The Fed keeps 'lying to us': strategist on rising rates

Tony Dwyer, Canaccord Genuity Chief Markets Strategist joins Yahoo Finance Live to discuss how markets are faring as investors worry about rising rate hikes amid the pandemic.

Video Transcript

MYLES UDLAND: And Tony, you noted something to us in your note about sentiment really cooling off, despite not a huge move in the major indexes. But some of that enthusiasm, that euphoria maybe, coming out of the market a little bit in the last couple of weeks.

TONY DWYER: Well, it really was clearly centered around the NASDAQ and the mega cap winners from last year. Our view since last summer, as you know, has been to look at the historic level of excess liquidity and how that's fueling a synchronized global recovery and being-- that clearly favors the economic recovery theme. But everybody had piled into the stay-at-home theme to the point where infotech and some of the FAANG names have become such a big part of the market, they didn't really have a choice.

So that was clear in the sentiment drop. And again, for sentiment we use the National Association of Active Independent Managers Exposure Index, and it measures how much long the market they are, in quick summary of it. And it dropped back to last September's swoon levels. And it's because of that 10% drop we got in the NASDAQ.

BRIAN SOZZI: Tony, I don't want to be a wet blanket here. You know, I have appreciated the rally. It's been good to see. But do you think defensive stocks, like consumer staples, they have simply gotten too cheap here and it may be time to start nibbling at them.

TONY DWYER: It's really, I think it's more tactical. I just, for our view is that you're going to have these weeks where it's back and forth, growth beats value, value beats growth. But ultimately, when you have this tsunami of money and liquidity that's in the market and the Fed is telling you they're not going to change it, remember what typically changes is it's not just a rise in market driven rates, but the Fed actually tightening and financial conditions tightening. There's been no tightening in the financial conditions.

So our view is that any relative outperformance of growth, because it got oversold relative to value, to your point, should be used as an opportunity to buy value. The global economy is-- we are in the beginning, the beginning of a new economic and market cycle. The market's gotten ahead of itself, but the economy certainly hasn't yet. So we expect better growth should benefit that economic recovery theme.

Now that has become the mother of all consensus calls, to your point, whereas summer, last summer was that nobody could even imagine it. But it could take a pause, but ultimately, I think you want to be long the economic recovery theme.

MYLES UDLAND: But you know, Tony, on that point of the mother of all consensus calls, I do wonder, and you know, you've seen a few cycles here, in the beginning of the cycle, everyone wants to, you know, maybe they missed whatever the contrarian call would have been heading into the downturn or recession or whatever it is. And now everyone wants to be a hero and get it right on the other side.

But the [INAUDIBLE] you outline, it's pretty straightforward here, right? Fed's easy, economy's growing, dials might change. And anything else, obviously we've got to fill the air here and clients are asking questions, but anything else kind of can end up being overthinking it here.

TONY DWYER: Well, this is super simple right now. It's not easy, but it's simple. And by that I mean, the folks printing the money keep coming on TV and on the shows and they keep saying exactly what they're going to do, to the point where we keep trying to out-think them, like they're lying to us. They said that they wanted core inflation above 2%. Vice Chair Clarida of the Fed actually said they want it there for more than a year.

So it's been about a month since he said that and we're not there yet. So it doesn't appear to me that the Fed is going to be moving unless they totally change their tune. They know the tsunami of money that's out there. They know the global recovery is in place. They're scared to death of disinflation and deflation still, not inflation.

So to your point, it's pretty-- it is pretty simple. The market follows the path of earnings, and earnings are going to be higher.

BRIAN SOZZI: Tony, what do you need to hear from Fed Chief Jay Powell this week just to, you know, send a signal to you and, I guess, the market more broadly that it's still OK to be bullish? We can stay long in this market, the Fed has our back.

TONY DWYER: So it's challenging. Because you have had this extraordinary move. in the recovery theme. You've had-- whereas the FAANG stocks and the mega caps are basically flat with where they were at points last year, especially on the 10% drop a week ago. There's been an extraordinary move in overbought condition that has taken place on an intermediate term level in the economic recovery theme.

So here's the playbook as I see it. I don't think it's any different than 2004 or 2010. Remember in those two post crash periods that were associated with a credit crisis and economic recession, the first half of the year saw new highs, but it saw a heck of a lot more volatility because interest rates had begun, in the market, had begun to respond to the economic expectations.

It's no different this time. We're in the same mode. If you go back and you search for interest rates, stock market, 2004 or 2010, you're going to find the same headlines you find now. So what we see is volatility in the first half as the market comes to grips with good economic recovery means higher market rates and it's OK. And then the real gains for the year come in the second half.

So our plan, our playbook has been to stay long our favorite areas since last summer, the economic recovery theme, small over large, cyclical over defensive, emerging over developed, and commodities. And when you get a pullback in those areas, use it as an opportunity to add exposure you don't already have.