Key Points From Last Week

  • Donald Trump was elected the 47th president of the United States by a surprisingly solid margin and was the first Republican to win the popular vote since 2004. The GOP also flipped the Senate and appears likely to retain control of the House of Representatives.
  • Markets largely cheered the resolution of uncertainty with a risk-on rally, led by small cap equities and bitcoin, while high-yield credit spreads compressed to their tightest levels in over 15 years.
  • Treasury yields rallied through Wednesday morning as the outcome of the election became clear, approaching 4.5% before backing off to end the week at 4.3%.
  • As expected, the Federal Open Market Committee (FOMC) cut the federal funds target range by 25 basis points to 450–475 but avoided commitments to further easing, emphasizing a data-dependent approach for December and subsequent meetings.
  • Labor productivity rose at a 2.2% seasonally adjusted annualized rate, which kept unit labor costs anchored at +1.9%.
  • The Institute for Supply Management (ISM) Services Purchasing Managers’ Index (PMI) reached its highest level in over two years, signaling continued strength in the all-important services sector.

What’s on Our Minds This Week

At Your Service

Source: FactSet, Cerity Partners, 11/11/2024.

In our modern economy, consumption of services makes up nearly half of all economic activity. This includes both discretionary services like hotel stays and concerts, but also nondiscretionary services like renting an apartment or receiving health care. The ISM’s Services PMI provides a reading on overall service sector business sentiment. The headline figure for October came in at 56.0, the highest reading since August 2022, when the FOMC was just a few months into its rate hiking cycle.

Americans’ propensity to consume services has been resilient to a variety of headwinds, including inflation, housing costs, higher credit card rates, and most recently, softening labor markets. This helps explain why aggregate gross domestic product remains strong even while other smaller areas like housing, manufacturing of goods, and commercial real estate all continue to struggle under the weight of rate hikes. As policy easing gets underway, we will be looking for improvements in these other pockets that can ease the burden currently borne by the services sector.

Employers Are Getting More Bang for Their Buck

As we just discussed, consumption of services is a major component of the U.S. economy. Wages are a large, if not the largest, expense for most service-oriented businesses. Wage inflation is still running fairly hot, drawing the ire of economists who fear that corporations will raise prices in tandem to protect profit margins. This dilemma highlights one of the paradoxes of macroeconomics: strong wage gains are good for each person individually but can be viewed as an imbalance to be corrected at the macro level.

Fortunately, we are also seeing signs of a revival of labor productivity, which measures the output per unit of labor used to produce goods and services. The best way for companies to pay for increased wage costs is to find ways to get their workforce to work more efficiently. Last week, the Bureau of Labor Statistics estimated that Q3 2024 productivity rose at a 2.2% annualized rate. This means that even though hourly compensation was up by 4.2%, unit labor costs (which accounts for both wage costs and productivity) were only 1.9%. Much has been discussed about the potential efficiency gains to be found in the adoption of artificial intelligence technologies. If there is any truth to that story, we would like to see it reflected in productivity data, which has been sluggish since the global financial crisis of 2007–2009. This could help workers continue to enjoy solid pay increases without eating into company profit margins.

A Few Words on Commodities

Gold has outperformed global equities, as measured by the MSCI All Country World Index, by +16.6% year to date through October and an annualized +1.1% over the trailing five-year period from October 2024. Aggregate commodities, as measured by the Bloomberg Commodity Index, have trailed global equities over both time periods, but they have performed better than global bonds, as measured by the Bloomberg Global Aggregate Index and outperformed an illustrative portfolio comprised of 60% global equities and 40% global bonds (rebalanced monthly) by +1.0% per year over the trailing five-year period from October 2024.

Commonly cited reasons for the strong relative performance include but are not limited to: potential inflation protection and an alternative store of value, heightened and escalating geopolitical risk, and growing fiscal concerns. Many central banks—including those in China, India, and Russia—have been net purchasers of gold in recent years, which, if continued, could help drive future price appreciation. Growing energy demands across the developing and developed world, in conjunction with decarbonization goals and relatively muted capital expenditures by energy and mining companies relative to levels a decade ago, could support aggregate commodity prices (and potentially, inflationary pressures). While near-term price movements are highly uncertain, both gold and aggregate commodities could find further upside over the medium to long term if these trends persist.

Source: FactSet, Cerity Partners. Past performance does not guarantee future results.

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