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Fed Chair Powell ‘is going to be more aggressive than he says he is,’ analyst says

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Rebecca Felton, RiverFront Investment Group Senior Market Strategist, and Fitz-Gerald Group CIO Keith Fitz-Gerald join Yahoo Finance Live to discuss how investors and markets are looking at Fed interest rate hike cycles, thematic investing, inflation concerns, and China's supply chain and semiconductors.

Video Transcript

- That does it for today's market action. Looking at the major averages eking out gains, we're not seeing too big of gains across the board. The Dow closing up just around 2/10 of a percent. S&P and NASDAQ in the green. The NASDAQ also up just around 27 points. Taking a look at some of the leaders that Ines was just going through, energy-- by far the outperforming sector, up just around 2 and 1/2 percent. Financials up over 1%.

Let's get reaction here with Rebecca Felton, RiverFront Investment Group's Senior Market Strategist, and Keith Fitzgerald, Fitzgerald Group Chief Investment Officer. It's great to see both of you. Keith, let me start with you because I think investors are trying to wrap their heads around what we will likely hear from the Fed tomorrow, what exactly this means for the market. How should investors be viewing the upcoming decision from the Fed?

KEITH FITZGERALD: Well, there's the personal take and there's the professional take. The personal take is the Fed caused the next three crises by waiting so long to take action. The irony, of course, is that now everybody's betting on the Fed to do the right thing. I think the Fed is going to be looked at-- are they going to be too hot? Too cold?

What they want to watch is for language that Chairman Jay Powell. Powell is going to be more aggressive than he says he is. Right now, they've baked in a half a point in increase. We get anything more than that, I think the markets sell off hard. The run-up into the close today suggests that traders are trying to get on the gas in the unlikely event that maybe he has some way of threading the needle tomorrow.

- Rebecca, what could the Fed do, and what could Jay Powell say that would shock you and therefore shock the markets as well?

REBECCA FELTON: Well, thank you for having me. And I couldn't agree with Keith more. I think that the Fed will probably do a 50 basis point hike tomorrow. And we find it hard to believe that they are going to come out and do something to shock the market. They've worked very hard to try to support the economy over the last two years, and so it would be difficult to envision them shocking it tomorrow, so 50 basis points is also what we're expecting.

- So Keith, as we saw, a very choppy day today for the markets as they're sort of holding their collective breath, waiting for that actual announcement. How should people be positioning themselves during a time like this? Do you hold onto your cash, or are there some safe havens to be found?

KEITH FITZGERALD: Well, I got to tell you-- you know, this is one of those things that's very, very counterintuitive. We have a saying that I think something's up. When in doubt, you zoom out, and you look for those companies that are growing by 20%, 30%, 40%, 50% that are making products and services the world can't live without.

For example, we've been on the acquisition hunt. We've been looking at Apple and Microsoft and buying both of those. We bought Pfizer this morning. These are companies that are not going away anywhere soon, so the question that investors need to do, particularly when it's getting choppy like it is, is what do you want to own five years from now? Everything else-- forget about it.

- Rebecca, let me put that question to you. What do you want to own in this environment?

REBECCA FELTON: Well, we agree on the large-cap tech-- quality and consistency of not just top-line growth, but bottom-line growth, right? And of course we've been seeing some of that as we have navigated through earnings season. And corporations right now have a lot of cash on their balance sheets. They're talking about pricing power, they're talking about strong demand, so we believe sticking with US, large-cap, quality, and the potential for growth is absolutely the way to go. Overweight tech, but we've also littered back in some value plays in industrials as well as energy and financials.

- And Keith, you wrote the magic word in your notes. That, of course, is Elon. You say that it would appear on the surface that he could be reading your investment journal. Where do you and Elon line up in terms of investment advice or opportunities out there in the tech world?

KEITH FITZGERALD: Well, how cool would that be, huh? The world's best visionary CEO reading my work? I mean, wow. Well, here's where we line up, and this is what we talk about all the time-- you want to invest in the best, not the rest. You want to focus on visionary CEOs because the politicians don't have a clue, the Fed is out to lunch somewhere, so you want to focus on folks who have to produce wealth and the products the rest of us depend on.

And finally, you want to go in companies you believe in. So this is a spin on "go with what you know," but this is companies, again, that are changing the world. They're thematic, not sector-based.

For example, lots of people are giving up on their Pelotons, so those are going to be very expensive garage sale items here in a little while, but nobody, I'm aware of, is giving up on iPhone. That's the difference between best and rest.

- I certainly am in that team. I had to give up my Peloton. It was not working out for me. I was not working out for it, I should say. Rebecca, I want to bring you in here because obviously we've talked about a lot of these big companies, but what about smaller companies? How are they faring in this sort of environment, especially when you do have rising interest rates and some more of this policy tightening?

REBECCA FELTON: Well, the flip side of what we were just talking about as it relates to the strength of large-cap corporate America-- the smaller companies aren't faring as well, obviously, as some of the NFIB stats last week bore out. They are suffering from labor shortages still, but they're also really suffering from the inflationary pressures. So these next few months will be very important as we sort of try to get a handle on what they're doing as it relates to CapEx, how their hiring plans may have changed and that sort of thing, given that they are responsible for about 50% of private sector employment.

- Keith, what's your read on the consumer, just the strength of the consumer? We know that's so important when it comes to the US economy. We have inflation up over 8%. Is this something that you think the consumer will be able to continue to shake off?

KEITH FITZGERALD: You know, that's an interesting question, and I think that we're beginning to see fear creep in around the edges. I'm hearing about lots of change behaviors, but again, to the point we're just making, there are certain things that you absolutely have to have. You have to have gasoline, you have to have medicine, you have to have certain kinds of food, so it's the composition of those things that are going to change, but buying is suddenly not going to fall off a cliff.

It's going to slow down, but that's about it right now. People are going to continue to go for the must-have stuff. They're going to continue to pull back on the nice-to-have stuff.

And Rebecca, Seana mentions the inflation number, but you know, all eyes are on the Fed this week, but is there another number that gives you a sense of the health, strength of the economy at the moment, whether it be that negative GDP number or the fact that we have 11 and 1/2 million open jobs? That is a record. Or we will get the April jobs numbers. Is there another number out there that gives you a better sense of the strength of this economy?

REBECCA FELTON: Well, the unemployment rate. When you think of where we are now relative to where we were at the height of the pandemic, this week we'll get the unemployment rate for the month of April, probably around 3.6%. So so many people are back to work even though there is still a labor shortage, but we are very encouraged by the health of the employment market.

- And Keith, obviously we can't forget we are still coming out of a pandemic, and we are also in the background still thinking about what's happening with Russia and Ukraine, whether it's supply chain issues and commodities. What are you watching in the international space in terms of the impact that that might have on US markets?

KEITH FITZGERALD: Well, there's two things that are very, very concerning obviously. There's an increasing amount of evidence, anecdotal and otherwise, that perhaps President Putin is losing control, not only of the war, but potentially of his faculties. That makes him exceptionally dangerous, but everybody knows that.

So the reverse side of the coin is true-- what happens if things get less bad? What happens if suddenly the offensive stops? What happens if peace breaks out? Instantly these things reverse, I think the market takes off like a rocket.

China, of course, is not one to waste an opportunity. They're looking at Taiwan. I'm very concerned by the lockdowns inside mainland China, having spent a lot of time there. I know how graphically difficult that's going to be for many of the Chinese citizens.

But will they make a move on Taiwan? I don't think they're going to, but certainly the posturing, the looking, the backfiring of the COVID policy the rest of the time the world is opening up causes me concern because that's going to come through our supply chain. When the ships can't get here, when the goods can't get here, estimates I've seen recently suggest that 90% of the employers and workers related to companies that can't get goods on and off ships in Shanghai's port and other Chinese ports really is a significant issue, and that hasn't been widely dealt with here yet.

- Rebecca, one of the sectors that caught my attention, at least today, was the travel names and some of the action that we're seeing there. Expedia was a big loser, actually having its worst intraday day that it's had since the start of the pandemic. We're waiting for Airbnb earnings. Is this a space where you are seeing opportunity, or is there still too much uncertainty right now just in terms of what summer travel is going to look like?

REBECCA FELTON: Well, we haven't gone specifically into that area of discretionary, but I have to tell you we are of the mind that particularly when it relates to business travel-- not just the summer travel that you mentioned, that's going to, in our opinion, be strong because we think consumers are going to shift from goods to services as it relates to their spending. But there is such a tremendous pickup in business travel, and we do expect that to continue as we move through the next few months.