Sam Stovall, CFRA Research Chief Investment Strategist, and Matt Kishlansky, GenTrust Head of Asset Allocation, sit down with Yahoo Finance Live to discuss market trajectories during inflation and the Fed's interest rate hikes, the U.S. dollar, and CPI data.
Video Transcript
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DAVE BRIGGS: You see Blue Apron there on stage ringing that closing bell. They'll join us, their CEO, shortly to talk about the industry as well as food inflation.
And here's how the markets closed out this day, Tuesday, July 5. It has been indeed, as Ines said, a wild ride on this day, as the Dow pares back some massive losses, still down in the red. And a nice day for the NASDAQ.
Joining us now to talk about it is Sam Stovall, CFRA Research Chief investment strategist, and Matt Kishlansky, GenTrust Head of Asset Allocation. Nice to see you both. Matt, you liken the economy right now to choking on inflation. Why so? And what is the maneuver, then, the Fed has to pull off?
MATT KISHLANSKY: Well, thanks for having me back. I do. I think for the last several months, the market's been watching the economy choke on inflation. And if anything, over the last 30 days, I think the choking has intensified.
So the Fed is standing up here in the middle of a crowded restaurant, and it's attempting an economic Heimlich maneuver, hoping just to squeeze really hard and that will resolve the problem. I think the market is saying, they expect it will stop the choking. The issue is, much like the diners at nearby tables, that a lot of market participants are taking cover, expecting that, while the maneuver will be successful, there will be a big mess to deal with afterwards. And I think it's going to be difficult for anyone to just go on with their meal until the whole thing plays out.
To that end, I think there's really no consensus between the stock market and the bond market as to what we do in the interim and where we're headed. In the fixed income markets, we're seeing the US 10-year Treasury, move from a multi-year high of 3.4% just two weeks ago all the way back down to 2.8% today, which is a huge move, obviously. Similarly, the terminal rate, in essence, what the market's implying, the level at which the Fed will stop hiking short-term interest rates, that's moved from 4% down to 3.3% in the same two weeks.
So if you try to reconcile those two numbers, the bond market's telling you that before the ink is even dry on the last interest rate hike, the Federal Reserve is going to have to start cutting rates in order to deal with the economic fallout from those rate hikes. Bond market's in essence saying that a recession is a fait accompli at this point. The stock market's not so sure.
Oh, excuse me. Go ahead, Rachelle.
RACHELLE AKUFFO: Well, I was going to bring in Sam here in terms of his reaction. Obviously, we're coming off a holiday weekend with the markets closed on Monday. What do you think the markets are digesting right now? What do you think is going into this rally, particularly that we saw going into the close?
SAM STOVALL: Well, I think Matt's correct, that because of the decline in the 10-year yield, that's put a bid underneath some of the growth stocks that had taken it on the chin leading up to this period. But I think that we're going to have to sort of wait until we get the financials in the latter part of next week as well as other stocks to report second quarter earnings, because right now, what we've been seeing is nine of the 11 sectors posting lower estimates as of today versus where they were for the second quarter on March 31, as well as two thirds of the industries within the S&P are also looking at earnings estimate reductions.
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Excuse me. So I would tend to say that right now, investors are playing a short gain right now and are really taking a wait and see as to how much capital they really commit for the long term.
DAVE BRIGGS: So from choking to digesting analogies. Somehow leaving me hungry. Matt, back to you. And the strength of the US dollar is telling you what?
MATT KISHLANSKY: Well, I think the strength of the dollar is a function of-- the US remains the best game in town. And there are bigger problems all across the world. But I also think it's reflective of a world that still disagrees as to where we're going.
As much as the stock and the bond market disagree as to how severe things are and what the likelihood of a recession is coming forward, I think even within the equity markets then, there's strong disagreement as to where we're headed. In the bull case, they see a glass that's half-full. They think that we've retrenched too far on inflation fears. They look at the Michigan Consumer Sentiment numbers from late June and see a slight decrease in consumer fear of inflation.
They think they have a crystal-clear picture of what the Fed's going to do in terms of rate hikes. And they think that, if anything, earnings are going to be better than expected. So they think they might get some relief here in the next couple of months on both the P and the E side, both in terms of price and earnings.
On the bear case, they look at that same Michigan Consumer Sentiment report, and they say, yeah, we're 0.1% up off the 50-year low. And the world still looks pretty scary from that perspective. I think they think corporations have internalized that data and started to board up their storefronts for a long, cold winter. And they think that they'll see some significant corporate retrenchment, which we've seen a little bit in layoffs, which we've seen in hiring freezes that have been announced by major companies. They think that will effectively start to reduce velocity in the markets.
I think their other point there is we're coming out of an environment where we saw all-time highs-- or based on different metrics, all-time highs in terms of price to earnings. And their argument is it's not just because rates are coming up those numbers have to come down, it's also because in a phenomenal business environment, people were willing to pay those multiples. We've now exited that, is the bear case, and that we're in this world that's discontinuous, that's somewhat fractious. And we're not going to be in a peak business environment going forward. And so again, I think that the stronger dollar is probably a safe haven for that in that kind of world.
RACHELLE AKUFFO: So as you heard this, Sam, Matt really laying out the sort of bear and bull argument, when you look at what's happening with oil prices, the potential domino effect on inflation, on consumer sentiment, what are you keeping an eye on in terms of data points that you think are really going to give us a good idea of what to expect in the mid-term?
SAM STOVALL: Well, we're going to be coming up fairly soon to the next reading for consumer price index. And our expectation is that we have not seen the peak, that 8.7% is the reading we're likely to get for the June data, and that number is going to plateau at about 8.7% for July and August, with upside threats. So I think that the Fed will look at that and realize they still have a ways to go and, as a result, possibly the movement into the US dollar, not only a flight to safety as Matt suggested, but also I would tend to say that its attraction to a higher yield for yield-starved investors overseas.
So a lot of headwinds, economic as well as geopolitical et cetera, overseas, and seemingly a bit more calm here in the US.
RACHELLE AKUFFO: Certainly a lot to keep an eye on. Everyone still searching for direction. Sam Stovall and Matt Kishlansky, thank you both so much.
