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‘The economy is fragile’ and the Fed must act accordingly: Commerce Street Capital CEO

Commerce Street Capital President and CEO Dory Wiley joins Yahoo Finance Live to discuss the market expectations for 2022, the Fed's tapering and rate hike policies, and technology sector favorites.

Video Transcript

- Let's bring in our first guest for the hour to break down all of the market action. We've got Dory WIley, Commerce Street Capital President and CEO. And Dory, I know you've been listening to Jeffrey Gundlach comments alongside us as well. He's pointing to the moves in the bond market, saying that's telling us the potential recession is on the horizon come next year. What are you seeing or what are you drawing from those moves we've seen?

DORY WILEY: Well, thanks for having me on the air. And I'm an old fixed income guy. And so I watched the bond market before I watch the stock market. It's very good at a little bit better at indicating versus the stock market. I would say the indicators of a recession-- I think I agree with him more on the fact that the economy is fragile. And I agree that it may not even take four hikes, as he said, it may take two or three. We're going to have to watch each hike and see how it responds.

Now, the problem is is it's just like in 2018. We get the easing in the first quarter of the bond buying. And then we start to raise rates. The market is going to react negatively. The market has reacted negatively every time there was an indication of a punch bowl pull away, whether that be fiscally or monetarily. So we know that's going to happen. The question is that will test the resolve of the Fed. And the poor Fed, you've got to feel for them. They've had this 12 years of easy money.

And now they got to time this thing. And the odds of timing are going to be very difficult. It's like throwing a 70 yard football down the field and trying to hit a moving tire. And unless they put Pat Mahomes on the Federal Open Market Committee, they're likely to miss it. And so they've got to react accordingly, not out of fear, but out of fundamental. It kind of reminds me of Volcker. They're just going to have to do the right thing. And it's going to be very difficult for them.

- Yeah. I mean, people can debate whether or not Patrick Mahomes is the best arm to get it down there accurately, at least what we've seen this season. But when we talk about, I guess, what you saw in the-- you know, tapering tantrum that we saw play out during the last cycle of raising rates and kind of moving off accommodations, I mean, it doesn't necessarily seem like the volatility has matched what we saw before. I don't know if that's credit to kind of the way that Jerome Powell has been really, I guess, signaling the plans this time around or what you would say about, I guess, what they've done early to set the stage for next year.

DORY WILEY: Well, the good news is is they've been extremely transparent, right. We don't have this Alan Greenspan Fed speak going on. This is what we're going to do. We're going to raise rates probably three times next year. My guess is it might be two if it's too sensitive. If the market can handle it, it might be up to four. But they're just going to have to be extremely careful.

In the meantime, you're seeing what we're seeing-- even in today's market, the traditional sector rotation, the markets responding positively, all of those things are a really good sign because as we know the first five days of January are an indicator of how the year goes.

- Dory, you talk about the unenviable position that Jay Powell is in right now. I mean, it is interesting to see this delicate balance that the Fed has to really tow, trying to raise rates in a slowing growth environment, not necessarily pulling back, but the growth slowing itself. I mean, do you see those three rate hikes coming? Or do you think it's more likely to be just two, or even just one?

DORY WILEY: Well, we'll see. What we do know is with the easy money we had less volatility. We're going to have more volatility right off the bat going in here as we stop the bond buying in the first quarter. And we're going to learn a whole lot about the market. And that'll tell us about how many rate hikes we're going to be able to absorb. I do think they are intent on doing at least two. And we'll just see. I think it may actually be three. That's certainly what the futures market tells us. But there's really no way of knowing because it's going to get emotional in a hurry as we have increased volatility. And when there's increased volatility, there's increased fear. And when that happens, you know, we'll see. It's going to test some resolve. That's for sure.

- What's the best way to play that then if, you know, you're speaking directly to our viewers out there and really bracing for some of that volatility. You're still calling for about 12% to 14% returns in terms of what we could see. I mean, is it all maybe shift away from big tech right now given what we saw last year when volatility hit, or is it more kind of-- we had a guest yesterday talking about leaning into small caps. What's the best way to play you think?

DORY WILEY: Well, it's interesting. The textbook right now-- and everyone seems to be saying it-- is, hey, hit the small caps. Rotate out of growth. Hit the value. Hit the industrials. Hit the banks. And there's room to run in all of those. And then there's certainly some good recommendations on all that. But at the same time, there's still some fundamental tech investing that you probably need to be in. Micron and Lamb Research on the semiconductor side. In the big tech area, how can you avoid Apple and Microsoft, right?

So I'll probably be a little pickier about what I'm in. Avoid the Teslas of the world and things like that. But there's room to run on the sector rotation play. And I'm extremely bullish on energy right now as an inflation play, as a contrarian play, as a value play, as a sector rotation play.

- Dory Wiley, some good takeaways there. Commerce Street Capital president and CEO. Appreciate you joining us today.