Economy: We have a ‘goldilocks scenario,’ strategist says

Many investors believe the Federal Reserve will skip raising rates at its next meeting in September. Right now, it’s shaping up to be a “goldilocks” scenario, Great Hill Capital Chairman Thomas Hayes tells Yahoo Finance Live.

“We finally have a goldilocks scenario where the slowing is starting to kick in, the lagged effect is starting to kick in, and more than anything what that means for the Fed is it gives them cover to actually pause in September, which is kind of priced into the markets right now,” Hayes says. Although many investors believe the Fed will hike in November, “we are going to get a lot of inflation data between now and then” and “if those numbers continue to come in a little bit softer, the Fed may be done in terms of hiking, not done with tightening cause they’ll keep rates elevated for a little while,” which “creates this perfect scenario for stocks moving forward,” Hayes explains.

Hayes also notes that with some softness in the labor market, quit rates declining, job openings softening, “that creates an environment where you're not going to have the wage price spiral, where you're not going to see this accelerating wage inflation, and that’s going to give a lot of comfort to the Fed.” Let the Fed “keep rates elevated” and have this “perfect situation where the economy is slowing a little bit, but the Fed is done tightening and then companies can start to perform,” Hayes explains. Hayes says for people expecting the “Magnificent 7,” Alphabet (GOOG, GOOGL), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), “to have a monster second half like they had the first half, I think they're going to be a little surprised.”

Video Transcript

SEANA SMITH: And investors they're sifting through a number of reports today. The latest reading on second quarter GDP showing a slowing growth in key areas across the US economy. The print was revised lower to 2.1% on the heels of declining business investment. And US job growth also pulling back in August. Private employers adding 177,000 jobs, less than half of what was added in July. All of this ahead of tomorrow's PCE report, the Fed's preferred inflation gauge.

Now despite the sluggish readings that we did get on the economy, stocks though, like Akiko was saying, are up. So as bad news actually good news for the market. We want to bring in Tom Hayes, Great Hill Capital Chairman and managing member. Tom, it's good to see you.

So certainly, we've heard Fed Chair Jay Powell, the Fed waiting for the economy, waiting for some of these data points to weaken just a little bit because we know what that means for Fed policy. It seems like investors are a little bit encouraged by the disappointing reports.

THOMAS HAYES: Yeah. I think we finally have a Goldilocks scenario, where the slowing is starting to kick in. The lagged effect is starting to kick in. And more than anything, what that means for the Fed is it gives them cover to actually pause in September, which is kind of priced into the markets right now.

And then we have till November, which everyone thinks there's going to be a hike in November. But we're going to get a lot of inflation data between now and then. We're going to get a few jobs reports between now and then. And looking at the ADP data today, we're going to see the jobs report on Friday.

If those numbers continue to come in a little bit softer, the Fed may be done in terms of hiking, not done with tightening because they'll keep rates elevated for a little while and that creates this perfect scenario for stocks moving forward a. Lot of people are very nervous about August and September's seasonality right now.

But there's a caveat to that. Since 1905, in the years that the S&P is up 15% to 20% by July, the remainder of the year on average is up 9%. So with all this fear, I think people are underestimating the amount of cash that's still on the sidelines that has to play catch up for underperformance in the first half of the year.

AKIKO FUJITA: And, Tom, we'll talk a bit about how you can play with that cash, but on Fed policy, specifically there's been a lot of talk about the lag factor in how much room we have to run essentially on this data. What is the data today tell you about to what extent the Fed policy, the monetary policy has started to take hold?

THOMAS HAYES: It's certainly starting to kick in. But actually when we look at earnings just in the past week, earnings have been revised up for 2024, from 246 to 247. So the economy is holding in there. We obviously know the Atlanta GDP now is pointing to positive things for Q3. So it's kind of this perfect balance. Operating margins are up 1% from last year. And no one expect that from 10.9% to 11.9%.

So I think if we have a little softness in the labor market, which we're seeing, the quit rates are starting to decline. The job openings as we saw with the JOLTS yesterday are starting to soften. That creates an environment where you're not going to have the wage price spiral, where you're not going to see this accelerating wage inflation.

And that's going to give a lot of comfort to the Fed. That's going to keep their pedal off the metal. Let them keep rates elevated like we saw in the late '90s and have this kind of perfect situation where the economy is slowing a little bit, but the Fed is done tightening, and then companies can start to perform.

And I think there'll be a lot of rotation under the surface. So for those expecting the magnificent seven to have a monster second half like they had the first half, I think they're going to be a little surprised.