Economy could stagnate but ‘I just don't see’ devastation, strategist says
Cornerstone Wealth CIO Cliff Hodge and Michele Schneider, Marketgauge.com Partner and Director of Trading Research & Education, join Yahoo Finance Live to talk about how markets continue to digest the Fed's interest rate hikes and the impacts from the Russia-Ukraine War, inflation, and the U.S. dollar.
Video Transcript
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SEANA SMITH: That was the closing bell, sponsored by Tastyworks. Now the Dow, S&P, and NASDAQ, as we take a look at where things settled, all off just over a half of a percent. The Dow off 176, S&P and NASDAQ taking a leg lower here in the final couple of minutes of trading. Sector action, eight of the 11 sectors closing in the red today. Biggest losses coming from financials, healthcare, consumer staples, and materials among the worst performers there.
Well, let's break down the market action. We have Michele Schneider, marketgauge.com partner, and Cliff Hodge, Cornerstone Wealth chief investment officer. Cliff, let me start with you. When you take a look at today's market action, obviously, some worry here just in terms of what we're seeing ahead when we look at economic growth. What is your read just in terms of the volatility that we've seen and what that means for the next couple of days?
CLIFF HODGE: It's great to be with you. It all started this morning with that ISM manufacturing report, which came in above expectations and actually showed a re-acceleration on the manufacturing side of the economy. And so, we're kind of in this weird period now, where good economic news actually could be bad news for the markets because of the reaction function of the Fed. So stronger economy could mean-- and this is what the market was telling us today, that the Fed may have to be more aggressive with their tightening cycle, which that, ultimately, the fear would be that it does choke off the economy and puts us into a recession.
DAVE BRIGGS: All right, I want to get both of your comments on what Jamie Dimon said earlier, but Michele, we'll start with you. And I'm sure you heard it, but if you didn't, brace yourself for an economic hurricane caused by the Fed and the war in Ukraine. That's technically an upgrade or a downgrade, depending on your perspective, from storm clouds. Is there an economic hurricane coming, Michele?
MICHELE SCHNEIDER: No, I don't think so. I believe that a lot of what we are seeing in the market, of course, seems like a huge surprise that inflation numbers were out of control, that the Fed was behind the curve, that we've seen an economic slowdown across the board with the dollar being strong, our trade deficits continue to grow, the war, et cetera, et cetera. But it's not like it's a hurricane. When you think about a hurricane, you think about the devastation. And I just don't see where devastation is going to be coming.
Do I think that we could stagnate and just not grow? Yeah, but do I think we're going to go into some crazy recession? Our labor market's too strong. Our consumer sentiment, although has come off, it's still relatively robust. And as mentioned in the beginning, we still have a little bit of economic data that is somewhat positive. I wouldn't sink my teeth into it. But yeah, Dimon is-- well, he has said many things through the years that are very controversial.
DAVE BRIGGS: All right, what about you, Cliff?
CLIFF HODGE: Yeah, I would agree. We don't see a hurricane. The consumer is still in phenomenal shape. There's really no excess leverage built up in the system either when you look at both the consumer side or the corporate side. The maturity will offer high yield, which is the tip of the spear for credit, so to say. It's actually pretty low for the next couple of years as well. So are we going to slow down from a growth perspective? Yes, absolutely. Are we going to fall into a recession? Eventually. But I think it's going to take longer to play out than what is currently being priced in and what the current narrative is in the market.
SEANA SMITH: So you said eventually fall into recession. What's the potential timeline of that?
CLIFF HODGE: Yeah, it's a good question. We think we've got at least another 18 to 24 months. We could be having this conversation a year from now if we have some volatile markets going into the summer of '23, you know, given that equity markets are a discounting mechanism, and they discount the future. But as of for 2022, for the bulk of '23, we are not worried about it at this point.
DAVE BRIGGS: Michele, what are you seeing in the housing sector? A lot of data out recently showing the prices just staying high because of that low inventory, despite surging mortgage rates. What's coming?
MICHELE SCHNEIDER: Well, a lot of people will not sell their house now. Because of the rising mortgage rates, they're not going to be able to buy something else. Besides the fact that they would have to pay up, they would certainly have to pay higher rates, especially people who are able to lock in over the last 10 years on these low rates. And that's going to continue to keep inventory relatively low.
New construction probably a bigger issue. A lot of people went out and built, particularly in areas where there are housing shortages. With the costs of raw materials and the rising rates, we might see more fall in the new construction. But yeah, existing home sales are going to stay robust. And of course, regionally, it's going to be a factor as well, depending on where you are. I know in our area, it's still very, very strong. The inventory is well below the demand.
SEANA SMITH: Yeah, certainly very strong in this area as well. Cliff, let's switch gears here a little bit because in your notes, I saw that you're keeping an eye on emerging markets. A lot of that relies on how China performs. We had this news over the last couple of days that China is relaxing some of its COVID-19 restrictions. But many of those restrictions remain in place. Are you seeing any opportunity within that area to put money to work? Or is this more of a wait and see call?
CLIFF HODGE: Yeah, so we've actually started legging in to EM ever so slightly over the past couple of weeks. It is certainly going to remain volatile as we move through the summer. And a lot of it, too, is going to depend on the Fed, and then thus, the knock-on effects to the US dollar. US dollar is now at roughly 20-year highs relative to our trading partners. So we do think that if the Fed is not able to enact all the hikes that are priced in, then we should see some easing on the dollar. Then that will flow through to emerging markets.
Also, China is really one of the only large countries at this point who are actually going through an easing cycle, whereas the rest of the world, from a central bank perspective, monetary policy is tightening. So we do think there is going to be opportunity in China. The valuations are getting really interesting. As you said, COVID restrictions are easing up, but likely going to be a little bit more volatility here over the next couple of months, but certainly looking interesting for a buying opportunity.
DAVE BRIGGS: And Michele, we hear Janet Yellen admitting her error when it comes to inflation. Is there any data that shows you the Fed is succeeding in bringing down inflation?
MICHELE SCHNEIDER: Other than the fact that they've changed their tune, not really. I mean, at this point, just the natural attrition of the fact that higher prices often are the best cure for higher prices. Even the yields going up, they're still historically very low. Do I think going forward, they may be more aggressive now, considering this incredible admission? Absolutely.
What's stunning to me, though, is how you can be so economically bent and be so in the dark about what was coming when it was so obvious to somebody like me back in early 2020 that production was so low with COVID and everything stopping, the demand would just go nuts, and that would create inflation. That kind of scratches your head a little bit. I think they're going to have a credibility issue. And that may also be one of the reasons why inflation won't get under control until they really prove that they're willing to do the hard work.
SEANA SMITH: A credibility issue, that's interesting there, Michele. Cliff, when you take a look at that, I guess, do you agree? And how big of a risk could that potentially be for the markets?
CLIFF HODGE: I take the other side. I think inflation has peaked out. A lot of the leading indicators for inflation, really, other than housing, have already peaked and begun to slow down. You look at things in the commodity space, industrial metals being a tell there. You could also look at some of the momentum indicators as well, which typically tend to lead the headline reading by one to two quarters. Those have all peaked and started rolling over. So I would anticipate that we'll see inflation begin to moderate probably pretty aggressively in the second half of '22 into '23, which then would allow the Fed a little bit of leeway, perhaps, to pivot after the next two 50 basis point rate hikes, and then give us the potential for pretty strong second half of '22 for risk assets.
DAVE BRIGGS: All right, good stuff. Cliff Hodge and Michele Schneider, thank you both for being here.
