Upcoming Election and Fed Meeting Highlight the Week

Quincy Krosby:

Hello from LPL Financial. Welcome to the Talking Point. I'm your host, Quincy Krosby. Good morning everyone. This is Quincy Krosby. It is Monday morning, November 4. Thank you for joining me on the Talking Point. Yes, it is really an important week. Obviously it's the election, the Fed is meeting, and we still have earnings. So before I get into all of that, let me just go over a couple of things from last week. When we got the employment report, it was a little bit of a shocker with the headline number, but I think the market clearly, because the market was higher. Clearly just basically said, okay, look, we've got the Boeing strike, we have two hurricanes. We get it. It's okay. But I do want to point out that the unemployment rate did stay at 4.1%, which is something that many were looking for, because again, you don't want to see that unemployment rate rising.

Quincy Krosby:

It's staying at 4.1%. It's interesting too. Wages a little bit higher, and in the employment cost index, it's the ECI, it's something that the Fed watches. We did see wages climb a bit higher. This is important because many of the surveys that we see, many of the folks that are answering the questions say, look, prices are still higher. I got to see my wages go up as well, but they're not galloping higher. So that's good news. But they are edging higher, which obviously is good for yes, consumer spending. And last week we saw from a number of the reports that came out, consumer spending is doing quite well. And now what you have is not only the labor market still resilient consumer spending up, you also have gasoline prices coming down across the country, which really should help lower-wage to earners. This is an important aspect. You know, if people have to drive to work from long distances, having gasoline prices down obviously is extremely helpful and they are coming down.

Quincy Krosby:

That said, OPEC and OPEC+ made a decision over the weekend, and that is not to increase production. And the reason is that oil prices are down so that, you know, the old saying, you don't want to go in there and add more oil. You simply don't want to do that because you want the price to climb higher. So that announcement came out. But again, the gasoline prices around the country coming down. Good news for workers. All of that said, I also want to add here something that came out last week. We follow the ISM reports. This is the Institute for Supply Management. It's the purchasing manager's reports. They're very important. And over time, there's a pattern that the S&P 500 tends to follow what these reports say in that you need to have, for the S&P 500, you need to have a solid underpinning, an economic underpinning.

Quincy Krosby:

It doesn't mean that it creates the corporate earnings, but it provides an environment for companies to sell their products. We also always talk about that GDP is not the S&P 500 because GDP looks backwards, right? And the S&P 500 looks ahead. But still, when you're in a bull market, we talk about this all the time. Bull markets don't die of old age. They die of usually a recession hits. So again, I want to point out why we pay attention to the Institute for Supply Management reports. Remember, there's one for the service sector, which will come out this week, by the way. And there's one for manufacturing. And that came out last week. You know, manufacturing, trying to bottom, trying to start coming into expansion territory. But what we saw last week, we saw the prices-paid prices being charged higher.

Quincy Krosby:

And I want to point that out because it is something that the Federal Reserve pays very close attention to. Last week, we also had the Personal Consumption Expenditures index, which is the Fed's preferred view of inflation. It's the PCE. And as I mentioned last week, it differs from the Consumer Price Index, the CPI, because the information comes from companies as opposed to the CPI, which is, you know, consumer surveys. So one thing we saw from the PCE, we saw overall prices coming down except four core PCE year-over-year. That was a 2.7%. So again, I'm not going to say it's a mixed picture. Most of the numbers that came out from the PCE were actually in line with the consensus estimates, but you don't want to see that sticky 2.7%. So I just want to point that out. Also last week we had the first read of GDP.

Quincy Krosby:

This is for the third quarter, and it came in at 2.8%. Initially we thought it could be above 3%, but it came down for a couple of reasons I won't go into on this call, but still absolutely solid. 2.8% is resilient. It's solid. So what we have overall, basically you've got consumers have jobs, and I do want to point out in terms of the jobs, we're not seeing people jump to new jobs as much as we did. Part of the reason is that, you know, people jump for new jobs, typically, not a hundred percent, but to get more money. And that is not the case as easily as it was, for example, a year ago when companies were desperate for workers. But they are getting a little bit more in wages. That's good news. We are seeing consumer spending resilient, the labor market resilient, and the economic backdrop resilient.

Quincy Krosby:

But we're keeping our eye this week when we see the service sector. Remember, that's the largest part of our economy. We will be watching as we always do for new orders, hiring expectations, and the prices. Because after all, when all is said and done, that's what inflation is all about, right? Higher inflation comes from higher prices. And that's why these reports are so important for economists and again, the Federal Reserve. So this week, where shall we start? Let's go with the Fed first, okay? And then we'll get to the election. So the Fed has its meeting, the market is expecting 25 basis points. And now the market is really focused on.

Quincy Krosby:

Tell us what you think about the beginning of the New Year. So we might get a hint from the press conference. The market is going to be very much focused on that, and to be sure there will be reporters. There's no doubt in my mind who will ask Chairman Powell what he thinks not about the election, because they don't want to get into the politics in that sense. But what about tariffs? What about the deficit? What about the fact that neither candidate talked about the deficit? I think it's the only thing that they agreed on that they were never going to talk about the deficit. But, you know, it's a reality and we know why it's important for the Fed, because they don't want to see the deficit growing much more, and nobody is talking about what needs to be done to cut the deficit. So all of this is important and the market is paying very close attention in terms of the election.

Quincy Krosby:

We'll keep our eye actually on the U.S. dollar, because right now, this is the narrative, if you will, is if the dollar, if Kamala Harris gets into the White House, the expectations are that the dollar will not climb that much. If President Trump wins the White House, the expectations is the dollar will climb higher. So we're watching that. And the implications for that, the implications are even for emerging markets. Just to give you an example, there's a kind of a risk off right now with emerging markets because obviously there's tremendous concern in terms of trade and in terms of tariffs. So the expectations are in emerging markets right now, it's basically a bit of risk off watching to see what happens. Also, there's another element here, and that is we normally talk about a gridlock. When you have one party in the White House, the market tends to like, you know, the Congress made up of two parties.

Quincy Krosby:

So we're going to see if that happens, because reason also is both candidates were out on the campaign trails, you know, offering all kinds of benefits, you know, more and just basically more money out there. And look, we've got to do something with the deficit. And so it becomes important if you do have a gridlock scenario that perhaps it would be a little bit more difficult to actually go out and realize all of the things that you promised on the campaign trail. And this goes for both parties, by the way. So it's going to be extremely interesting. The question obviously is going to be, you know, are we going to know who's in the White House this week? Are we going to know the makeup of Congress? It could go on for a bit longer, as we all know, but we'll keep our eye on the dollar.

Quincy Krosby:

Again, I want to point this out. There's been a trade that suggested if the dollar U.S. dollar rises between now and election day, it's, it's indicative of a Trump victory. If the dollar pulls back a bit, it is indicative that the currency market sees the Democrats taking the White House. So we're going to keep our eye on that as perhaps. And the reason I'm mentioning it is that it's so tight right now. Everyone who works in the market is just looking for any indication to give a sense at all of which party has the lead. And if it does have the lead, it's, by the way, it's very, very slight, extremely slight, and can change over the next couple of days. And just again, to repeat, a weaker dollar tends to be better for emerging markets. And quite a bit of that has to do with they have debt that's dollar denominated.

Quincy Krosby:

They could pay that off with service, the debt with a weaker dollar, but also a weaker dollar tends to benefit global financial conditions, whereas a stronger dollar tends to tighten global conditions. So keeping our eye on all of that. And the other part of it is that the emerging markets are worried about trade relations and tariffs. So that's another concern that emerging markets have and investors in emerging markets have. So all of this, you know, is factoring into how we analyze ultimately what happens with the election. Generally, in terms of the earnings, I do want to go over this. You know, we've had mega tech and it's been mixed. There's no doubt about that. It's been mixed. It has been, for example, the market did not care for what Microsoft had to say. Didn't care for hearing about, you know, that companies are going to be spending a lot more money, you know, on AI versus those companies that are in integrating AI into their operating processes.

Quincy Krosby:

But, but the fact is, and this coming out of the week last week with the earnings. It is interesting now a debate on if the companies are coming out and saying, look, we are going to spend a lot more, we're going to spend a lot more. Obviously the market doesn't like it. It just says, why are you spending all of this? And not telling us how it's going to unfold, but the broader narrative in the market, the much broader narrative in the market, is that ultimately, remember the word. Ultimately down the road, we will see how AI is becoming an important part of the tech company's infrastructure. So this is very important. And remember also, every time they talk about that they are spending more and expect to spend more what the market does, it takes a look at the companies that provide that infrastructure. Primary one, yes, happens to be Nvidia, and, but there are others that are also involved in the, so-called AI, generative AI, infrastructure.

Quincy Krosby:

So what you're looking at is an ecosystem essentially, if you want to look at it that way. So this week we also have earnings just about I think a hundred more companies, but I don't even know if anyone's going to be able to talk about it with the Fed meeting and analyzing the election. In any case, we'll be back next week maybe with a sense of where we're headed in terms of who's in the White House and who's in Congress. That's going to be extremely interesting. Have a very good week and take good care. Thanks so much.

Quincy Krosby:

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Quincy Krosby:

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