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Fed: There is ‘an investable window’ between peaking inflation and rate hikes, strategist says

Quant Insight CEO Mahmood Noorani and Raymond James CIO Larry Adam join Yahoo Finance Live to discuss the Fed, inflation, and where investors should focus.

Video Transcript

[AUDIO LOGO]

INES FERRE: Here's a closing bell at the New York Stock Exchange.

[BELL RINGING]

DAVID BRIGGS: All right, there is your closing bell for the day on Wall Street. It's been an interesting ride throughout the last couple of hours. As we've talked about here, things really saw some movement about 2:00, 2:30 with those news-- those reports of rockets landing in Poland near the Ukrainian border, killing two.

But nonetheless, the NASDAQ, a solid finish, up nearly a percent and a half. The Dow ekes out some gains, just barely. The S&P out just less than 1%. Let's talk more about all this with Quant Insight CEO Mahmood Noorani and Raymond James CIO Larry Adam.

Nice to see you both. Let's talk about those reports. Now, we're not going to ask you to break down the defense latest. But there were two rockets, not sure where they came from, landed in Poland near the Ukrainian border, killing two. Again, that's all we know. But we do know that markets plunged shortly thereafter. Larry, what does this have the potential to do to the equity markets?

LARRY ADAM: Well, actually, I think that's one of the reasons why the market has been rallying here of late, right, because we thought we were getting a little bit of momentum that we could see some positive results over in that area as Ukraine has taken, for the most part, the upper hand. But when you see this type of potential escalation, it means you could see oil prices move higher, which would then all of a sudden pour some doubt on a lot of the improvement that we've seen with inflation.

The bigger point, though, is I think, as you've stated very clearly, don't overreact. Hopefully, something happened. Maybe it was a stray missile. Maybe it was one that was knocked down. Hopefully, it ends up being something like that. But if there is an escalation, it would start to be at least a near-term negative for these markets.

SEANA SMITH: Mahmood, I'm going to put a similar question to you, just your view of this geopolitical risk and how you're factoring that into your investment decisions.

MAHMOOD NOORANI: Yeah, well, undoubtedly, whenever we get these headlines, the market gets nervous for a while. However, in the absence of any further information, the assumption is that this is relatively accidental and peripheral event. And that's why you saw the market recover. In terms of how you incorporate this sort of in a quantitative sense, you're looking at what's sensitive to measures of risk aversion like the VIX, the gold/silver ratio, various worry indices out there that we keep track of and what's sensitive to those. But they haven't had any major moves today.

RACHELLE AKUFFO: And, Larry, before that news, we saw that PPI data coming out, giving perhaps one more signal about where inflation is headed, although obviously the Fed still wants to see some consistency there. How is that informing how you're viewing your portfolio right now?

LARRY ADAM: No, I think it's one of the reasons why we've been more optimistic on the equity markets of late. For the most part, if you look at real-time indicators, we've seen inflationary pressure's coming down. It just has not been reflected yet in the data.

But I think that you're starting to see it is starting to get reflected in the data. And if that trend continues, that means that the Fed's not going to have to be as aggressive. And if we can see both interest rates and the Fed stop their tightening cycle, I think that'll be a positive catalyst for the equity markets going forward.

DAVID BRIGGS: And, Mahmood, your read earlier in the day of the PPI coming in a little bit lower than expectations, as well as earnings from Walmart and Home Depot?

MAHMOOD NOORANI: Yeah, well, the softer PPI adds to the softer CPI. It reinforces this sense that we are now seeing the peak in inflation in the US. That means financial conditions are probably not going to have to be as tight as they otherwise would have had to be. And sort of where we are now, the way we see it is that there is an investable window right here between the point where inflation is peaking but rate hikes haven't really had the time to hurt the economy meaningfully.

So we think we're in this window at the moment. But we think the Fed will err on the side of conservatism and continue to push higher, well above 4 and 1/2%. And next year, that will start to impact the fundamentals and earnings. So that's where we are based on the current information, and that's how we see it.

SEANA SMITH: Larry, do you agree with that? Or what do you think should be on the table at the next couple of Fed meetings?

LARRY ADAM: Well, first of all, I completely agree. And I think you're hearing a lot of Fed members talk about, right, the two-sided risk of rate hikes and the fact that there's a cumulative effect. And normally, most people at the Fed will say it's about a six to nine-month lag before it actually starts to impact the economy.

Well, if you go by that metric, we've just factored in the first 75 basis points during the first two rate hikes, right? So we still have four 25-- 75 basis point increases that we still have to absorb. So we do have to keep that in mind.

That being said, I think that we're getting pretty close to a point where this is starting to impact the economy already. This economy is much more interest rate sensitive than it has ever been. So I think the Fed's really going to start to look at that very closely. And my expectation is that at the next meeting, it's likely going to be 50 basis points. And I would think that there's an outside chance that they could be done at that meeting if, in fact, we continue to see this trend of inflation going lower.

RACHELLE AKUFFO: It's tough. We know that the Fed doesn't want to take its foot off the gas too soon. Mahmood, I do want to turn your attention to what we're seeing in China. Obviously with some easing of zero-COVID policies and some at least-- there seems to be some settlement a bit about what's been happening in the property sector in China. What are you watching in that space and how that could impact what we see in US markets?

MAHMOOD NOORANI: Yeah, so a couple of weeks ago, China was all abuzz with the certainty and the sort of asset management and hedge fund world with this talk of the zero-COVID policy. We started to see some life in some indicators like copper that tracks China demand and is a huge factor in their property expansion. One of the big impacts that we see if China does recover is that the eurozone will benefit.

And so eurozone-- the eurozone has generally been a bit of a leveraged play on global growth. China is a very big part of that global growth. And so, for us, the sort of asset and region that is most sensitive and really worth watching if we do see a reversal in China is eurozone equities, huge exporters to China. And I think that's where we'll see the biggest impact. And there'll be a general sentiment shift towards equities globally if that happens, but the eurozone will probably outperform.

RACHELLE AKUFFO: All right, we'll have to leave it there. Big thank you to our market panel, Mahmood Noorani and Larry Adam. Thank you both so much for joining us this afternoon.