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The debt markets are acting 'smarter than the stock market': Strategist

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Wealth Consulting Group CEO Jimmy Lee and Key Advisors Group Owner Eddie Ghabour join Yahoo Finance Live to discuss market volatility amid recession indicators and the Fed's rate hike cycle.

Video Transcript

RACHELLE AKUFFO: And there you have it, your closing bell for today, July 11. All three major indices in the red, as you can see there. The DOW losing about 1/2 a percent today, 162 points. The S&P 500-- down about 44 points, just over 1%.

And the biggest loss is on the tech-heavy NASDAQ-- tech stocks driving that down about 2 and 1/3 of a percent there, losing 262 points. Let's break down this market action with our market panel now.

Eddie Ghabour, KeyAdvisors Group owner and author of "Common-Sense Bull," and Jimmy Lee, Wealth Consulting Group CEO. So Eddie, starting with you, in terms of the sentiment in the market right now, as they brace for more data coming out this week, what are markets digesting at the moment?

EDDIE GHABOUR: So I think the biggest thing that market is going to be digesting is its inflation data and how the Fed interprets that. We continue to be pretty bearish here, because I personally think there's too much complacency in the marketplace right now, when you take a look at where the VIX is.

So I think as we start to get this second quarter earnings data coming in the month of July and the month of August, investors are going to come to understand, in our opinion, that growth is really slowing materially. And we, in our opinion, are heading into a recession. We could potentially be in one right now.

And we have a Fed that's going to have to deal with a really hot inflation number. And they're going to have to pick on whether to try to save the economy or just continue to raise rates into this slowdown. So I think risk assets are going to take another leg down in the coming months.

And there are going to be some potential opportunities to be buying late third quarter or fourth quarter. But right now, we are continuing to stay on the sidelines.

- Jimmy, the same-- your stance-- and is there too much pessimism out there at the moment, or about the right level?

JIMMY LEE: You know, the more pessimism I hear-- and it's been like this 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 is going to be very volatile.

The inflation data is not going to improve fast enough, and the Fed's not going to signal that they're going to change course. And I really think that's what you're going to have to have-- is that investors have to believe that the Fed is going to pause and when, and possibly even reverse course down the road if we continue to get some negative economic data, which we probably will get.

But as you saw with the strong jobs report last week, I think right now, we're just giving up a little bit of the profit from a strong week in the markets, especially on the technology stocks. The NASDAQ was up over 5%. And today, with China and the new lockdowns, you know, I think that's making investors nervous for the short run again.

RACHELLE AKUFFO: And Eddie, with a lot of this nervousness still frothing in the markets right now, do you see any, perhaps, what would be considered safe havens or defensive plays that are really standing out to you?

EDDIE GHABOUR: We've been telling clients as we're heading into this second quarter that cash is going to be king in this environment. Because I think there's very few places to hide when you take a look at what the dollar has done, what interest rates have done.

Now, with all that being said, I do believe, like I say, we're going to be getting some great buying opportunities in the third and fourth quarter of this year. But we have to get through this second quarter earnings data that's coming in. The second quarter numbers are going to be really tough.

The comps are going to be extremely tough. And again, I think when you take a look at the consumer, you're starting to see debt levels start to increase. You're starting to see late payments on credit cards.

The used car loans are starting to show breakdown. So the credit markets are telling us to be very, very cautious here. And I believe that the debt markets are smarter than the stock market. And in the near term, we're going to follow those signals, and it's telling us to just kind of be very, very cautious here and not try to be a hero.

- Jimmy, what's your expectations as we start to get a glance at earnings as well as an inflation print for the month of June?

JIMMY LEE: Yeah, I think inflation is still going to probably run pretty hot, which isn't great for people that are looking at what the Fed is going to say in the upcoming meetings. I think we're guaranteed 50 to 75 bips in the next meeting, and then in September, probably at least another 50, probably-- maybe not guaranteed on that one.

But at least two Fed rate hikes, I think, we're in for, for sure. And then, as far as earnings go, you know, I'm not sure if the adjustments came in fast enough. People were rushing-- analysts were rushing to make adjustments. But I think we're going to be looking more at guidance.

And you know, consumers still have a lot of cash on the sidelines. And as you saw with the jobs report, people are still hiring. So the good news is what we can look forward to down the road, and I do think it's going to be more Q4-- is that we haven't had a global synchronized recovery from COVID quite yet, right?

So I think we have good news yet to come, hopefully some resolution from Russia and Ukraine, hopefully, better inflation data that allows the Fed to sound less hawkish, maybe turning the tide. And I really think that's what you're going to need for a sustained bull rally, and I'm hopeful for that.

RACHELLE AKUFFO: And Eddie, in terms of how people should be viewing their portfolios, BlackRock is saying that the traditional 60-40 stock-bond portfolio split doesn't work anymore. What are your thoughts on that? And is that something permanent, or just to get through this period?

EDDIE GHABOUR: I don't think it's anything permanent, in my opinion. The reason why the 60-40 hasn't worked is because the markets have really gone down in a big way, and the 10-year bond has gone through the roof. So fixed income has really gotten hammered, too, from a price perspective.

But I believe as we start to get to these peak inflation numbers, and then ultimately, the Fed goes from raising rates to just hopefully staying pat where they are, you'll see the 10-year bond peak out and actually start going down. We think the 10-year bond will start rolling over once we get to that peak number.

And that would be good for bond prices, because they work inversely with interest rates. So I don't like to say the word, never works, because that usually means that we're probably close to it working. So I wouldn't abandon fixed income because you had a bad six months, just like I wouldn't abandon equities because it had a bad six months.

- All right, we got to leave it there. Gentlemen, Eddie Ghabour, Jimmy Lee, thanks so much. Appreciate that today.