsed into distressed territory. It did trigger bond. It did trigger some broader anxiety about AI related financing. But the contagion to the large cap investment grade AI names, that was pretty limited. CDS, to Steve's point, we saw almost a 75 basis point move intraday hit an all time high for Core Weave CDS.

But even their unsecured bonds that are long bonds, these bonds, they cross the distressed territory around Wednesday. And you're talking bond yields for this name of greater than 15%. But it has not really caused a huge contagion into investment grade, into the investment grade landscape. The remarks pretty much, you know, kind of started talking about AI CapEx sustainability. But an interesting point that I had read earlier in the week that if you do see a slowdown in AI CapEx, that could signal the market something completely different and you could start losing some faith in these companies that how come they're not really building out the way they thought they would. So right now, whatever AI forecast we've seen from some of these larger AI, large cap AI names out there, they haven't really revamped or rescheduled what their CapEx expectations are going to be going forward. And we do expect more bond deals to come in this space into 2027.

Brian Pietrangelo [00:21:48]

Steve, before we close the podcast, we'd be remiss if we didn't get your take on Q3 earnings now that we're two weeks into it. Hey, you know, it's been interesting to watch, Brian, because we have seen

Steve Hoedt [00:21:59]

estimates continue to creep higher as we've gone through earnings season, but we certainly have not seen any step functions so far. When you look at the vast majority of the earnings growth for the 500 this year, it's crazy to say it, but it's been driven by two companies. It's been driven by Micron Technologies and Nvidia. We're really going to have to see how the numbers come in for those two companies when they report in order to get a gauge for where this number is going to go. I would say a couple of points though. Bank earnings did not come out and blow the street away. Higher rates are having a bite on things.

The commentary regarding the health of the consumer was relatively constructive there, but there was nothing in the bank earnings that caused the market to revalue higher. And when you look at what we've been talking about lately has been this relentless downtrend in the PE multiple for the S&P 500. We've seen nothing so far in earnings season that would argue that we're seeing a broadening out of earnings away from Nvidia and Micron being the dominant feature. And our perspective really is that if we start to get some kind of a broadening, Then we could see the multiple start to expand on the growing earnings number that we've had over the course of this year instead of contract.

But right now we're actually trading with an 18 handle on the PE multiple for the first time since the significant sell off last March. And it's something that we continue to watch with great focus because what happens with that multiple is really going to tell the tale from here because it seems like the Earnings numbers are baked in the cake that they're going to continue to move higher here because of what's happening with the key drivers behind that. The multiple is going to tell the tale for the rest of 2026.

Brian Pietrangelo [00:23:58]

Well, thank you for the conversation today, George, Steve, and Rajiv. We appreciate your perspectives. 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 navigate your financial journey.

Disclosure [00:24:35]

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October 9, 2026

Brian Pietrangelo [00:00:00]

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, October 9, 2026. I'm Brian Pietrangelo, and welcome to the podcast. And heading into the weekend, we've got three different observations that are coming up with various days and dates. One is obviously typical going into the annual Columbus Day and or Indigenous Peoples Day observation coming up on Monday. A lesser known observation coming up next week, early on October 13th, is the US Navy birthday or the National Day of Observation for the creation of the US Navy back in the 1800s. Specifically, it was created in 1775 by the US Continental Congress and commemorates the founding as the US Navy was created at that time. And again, a shout out to all our military out there in the Navy taking care of our country. And we know it's an important job. Thank you so much for your service. And finally, on a much lighter note, a little bit funny, today is the observation on October 9th of International Beer and Pizza Day as a combination of the two. as it was in the earlier years, 1950ish or so, when the two together became very popular. I myself do not like the combination. I like pizza with soda, and my favorite is Mr. Pibb. But if you are one that likes the combination, might be a good opportunity for dinner tonight. With that, 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 slash wealth insights, including updates from our Wealth Institute on many different subjects and especially our Key Questions article series addressing a relevant topic for investors. 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 activity, we've got three key economic releases for you, and we'll also talk to Steve about the stock market and Rajeev about what's going on with the Fed. But first, let's go over the individual items for the economic updates. First up is the Institute for Supply Management. Their manufacturing PMI, their purchasing manager's indices, fell a little bit lower than the prior month, which was not that big of a deal. The most important point was that the prices paid component, which is the inflationary component of the survey, continued to rise significantly. On the services side of the economy, the same report showed, again, the same conundrum where they got the Activity that slowed very slightly from the prior month, but the survey also showed prices paid continued to escalate, continuing to the same challenge. And second, the initial unemployment claims filed for the week ending October 3rd remained very stable and low at around 200,000 again, specifically at 197,000 for the week ending October 3rd. So again, that message continues to be stable and resilient in a good news or favorable manner. And third, we received the minutes of the Federal Reserve's meeting that they had back on September 16th, and the meeting minutes showed two pretty clear items that number one, there was unanimity around support for raising rates at that meeting, but there was no sense of any urgency to again hike in October, although the prognostication may be one more hike and that might come in the month of December, but by year end may or may not be appropriate based on new information that we'll get soon on inflation. We will talk more with Rajeev on that topic in addition to his update for the bond market, in addition to Steve and his update on the stock market with some new all-time highs this week. But before we do, let's always go to George to get his take on what might be going on internationally in addition to what might be on his mind with regard to the economy. George?

George Mateyo [00:04:01]

Well, internationally, Brian, I think we have to quickly acknowledge the situation in Iran continues to be a prickly one, and it's likely to stay that way probably up until the midterms and probably through the midterms. And it's really nobody's business trying to predict what's going to happen there next. It's very much unstable and unsure and unclear in terms of the actually long-term and even the short-term direction of what happens in the Middle East. So we'll just kind of compartmentalize that for a second because I know that's going to be an issue for some time, unfortunately, it seems. But I think the other situation, of course, is what's happening in Europe, in France in particular. And to kind of build on your reference towards, I guess, international beer and pizza day, I'd probably have to extend the pun a little bit by acknowledge that we have to say au reoir to easy money in the sense that I think what's kind of gotten France in trouble is probably the situation that we've all been talking about now for quite some time, which is that frankly, the cost of borrowing has been really low for quite some time. It's certainly moving up with rates now in the past few weeks and months moving significantly higher. But this is a situation that France finds themselves in because frankly, money was pretty cheap and very available for quite some time. And now it's not. Now, I think there are some unique situations within the country of France and the government there, and maybe the fractious nature of their overall government structure that's somewhat compounding the problems and the challenges they face, which I think makes it somewhat unique. But it really can't be dismissed entirely in the sense that some of the things that they're seeing in their streets right now does capture our attention, and we can't ignore that. I think the biggest takeaway from my perspective, though, in terms of how we think about markets, how we think about investing, how we think about Portfolio construction is this notion around innovation, frankly. And I think to some extent, while many countries, our own country included, have debt and deficit situations that are probably becoming untenable, we do have this great ability to somehow grow our way out of that, or we have the potential at least to grow our way out of this situation, whereas other countries don't. I'm not pointing fingers at any one country, but I think it's oftentimes that when we have a situation that France finds themselves in, those countries that can essentially reinvent themselves from within find new ways to grow and overcome their debt situations are probably better off in the long run despite maybe some short-term pain. So Steve, on that sense, I think it is probably fair to say that the AI revolution that we've seen here in the US is really alive and well. Although notably just the other day, I think it was yesterday on Thursday, that one major company in the AI infrastructure, OpenAI itself, there were some rumors that maybe the revenues weren't quite as robust as once expected or maybe once thought. And that was kind of interesting to me in the sense that up until that point, the last few weeks, of course, has been marked by the return of the Mag7 stocks, the return of technology leading the way. And yesterday, the market, despite the fact that the tech sector took a bit of a hit, the other part of the market didn't fare too bad. In fact, I looked at my screen last night and I saw many sectors actually up on the day. So how are you thinking about the market structure these days? How are we thinking about AI itself? and what are some implications for clients in their portfolios?

Steve Hoedt [00:07:05]

George, you mentioned the OpenAI article and then there's another article out this morning on Bloomberg and the headline, the Bloomberg headline was the math for making MetaMuse AI profitable doesn't make sense. And we've been talking about this theme for a while. AI as a technology seems like it's here to stay and nobody disputes that, right? There are many things about it that are transformational. And I think that you can make leaps to think about how it impacts not only our daily lives, but productivity for corporate America and all kinds of things like this, right? But the problem is that nobody has figured out how this is going to make money yet. And that doesn't mean the technology won't still be around five or 10 years from now. But if past investment CapEx cycles are any prologue, there's no guarantee that the companies that are doing the innovating today are going to be the ones that are going to be the long term winners. I mean, keep in mind a stock like Amazon I was talking to our team about it this morning. A stock like Amazon was one of the major beneficiaries of the internet infrastructure that got put in place during the bubble in 2000 and that stock still went down 95% peak to trough post the, post the crash. And all the companies basically that were involved in the infrastructure build either don't exist anymore or, um, also had similar decline. One of the survivors was CIPCO, but you can point to any of the ISPs and things like that. Those were internet service providers back in the day. Like those things don't exist. So

George Mateyo [00:09:06]

Well Cisco, once their shock peak, it took 20, what, 26 years to actually recover?

Steve Hoedt [00:09:10]

Exactly. It took 26 years before it made another new all-time high. Like it's mind-boggling to think about that, right? Because that's a legit company, real business, S&P 500 constituent, and yet it took 26 years to regain the high. So, you know, I think We, again, we believe that this AI stuff is legit and real. It's very clear that the technology is here to stay. We just are a bit mindful about trying to figure out, okay, what are the investment implications of this? Because it's not clear to me that simply buying a meta or buying an open AI or an anthropic when they come public or buying a micron, which is a key enabler today. Buying all of that stuff today is no guarantee that you're buying the stuff that's going to work on a 5 plus year time horizon to leverage the technology. So I don't think that is as easy as some people are making it out to be.

George Mateyo [00:10:17]

So I'm going to go on a limb and you can tell me if I'm too far out on a limb. But I would think, and this is not a novel idea. I've heard a few other people say this, but I think I subscribe to the view, which is probably the next few years, companies like OpenAI, maybe Anthropic, and others are privatized, essentially taken over by the government, basically. They're essentially brought to the public domain. It becomes a public good. And that probably doesn't mean great things for shareholders necessarily. It could, I don't know. But I feel like to some extent, it's going to be all viewed as one public good as opposed to a private company.

Steve Hoedt [00:10:52]

I mean that's entirely possible if you think about it like the essentially what if you look at the AI stuff part of the reason why the current administration is loath to regulate it is because it's viewed as a kind of a global competition between the US companies and the Chinese companies like Deepseek or Kimi or whatever these ones are that are producing their own large language models and trying to do it on cheaper infrastructure. Like it's a, there's no doubt that this is kind of a proxy battle between the two major global geopolitical powers right now, who's going to win? And you can make the case that it's in the US strategic interest to see that these American large language models end up being the global standard. So I could see a scenario where it evolves that way, George, or at least there's some kind of regulatory moat put in place to protect them at some point. And that's another reason why, irrespective of all the politics, and I don't know, I don't want to get into the political stuff, but if your mailbox is anything like mine, I'm getting bombarded with anti-data center flyers from all the different hard political people this season, right? And I think that while that may be low hanging fruit in terms of trying to stir up and drum up traffic to the polls in another month, I doubt that it's actually going to have any policy impact whatsoever simply because it's not in America's interest to do anything to dissuade the ability of these US national champion AI companies to compete with the Chinese ones. So I think both parties are likely not going to take any stance that's going to impede that competition on the American company's behalf, irrespective of what they're doing politically. They can say one thing, but that doesn't mean we're actually going to get anything different done because of it.

George Mateyo [00:13:08]

So other policy decisions, I think, are also looming regime in the sense that the Fed is poised to meet, what, in about 10 days or something like that? Maybe I don't have the exact count in front of me, but two weeks, we'll call it. Any thoughts on what the Fed might be thinking as it relates to inflation, as it relates to some of the other concerns we've surfaced already today about governments overseas that are finding debt problems washing their shores? Anything that you think the Fed is thinking about as it relates to those two things?

Rajeev Sharma [00:13:34]

Well, yes, nine days. And I think you're absolutely right, George. I think there's a lot of things going on right now with the Fed and what the Fed's going to do next. And the bond markets had to deal with it. Just a few weeks ago, we saw probabilities of a Fed rate hike in October reach around 70%. Those have come down substantially. And with them coming down, you did see another volatile week for treasuries. And you're seeing all the impact of market expectations of what the Fed's going to do. market expectations of how the economy is going to fare going forward. You're seeing it across the yield curve. We did see a sharp midweek sell off that saw long end yields take the brunt of the pain. We reached multi-decade highs in the long end. And then later in the week, we did see treasuries start to rally a little bit because of the strong treasury auction demand. So we did see the 30-year bond briefly touch 5.73% in midweek. And now we're pretty much at the highest levels that we've seen since 2002. And the rally that we saw came in the form of the 10-year treasury auction. So I've talked about it before that investors, when we got to that psychological level on the 10-year 5%, many thought that investors would step in at that point. They did not step in. I think they continue to feel that yields should move higher to be compensated for that. So we did see a $39 billion 10-year auction this week, and it stopped around 5.30%. Investors are willing to play at this level. And we also saw a $22 billion 30-year treasury auction that also saw buyers start to step in. So these yields are attractive for bond investors, and I think investors are looking at it that way. We went way beyond the 5% point. There are a lot of reports out there that on the 10-year, can we get to 6%? There's no reason why we can't. There's a lot of pressures for yields to continue to move higher. But what does keep a lid on yields was if you have a slowdown in some of the investment grade primary issuance. We did see kind of a pullback of new issuance this week for investment grade. Something that we spoke about before also that when you have all the supply coming to market, that also pushes yields higher. Dollars are competing for whether you want to buy treasuries or you want to buy corporate bonds. We did see less than $25 billion of new issuance this week. That's on the lower side. Syndicate debts were estimating a lot more than that. And with that, you did see credit spreads also start to move in a little tighter this week, and you did see high yield outperform investment grade. Now, one key issue the market was focused on this week, and to your point, George, was the FOMC minutes that were released from the last FOMC meeting, where we did see the Fed unanimously vote on a 25 basis point rate hike That got us to that target range of 3.75 to 4%. Again, this was the first rate hike that we saw since July 2023. So the minutes were very important for investors to look at and kind of see where the thinking is at the Fed. Most Fed members agreed that one more rate hike this year would be appropriate. There was some division in those minutes where you saw how to frame future hikes as risk management against stubborn inflation. That's kind of the tone that I've gleaned from the minutes. Fed members noted supply shocks like energy, geopolitics, AI investment. Other members spoke to the resiliency of the consumer and the consumer spending, not taking a hit. But overall, the tone of the minutes focused on one thing and one thing only, inflation is the primary concern at the Fed. Nearly all Fed members said that inflation risks are to the upside. Fed projections point to inflation getting to the Fed's 2% target no sooner than 2029. Now remember, these Fed minutes, they point to the past. We've had a downward revision to inflation. We've seen the weak September non-farm payrolls print. So some of the pressures for the Fed to do something at the October FOMC meeting have subsided. Another important market mover this week was you have Fed Speak. So you had Fed Governor Waller come out, Christopher Waller, and he came out and he talked about that more hikes are needed, but said the Fed can be flexible on timing. And he reiterated that the 2% goal is a real goal for the Fed, but said there's really no urgency for the October meeting. It's a live meeting, but he wasn't committed to hike or vote to hike for that meeting. And so again, if you signal no urgency, those odds of October rate hikes start to move down and we're around 20% this morning. So it's a very fluid situation. I think, you know, each piece of data is very important. We've seen that when we saw the September non-farm payroll was print, it really took a lot of pressure off the Fed.

Brian Pietrangelo [00:18:22]

So Rajeev and maybe George also, remind our listeners about the entry point when the yields get that high, Rajeev. Does it become attractive to allocate to bonds in this scenario and what are we thinking from a tactical perspective, George?

Rajeev Sharma [00:18:36]

Well, I think it does get very attractive, Brian. At this point, you know, we lived in a world where we had basically zero yields in bonds. You weren't seeing any type of upside and people were still investing for diversification of their portfolios. But right now, if you're investing in bonds right now, you're getting north of 5% five years out in the curve. I think investors are looking at that as an attractive entry point. Can yields go higher from here? Of course they can. They can go higher. But at the same time, you're locking in some really solid yields. If you think corporate bonds, these are very big blue chip companies with strong balance sheets. We're in a very different world in fixed income than we were back in the day around the global financial crisis. Now you're seeing very strong balance sheets, strong companies offering you very solid yields. You're not taking a lot of credit risk to pick up these yields. You're not having to take a lot of duration risk to do it either. Investors, I feel, are looking at this as an attractive entry point. That 5% psychological level in the tenure that I spoke to, that wasn't enough for investors, given the fiscal deficit, given the AI pressures, given the economy and inflation being stubbornly high. But when we start getting to talks about 5.5% on the 10 year, like we're around 5.3 right now, there's no reason why we can't get to 5.5, investors have to think about that as a good entry point, good income generating investment for investors, right?

Steve Hoedt [00:20:04]

You know it caught my attention, Rajeev, that the cover of The Economist talked basically about a bond apocalypse this week. If you go back historically and look, I mean, I remember the $5 oil headline or cover on The Economist many years ago, like they've got a fantastic track record of being a contrarian indicator. I'm an equity guy, but I'm also a technician. And when I see this kind of stuff, it really makes me wonder about the timing on fixed income. Like when the economist is telling you that you should be selling all your bonds, maybe the move has already happened. And I can't tell you what the proximate cause is going to be to cause the long end of the yield curve to turn around and go to the other direction. Typically it's some kind of a recession, and I know that's not our call right now, but at the end of the day, the cover indicator as a contrarian indicator has a pretty good track record historically. So I'm willing to entertain taking the other side of that trade right now.

Rajeev Sharma [00:21:23]

Well, everybody, Steve, everybody's kind of looking for the canary in the coal mine right now to find out exactly what it's going to be. You've seen a lot of headlines out there that said, oh my God, triple C rated bonds are, you know, their spreads are widened out. They're doing terrible. But then you think about the triple C market being less than 10% of the high yield market.

Steve Hoedt [00:21:41]

It's 11 companies, Rajeev. 11 companies.

Rajeev Sharma [00:21:44]

Yeah, 11 companies. Some of them are lottery companies. Some of them are

Steve Hoedt [00:21:48]

Aston Martin!

Rajeev Sharma [00:21:49]

Aston Martin Hertz. These are the type of names that are in there, which You can't look at before, back in the day, triple C's were viewed as that canary in the cold when we start seeing risk happening with. but that market has shrunk so much. If you see single B-rated bonds not really reacting, I think we're still looking for the canary in the coal mine right now. So if you're an investor, especially a pension investor or somebody out there who's trying to do asset liability matching at these yields, it's pretty attractive.

Brian Pietrangelo [00:22:17]

Well, thank you 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 navigate your financial journey.

Disclosure [00:22:53]