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Fed’s inflation-fighting tools ‘aren’t working as quickly as’ they would hope: Strategist

Horizon Investments CIO Scott Ladner and Rebecca Felton, RiverFront Investment Group senior market strategist, join Yahoo Finance Live to discuss Fed policy and inflation, economic data, and overall volatility.

Video Transcript




SEANA SMITH: And that does it for today's trading action. All three of the major averages holding onto gains, although closing well off the highs of the day. Dow up 335 points, a third day of gains in a row there for that major average. S&P up just around half of a percent, as well as the NASDAQ. Let's talk about the gains that we've been seeing, whether or not it's going to hold. And for that, we want to bring in Scott Ladner, Horizon Investment's chief investment officer, and Rebecca Felton, RiverFront Investment Group senior market.

Rebecca, I'll start with you. When you take a look at the gains that we're seeing play out today and what we've seen over the last several trading days, heading into the results tonight and what that typically means in a mid-term year between now and the end of the year, the trading action that we'll see, what do you think is most likely?

REBECCA FELTON: Well, thank you so much for having me. And certainly, history tells us that post-midterms, markets typically do well. But we have so many mitigating factors when we think about what we are experiencing right now, as it relates to what's going on with the Fed, the inflationary pressures, what we're seeing in terms of what the companies have told us, as we've navigated through the third quarter. So certainly, those historical numbers would be appealing. But we have to think about the other factors that are at play here.

RACHELLE AKUFFO: And Scott, when we look at the market action they seem to be oblivious to what's happening with the mid-terms, clearly looking further forward than that. What should you think the markets should be focusing on right now?

SCOTT LADNER: Well, look, I mean, I think Rebecca is generally right. I mean, markets tend to do pretty well after midterms, but she's also right that there's a lot of crosscurrents going on right now. And so the Fed is probably the most important one of those things. And getting some clarity as to how they're thinking about the world, we actually got that over this last meeting. And so right now, what the market is trying to do is figure out, what is the right discount rate to discount earnings back? And how bad is this recession that's coming going to end up being?

So what are earnings going to look like? Right now, the market has earnings priced around $225 for 2023. We think that probably needs to come down 5% to 10% for sort of a mild recessionary type of outlook next year. And that sets us up to bottom sometime in the, like, late fourth quarter, early first quarter, and then be able to stage a pretty meaningful rebound off of those lows. But we still do think we have a little bit of wood to chop. And we do have these kind of weird risks out there in the market, as you guys alluded to earlier, with this FTX and Binance thing really kind of ruling the market action today.

DAVE BRIGGS: Yeah, Rebecca, I'll be watching election results all night and probably Georgia for the next-- I don't know-- 30 to 60 days as they do a recount there. But I think Thursday, with that CPI numbers, the markets really need to see what comes in there. What's your expectation for inflation Thursday and the months ahead?

REBECCA FELTON: Well, there's no reason to believe that we won't hit that consensus number. I think it's 7/10 month over month and 8% year to year. But even then, we are still far above that 2% target. And when you think about the wage pressures we're still experiencing and certainly the energy cost, whether you're talking about transporting goods, heating bills, as we head into winter, there are so many factors that are going to keep these pressures higher than where the Fed wants them to be. So we don't believe that the Fed is going to ease up at any point in the near term. And so rates will stay higher for longer. And inflationary pressures clearly are likely to stay higher for longer, too.

SEANA SMITH: Do you agree with that, Scott?

SCOTT LADNER: Yeah, look, there's a lot of deflationary pressures in the pipeline. We've seen what's happened with commodities, industrial commodities. We're seeing what's happening to prices paid in some of the survey data. We're seeing that the small businesses don't think they can raise prices anymore really. So we kind of know what the story looks like three to six months hence. And the problem is we don't really know what it looks like from now for the next three months. And so the market's going to trade off of what it looks like between now and the next three months.

So we're not terribly concerned about the inflationary outlook, as we get into the first quarter of 2023. But these next few months will be kind of rough and really sort of like random number generator type of rough. We just don't know what these month-to-month prints are going to look like. There's so much volatility in these data. And so we do think it's an environment that you need to be a little bit cautious in, just knowing that. But we do feel pretty good about the disinflationary pipeline. It's just got to get through the system. It's gotta get into consumer prices. And that's usually, like, a three to six-month process.

RACHELLE AKUFFO: So, Scott, how would you assess what we're seeing with consumer spending and then what you call the quizzically strong labor market? Though it's softening, but clearly, what the Fed is doing isn't quite making the dent that it wants.

SCOTT LADNER: Well, I mean, there's no reason to expect that it would necessarily. They've cut really, really quickly. But the consumer is sitting on a boatload of cash. And we're coming up in an environment where companies couldn't hire anybody. And so they're very fearful of hiring anybody outside of the tech realm.

And so it's this weird backdrop where we kind of know what's coming. The Fed kind of knows what's coming a little bit probably as well. But they're scared to admit that they were wrong last time. And so they're going to over tighten this time because they think from a risk management standpoint, they have the tools to deal with the recession. And they're finding that their tools to deal with inflation aren't working quite as quickly as they would hope that they would.

And so, in terms of the overall outlook, we think it's-- we think it's going to end up being pretty good, but we're just-- we've got a few months we've got to get through in terms of the labor market and remaining kind of this very strong labor market, these very strong prints with all these cross-currents going on, even in the face of a place where businesses know that the demand shock is coming. They know that demand is coming down. They know that we're coming into a recession.

But they're just scared to fire anybody yet. And the Fed wants them to fire people. They need-- the Fed needs companies to fire folks for the next few months. And then they can take the foot off the brakes. But we have to get to that point. It's just going to be probably a choppy couple months until we get there.

DAVE BRIGGS: Yeah, some interesting news on that front, Rebecca, as the Wall Street Journal reports Mark Zuckerberg says he is accountable. His company preps for mass layoffs, could begin as soon as tomorrow. Will the Fed get what it wants, Rebecca?

REBECCA FELTON: Again, I think it's-- we think it's going to take some time. We have heard, as we've navigated through earnings season, a number of companies cutting hiring plans, putting freezes in place, and even laying off workers. And in your segment before, when you were talking about credit card debt and the consumer, according to the National Retail Federation, folks have said that they're going to spend as much this year as they do on average.

But we're also seeing the credit card delinquencies creep up. We're seeing rent-- people falling behind in their rent. There's an awful lot at work here. And so we know also with respect to the midterms that inflation was the biggest issue for voters from both parties. So it is going to be choppy. It is going to take a while for some of these things that have eased to show up in the numbers. So it's probably going to be a tough period from now until January.

RACHELLE AKUFFO: Well, a big thank you to Scott Ladner and Rebecca Felton for breaking down today's market action with us. Have a good afternoon, guys.