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U.S. consumer sentiment hasn't been great in recent months, and there's one primary culprit: inflation.
"The economic fundamentals are very, very good — with the exception of inflation,” Randy Frederick, managing director of trading and derivatives at Charles Schwab, said on Yahoo Finance Live (video above). “Everything else in the economy looks really, really good. The labor market's in great shape.”
The Russian invasion of Ukraine and resulting sky-high energy prices added to the issue. And on Tuesday, the yield curve inverted as the 10-year Treasury note yield dipped below the 2-year yield for a few seconds, which is seen by some as a warning signal for recession over the following 18-24 months.
There is reason for optimism: Frederick pointed to the fact that the S&P 500 (^GSPC) roared back over 4,600 this week, erasing the losses of the gloomy late winter. Other measures of strength include five consecutive weeks of reduced jobless claims (though new claims ticked up slightly in the most recent report), volatility at a 10-week low, and the fact that the market didn’t panic at the inverted yield curve, which would ordinarily have a “tremendous impact” despite it not being a perfect signal.
However, the strong economic fundamentals (and stronger market) are especially interesting because of the dichotomy between that strength and how people are feeling.
“When you look at some of the consumer sentiment gauges, they're terrible, and it basically means people are not feeling good about inflation and they're complaining about inflation,” Frederick said. “But you know, when you look at the behavioral measures — retail sales, income, spending, travel — all of that, it shows that people are still spending.”
All things considered, according to Frederick, the spending-through-gritted-teeth amid high inflation shows the strength of the consumer.
'Massive, exogenous event' weighing on markets
Overall, until the Russia-Ukraine war begins to resolve, Frederick advocated staying neutral and refused to even speculate where the market might go.
“When those types of environments are out there, you can't look at basic fundamentals and you can't look at technicals and all the things that you normally look at because there's such an enormous sort of outsized event outside of that that's causing problems,” Frederick said. “So our overall outlook is, again, very much neutral across the board.”
He also suggested that investors should “take these opportunities when the market pulls back to adjust your portfolio to make sure that you are well diversified.”
The diversification point, Frederick continued, is paramount because “making predictions in an environment where you've got this massive, exogenous event going on between Russia and Ukraine is really kind of foolish.”