Author and KeyAdvisors Group's Eddie Ghabour joins Yahoo Finance Live to discuss the outlook for markets amid Fed policy tightening and earnings season.
BRAD SMITH: Everyone, for more on today's tape, let's bring in Eddie Ghabour from KeyAdvisors Group and author of "The Common Sense Bull." Eddie, good to have you here with us this afternoon. On the thought of the global inflationary problem that you've been monitoring, we've been discussing here as well before we get into some of the individual names here-- you believe this will take much more aggressive action to rein in this situation. So how much more aggressive above what's currently signaled?
EDDIE GHABOUR: So, look, I think what they're signaling now is one of the fastest tightening in history in the latest of the stages you could possibly imagine from an economic standpoint. I mean, the fact that they're going to be this aggressive is due to the fact that they did nothing last year. And what's happening right now is this economy is slowing down faster than I think most investors are pricing in, than what the market's pricing in.
Earnings are only going to get worse from here, in my opinion. First quarter has been mixed. Second quarter, in our opinion, is going to be much worse than the first. And you've got a Fed that's forced to tighten going into this slowdown is why starting in November of last year, we started to wave the warning flag that we were becoming bearish on the market for the first time in a very long time.
And, look, I don't want to sugarcoat this and I hate being bearish because my Twitter handle's CommonSenseBull for a reason-- this is the worst setup I have seen in over 20 years in this market. And I think investors that aren't bracing for what could potentially happen here over the next few months, they're putting themselves in harm's way. So it's unfortunate, but this is the price you pay for really loose monetary policy and letting inflation get way ahead of itself and now trying to play catch up.
RACHELLE AKUFFO: So then as investors really take a collective gulp looking at the road ahead then, how should people be positioning their portfolios? Or should they hold on to their cash? What do you recommend?
EDDIE GHABOUR: Look, cash is king right now. We have a cash position for clients right now. The only sectors that we have been buying on the equity side for the last few months has been utilities, health care, and consumer staples. That's it in our tactical strategies. We got out of tech by the second week of January, we've been out of small caps since the end of December.
Because right now, those areas that carry the highest beta, in our opinion, are going to continue to go down. And I think this broader market goes down at least 20% at a minimum before we'll start looking to buy back into these riskier assets. Now is the time to be playing defense, and, in our opinion, not trying to play offense. Because, again, we haven't even started really tightening yet.
Wait till these rate hikes go in. If they really raise rates 50 basis points in May and 50 basis points in June, you better buckle up, because this market and this economy cannot handle that, in my opinion.
DAVE BRIGGS: There's been a suggestion of 75 basis points. Do you think we'll see it?
EDDIE GHABOUR: If we see 75 basis points, this market will crash and we'll have a recession much faster than what we're anticipating. And that's my opinion if they get that aggressive. That is reckless, in my opinion.
BRAD SMITH: Would it be an economic recession in terms of the actual data that we review? Or is this something that would be more reflective immediately in the stock market than in the data?
EDDIE GHABOUR: It's going to be in the stock market first. I mean, look, there are bubbles all around us. Look at the hot stocks from last year, the stay-at-home stocks-- a lot of these companies are down 30%, 40%, 50%, some 60% from their highs. So it always starts with the higher risk assets first before it hits the broader market, OK?
And here's the biggest risk, in my opinion, to the broader market right now-- the broader market is highly concentrated in just a handful of names. What happens if their earnings or guidance for the second quarter is very dismal or if they have a second quarter earnings report because they don't give guidance that really surprises to the downside? That's when you'll see that big downdraft in the S&P, in my opinion.
And, look, no one is bulletproof in this environment. We haven't seen this environment in a long time. And I think being cautious here after the massive run-up we've seen over the last several years in risk assets is just a prudent thing to do, because there will be some amazing buying opportunities that will come when this bubble bursts.
RACHELLE AKUFFO: And speaking of buying opportunities, I mean, a lot of people are looking at some of these pandemic darlings that you mentioned-- do they actually have a hope in the future at this point? Is it time to buy the dip? Or is it time to really let them go and look at other areas?
EDDIE GHABOUR: So, look, I look at this time period and I relate back to 2000 when we were managing money. And these technology companies that just continue to implode, and people thought because they were down 30%, 40%, or 50%, that it was a great buying opportunity and many of them went down 90%-plus. So I'm not here to try to catch a falling knife because I think for many of these companies, if the environment stays the way that it is and the Fed truly tightens to slow this economy down, that we could be in the very middle innings of this bear market.
So it could get a lot worse. And, look, I have to point to the VIX today. This market does not justify a VIX being as low as it is. I personally believe we will see the VIX in the 40s by summertime. And that's when you'll start to see capitulation and potentially some buying opportunities late third quarter, early fourth quarter.
DAVE BRIGGS: That's a long way off. Your reference "Common Sense Bull," and in that you have some advice for retirement strategies. I'm curious what you think about the man who wrote the 4% rule back in 1994 who says we actually need to reconsider that number because of the economic conditions you've spoken about. Do you think it's time to reconsider the 4% rule?
EDDIE GHABOUR: Look, I think the 4% rule works if you have the right risk management strategy. I think this environment and the investment world has changed so much-- and we've been talking about this for the last 12 months-- this is not a buy and hold environment. So if you're going to buy and hold and ride this market all the way down and lose a third of your portfolio or 20% of your portfolio, then, no, that rule will not work.
But if you're going to be tactical and make changes based on what the economic data is telling you, then I think it can work. Because, look, at the end of the day, we don't need to overthink this. Why do we want to fight the Fed? Us bulls say, don't fight the Fed when they're dovish because we're bullish.
Well, I'm saying it also works in the other direction. They're giving you the answers to the test. They're going to slow the economy down. And it's already slowing down. And the market won't like it. It's already reflected in the numbers, but it's because the broader market is not ugly enough yet that I think the average investor thinks that this time is different. And that's a very dangerous way to think in this market.
BRAD SMITH: All right, flashing some warning signals there-- Eddie Ghabour from KeyAdvisors Group and author of "Common Sense Bull" joining us here. Always a pleasure to get your insights, Eddie. Appreciate it.
