What data this portfolio manager is watching around Fed event

Major indexes (^DJI, ^IXIC, ^GSPC) opened in the green on Monday ahead of this week's highly anticipated Jackson Hole Economic Symposium, where world economic leaders convene to discuss policy. Federal Reserve Chair Jerome Powell is expected to hint at the central bank's interest rates policies in a speech on Friday.

Northwestern Mutual Wealth Management chief portfolio manager of equities Matt Stucky joins Morning Brief to discuss what investors and the economy are expecting out of the Fed's monetary policy.

Stucky emphasized that a critical factor for the next phase of the market is determining whether the Federal Reserve will transition from being a headwind to asset prices to potentially easing rates gradually. He pointed to the Conference Board's Leading Economic Index (LEI), which is currently experiencing "the fourth deepest drawdown," indicating ongoing economic deterioration.

"I don’t think the Fed wants to repeat the mistake they made in the fourth quarter of 2023. And the mistake they made was signaling an aggressive path of rate cuts in 2024, and here we are in the month of August and we haven't had a single cut yet," Stucky explains. He notes that while the Fed's commentary has influenced business and market decisions, those signals have not materialized into actual rate cuts.

For more expert insight and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Angel Smith

Video Transcript

We've got stocks hovering near the flat line this morning after all three of the major averages notched their best week of the year.

The next big test for the market is going to be the earnings reports that we're going to be getting here this week.

And then also looking ahead to Friday and Jackson Hole, what we hear from Fed chair Jay Powell that could potentially put the rally that we have seen, put it on hold if there isn't enough Dovish commentary within that.

So let's talk about what all this means for the markets with our next guest and we want to bring in if we can keep scrolling here, Matt Sucky.

He is Northwestern Mutual Wealth Management's chief Portfolio manager, Matt.

It's great to have you and great to talk with you again.

So let's talk about what is right or what's on the line when it comes to the markets this week.

Certainly, there's a lot when you take a look ahead to Jackson Hole, you've got earnings report.

Also the DNC kicking off what's top of mind for you and why?

Look, I mean, I, I think this week is gonna be highlighted by um you know, traders really kind of evaluating what's what's in store for us in Jackson Hole because I think that's the key to kind of the next phase of the market.

You know, are we going to be in a market where the fed is not so much of a headwind to asset prices?

Or is the FED is going to start to ease gradually and start to bring uh monetary policy back down from a restrictive level.

Um You know, there's not a whole lot of data points between now and then, but one data point that I would highlight that I think hasn't really gotten enough attention is just the, the conference board leaning economic index.

Um Right now, we're in the midst of the fourth deepest drawdown in this, in this series all the way, going back to the 19 fifties.

And the other times we've seen drawdowns in the leading economic index to this level have been, you know, 1973 1981 and 2008, we're 14.7% off the all time highs that were set at the end of 2021 for this index.

And so to me, it's just a deterioration that keeps, um, it keeps, um, uh, going against us here as we look at kind of where the economy is headed.

And so it's important for us to kind of look to Jackson's goal to see that the fed can start to uh remove the restricted policy.

Uh We're gonna find out, see and see what happens this upcoming Friday.

But, uh you know, to me, I'm, I'm paying laser like focus on kind of where le I are headed from here.

Is, is it too early for the fed to declare victory on inflation at Jackson Hole?

You know, I, I think that they're going to be awfully careful about declaring victory.

I think that the most likely outcome for, for the meeting, uh this upcoming Friday is a 25 basis point cut absent, you know, some other kind of uh downside surprise to inflation or employment between now and then.

Um you know, what, what really kind of looks at, you know, my thinking here is just simply, I, I don't think the Fed wants to repeat the mistake that they made in the fourth quarter of 2023 and the mistake that they made was signaling, you know, a, an aggressive path of rate cuts uh in 2024 and here we are in the month of August and we haven't had a single cut yet.

Uh What happened back in the fourth quarter of 2023 is that uh investors as well as business owners started to um um take that expectation of fed cuts, that signal from the Federal Reserve speakers and, and, and that started to influence their behavior.

You started to see activity pick back up, you started to see loan demand pick back up.

And that reignited that upside surprise to inflation that we saw in the four, the first quarter of 2024.

Um I think the Fed wants to be a little bit guarded against that, as we think through, you know, the next couple of quarters.

Um you know, certainly they would like to ease policy uh but they don't want inflation to reinvigorate back higher uh and have to start the process all over again.