Debt markets behaving ‘smarter than the stock market’: Strategist
Wealth Consulting Group CEO Jamie Lee and Key Advisors Group owner Eddie Ghabbour join Yahoo Finance Live to discuss market volatility amid recession indicators and the Fed rate hike cycle.
Rachel Akufo: There you have it, the closing bell for today, July 11th. All three major indicators are in the red, as you can see there. The DOW lost about 1/2 percent today, 162 points. The S&P 500 is down about 44 points, just over 1%.
The biggest loss was on the high-tech Nasdaq – tech stocks shed about 2 and 1/3 of a percentage there, losing 262 points. Let’s break down this market movement by our market panel now.
Eddie Ghabbour, owner of KeyAdvisors Group and author of “Common-Sense Bull”, and Jamie Lee, CEO of Wealth Consulting Group. So Eddie, starting with you, in terms of market sentiment at the moment, as they prepare for more data out this week, what are the markets engrossing in right now?
Eddie Ghabbour: So I think the biggest thing the market will absorb is the inflation data and how the Fed interprets that. We’re still bearish here, because personally I think there’s a lot of slack in the market right now, when you take a look at where the VIX is.
So I think when we start getting the next second-quarter earnings data in July and August, investors will understand, in our view, that growth is actually slowing down materially. We are, in our opinion, heading for a recession. We’ll probably be in one now.
And we have the Fed that’s going to have to deal with a really hot inflation number. They will have to choose whether to try to save the economy or keep raising prices in this slowdown. So I think risky assets will decline again in the coming months.
There will be some potential buying opportunities in the late third or fourth quarter. But for now, we’re still on the sidelines.
– Jimmy, same situation – yours – and is there a lot of pessimism at the moment, or about the right level?
Jimmy Lee: You know, the more pessimism I hear – and it’s been this way for months – the better I feel that we have some buying opportunities for long-term investors. So I agree with the other guest. I think the next 90 days will be very volatile.
Inflation data will not improve fast enough, and the Fed will not indicate that it will change course. And I really think that’s what you have to have — is that investors have to believe that the Fed is going to pause and when, and maybe even reverse course down the road if we keep getting some negative economic data, which we’re likely to get.
But as you saw with last week’s strong jobs report, I think we are now giving away a few gains from a strong week in the markets, especially in terms of technology stocks. The Nasdaq is up more than 5%. And today, with China and the new lockdowns, you know, I think that makes investors nervous in the short term again.
Rachel Akufo: And Eddie, with so much of that tension still troubling the markets right now, do you see any, perhaps, what could be safe havens or defensive plays that really set you apart?
Eddie Ghabbour: We’ve been telling clients as we head into this second quarter that cash is going to be king in this environment. Because I think there are very few places to hide when you look at what the dollar has done, what interest rates have done.
Now, with all that said, I think, as I say, we’re going to have some great buying opportunities in the third and fourth quarters of this year. But we have to get the next second quarter earnings data. The second quarter numbers are going to be really tough.
Companies will be very difficult. And again, I think when you look at the consumer, you start to see debt levels start to increase. I started seeing late payments on credit cards.
Used car loans are starting to appear. So the credit markets are asking us to be very careful here. I think debt markets are smarter than stock markets. And in the short term, we’re going to follow those signals, and they’re telling us to be kind of very careful here and not try to be a champ.
– Jimmy, what are your expectations when we start taking a look at the earnings as well as the June inflation report?
Jimmy Lee: Yes, I think inflation will likely remain very high, which is not great for people looking for what the Fed will say at upcoming meetings. I think we guarantee 50 to 75 points in the next meeting, and then in September, maybe at least another 50 points, maybe – maybe we don’t.
But at least two rate hikes from the Fed, I think, we’re definitely prepared. And then, in terms of earnings, you know, I’m not sure if the adjustments came fast enough. People were rushing — the analysts were rushing to make adjustments. But I think we’ll look more at the routing.
And as you know, consumers still have a lot of money on the sidelines. And as you saw in the jobs report, people are still hiring. So the good news is what we can look forward to in the future, and I think it will be more than the fourth quarter – have we not had a synchronized global recovery from COVID yet, right?
So I think we have good news yet to come, hopefully there will be a decision from Russia and Ukraine, hopefully better inflation data that allows the Fed to look less hawkish, and maybe turn the tide. And I really think that’s what you’ll need to achieve sustained highs, and I’m optimistic about that.
Rachel Akufo: And Eddie, in terms of how people should view their portfolios, BlackRock says the traditional 60-40 equity bond portfolio split no longer works. What are your thoughts on that? Is this something permanent or just past this period?
Eddie Ghabbour: I don’t think it’s a permanent thing, in my opinion. The reason 60-40 isn’t working is because the markets have already fallen too far, and the 10-year bonds are over-maxed. So fixed income has also been hit from a price perspective.
But I think when we start to get to those peak inflation numbers, and then eventually, the Fed goes from raising rates to just staying put, you’ll see peak 10-year bonds really start to fall. We believe that the 10-year bond will start to roll over once we reach that peak number.
And that would be good for bond prices, because it works inversely with interest rates. So I don’t like to say the word, never work, because that usually means we’re probably close to making it work. So I wouldn’t give up on fixed income because you had six bad months, just as I wouldn’t give up on stocks because you had six bad months.
– Well, we should leave it there. Gentlemen, Eddie Ghabbour, Jamie Lee, thank you very much. Appreciate it today.