Markets & Economy

There’s no shortage of topics to discuss and break down when it comes to markets and the economy, and today we’re sharing our views on current events that are top of mind. Get answers to: How will the election results impact the market and our investment strategy? What is the labor market telling us? And our thoughts on crypto.

Question: How will the election results impact the market and our investment strategy?

The outcome of the GOP House majority and a Democratic Senate is a legislative stalemate, therefore, we believe Democratic agenda will be curtailed. In particular, we view the outlook for inflationary spending policies as having diminished, which probably means that for the Fed, less hawkishness will be necessary than under the current makeup of the government, all else equal.

For investors, a government gridlock will keep either party from executing its full agenda, ultimately leading to no significant legislation and a freeze on fiscal policy. However, we believe the Fed will continue tightening into a slowing economy for the foreseeable future. Additionally, the Fed can manage being tighter for a longer extended period than other central banks, so we do not expect meaningful weakness in the dollar barring an unforeseen major reversal in global risk appetite.

Question: What is the labor market telling us?

With the Fed raising rates, the labor market is next most obvious indicator for signs that their efforts to curb high inflation are working, or not. Overall, the labor market looks very healthy today on most measures – lower unemployment, strong wage growth, plentiful job openings, etc.

However, we are seeing some signs of cracks forming in the labor market. There’s been plenty of headlines announcing hiring freezes, as well as talk of companies making contingency plans. Tech layoffs are starting to notably rise. Combine those labor market cracks with poor business confidence, erosion of consumer purchasing power, and rising interest rates, it is likely the case that economic activity continues to slow.

The labor market is considered a lagging measure of activity as businesses tend to be slow to hire early in economic recoveries. This is because companies typically wait to make sure it is safe to add workers. On the other end, companies are also slow to cut hours or workers into a recession for reasons from bad for morale to the difficulty of finding good workers. Because of this lag, by the time unemployment starts to move higher, we are already in recession.

Our outlook is that unemployment likely goes higher, but some good news is that given difficulty of finding workers, it is possible that labor market pain will not be as bad as past recessions.

Question: Any updated thoughts on the crypto collapse?

The FTX situation has certainly garnered an incredible amount of attention for all of the wrong reasons.

As it pertains to crypto, it is another high-profile implosion that has sent prices lower and destroyed consumer wealth. It’s also eroded trust in an asset that was already walking a fine line between real utility and Ponzi scheme in the minds of many. It’s likely to draw a strong response from regulators at some point, though there are likely to be some serious questions about conflicts of interest given how close the founder of FTX and Alameda, Sam Bankman-Fried, was with regulators and policymakers. Finally, it is likely to cause some serious soul-searching at some of the largest and most respected VC firms in the world. As more information comes to light, it appears there was a remarkable lack of due diligence on their part.

While the crypto industry will have to contend with the ramifications of the FTX and US-Alameda collapse for many years, there are a few important things to point out. While this was a spectacular failure of a series of businesses trading crypto products, this was not a failure of the underlying tech. Sam’s empire was a series of off-chain, centralized entities that operated off-shore, due in large part to regulatory uncertainty. One could argue that crypto’s potential use cases were proven during the debacle. Crypto-native protocols functioned flawlessly during the volatility, and on-chain data allowed individuals to monitor and analyze the situation in real-time. There is a strong argument that had these businesses functioned on-chain using blockchain technology exclusively—thus been fully transparent rather than as a centralized off-chain entity with closed books—this entire mess could have been visible as it built up and subsequently unfolded.

As it pertains directly to our holdings, we see essentially no impact. We don’t own positions in any companies directly exposed to crypto assets, and while we are indirectly exposed through the semiconductor value chain, our exposure is minimal.

We, as a multi-asset class manager, will continue to monitor for developments in the space. For now, it is comforting to see that while loose monetary policy and speculative behavior in traditional markets drove crypto prices higher for much of the last couple of years, that impact does not seem to work in reverse. Traditional markets have been largely immune from the volatility from the collapse of FTX and its related businesses.

Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, subscribe to our insights.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.