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The Fed aims to ‘avoid volatility at all costs,’ strategist says

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Brigg Macadam Founding Partner Greg Swenson and DailyFX Chief Strategist John Kicklighter join Yahoo Finance Live to discuss what to expect from the Fed this week and how to invest accordingly.

Video Transcript

[MUSIC PLAYING]

- Welcome back. And we want to welcome in our market panel to discuss the trading we've been seeing today, and throughout the past couple of sessions. And for that, we have Greg Swenson, Brigg Macadam founding partner, and John Kicklighter, DailyFX chief strategist. But before we turn it over to you both, we want to get one check of the markets with less than a minute to go until the closing bell.

As we can see here, not getting quite that rally in the final minutes of trading that we saw during yesterday's session, although we are definitely off the lows of the day today, as well. You can see here the Dow Jones Industrial average is down just about 71 points, or about 0.2 percentage points, and taking a look at the components here, Salesforce, Walgreens Boots Alliance, and Walmart are the laggards, whereas on the flip side, we have American Express, and IBM both trading sharply higher after posting better than expected quarterly results. For American Express, those were this morning, and for IBM, that was after the bell last night, that stock still holding on to those gains.

And taking a look at the other major indexes, we have the S&P 500 down just over 1.2%. And taking a look at the sector action there, we do have information technology, communication services, and consumer discretionary the laggards in terms of the 11 major sectors in the S&P 500. NASDAQ also trading in the red today. And here's the closing bell.

[MUSIC PLAYING]

[CLANG CLANG]

[APPLAUSE]

All right, so let's see where we are going to settle, and not quite a repeat of yesterday, where we recovered the losses. The Dow was off 67 points, will be down about 2/10 of a percent. S&P 500 is going to be down a little bit over 1%, down 53 points. The NASDAQ is down 2 and 1/4%, off 315 points. One sector, by the way, in the green today.

And that would be energy. The energy sector was up almost 4%. Let's get to the panel and kick this off with Greg, because you are warning, with the Fed statement coming tomorrow, that the debt trap dilemma may be alive and real. As an investor, what does that mean to us?

GREG SWENSON: Well, yeah, I think, you know, to a certain degree, it might be too little too late. You still have a lot of inflationary factors in the economy, specifically or notably rents, that haven't really been factored in the CPI until-- and we won't expect that immediately. But, you know, that is definitely a factor. Rents are stickier.

And I think that investors have to be prepared for CPI to stay high for longer, which, you know, the last year everybody decided it was transient. That didn't really work out. And I think the market expects inflation to tail off in March, April, May, when in fact these rent numbers haven't really been factored in yet.

So I would just keep an eye on inflation. Obviously, you know, the Fed's going to make their comments tomorrow. And everyone, I think, the market expects the first hike in March. But I think that this might be too little too late. And I would keep an eye on inflation.

- John, as we take a look at the market action that we've seen over the past couple of days, and notably the selling action we had yesterday, then that little bit of a rally into the close, the fact that we did come off the lows of the day today as well. Do you think we're seeing an investable bottom here, or is there more volatility ahead?

JOHN KICKLIGHTER: I would not call it an investable bottom. Investable is more of a long-term view, and I think these markets are still extraordinarily expensive. I think that there's a lot of opportunism out there. There's a different mix of investors and traders, who have greater influence on the markets, in their more concentrated liquidity types, the retail trader, for example. And when you see the hands-off of big investors and big institutions, you see more of the influence of these smaller, more flip-it traders. And you get this kind of volatility.

And I think this volatility that we've had over these past 48 hours is incredibly worrying. And the fact that the markets are perhaps a little bit more sensitive to negative news now, more so than they have been in the past, where there are so many opportunities to buy dips. Now it's much more introspective and uncertainty about what the future holds.

- When we were talking to a guest in the last hour, John, that guest pointed out, though, that the wording of the statement tomorrow, if it's really aggressive, will have an impact on trading. So do you think that what we see tomorrow is going to calm the markets, John, or is it going to add to the ups and the downs?

JOHN KICKLIGHTER: I think the Fed is going to do everything in its power to try to avoid generating volatility it does not want. It wants to avoid volatility at all costs. It wants to just respond to the market, rather than being an influencer of the market. However, I don't think they're in kind of that position to do that now.

Now the markets are hanging on every word they say. They've actually encouraged it, to have us hyper-interpret all their language, and that's been building up over years. So now they have a highly-attuned market, and it's almost inevitable that we're going to read into what they say. So they're going to be as explicit as possible, which means they're going to make surface-level promises, which they're probably not going to be able to keep. And it's just going to generate more volatility in the long term.

- Well, Greg, and to that point, do you think the bigger concern for markets with regard to the Fed, and perhaps what's been driving this volatility, is the fact that the Fed has signaled that it's going to be raising rates and conducting tightening, or is it the fact that there is still uncertainty about just how tight and how hawkish the Fed is going to go?

GREG SWENSON: Yeah, it's a great question. I think, you know, we're all wondering that. But the Fed has done, I guess, a good job in one way. They've signaled their intentions pretty deliberately. And that probably takes some of the volatility out of the market, rather than surprises where they just come out and tighten 50 basis points and surprise the market, which I think would cause even more volatility.

So but the concern is, you know, they're telegraphing it well. But they were wrong last year. And they sort of missed all the signals on inflation. So my worry is that they will be wrong again. They'll either have to aggressively hike rates, or they'll miss that and have to hike rates aggressively later.

Either way, it's a delicate balance. So I think John makes a great point, that, you know, all eyes are on the Fed. And I don't think we have that luxury of the Fed put anymore, unless things get really ugly. So, you know, look, again, all eyes are on the Fed. But all eyes should be on inflation, which ultimately dictates what the Fed will do.

- And to follow up on that, Greg, is that one of the reasons why your advice to some of us might be either store some value in gold or in Bitcoin?

GREG SWENSON: Yeah, definitely. I mean, I think you have to think about alternatives at this point, right? Still stay long the market, with cyclicals. That trade has worked, obviously. Energy and banks did really well last year. And they've actually continued to hold on this year. But I think that, you know, ultimately the cyclical trade will run out of speed.

You know, you do have some headwinds in terms of earnings maybe not being quite as spectacular this year as last year. So I would definitely have an alternative basket in your portfolio, whether it's gold, Bitcoin, other real assets. I really like, you know, if you can invest somehow directly or indirectly in LNG infrastructure. There's a lot of geopolitical issues going on right now with energy.

We're having a major crisis here in Europe, where I am right now. I'm in the UK and I think that has to be taken seriously. So LNG infrastructure, social infrastructure like housing, affordable housing. There are a lot of areas right now that need capital. And a lot of capital is pouring in, but they're inflation protected. And the companies and projects have the ability to raise prices along with inflation.