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Fed: The market 'is already comfortable' with another 75 point rate hike, strategist says

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Shawn Snyder, Citi U.S. Wealth Management, Head of Investment Strategy, sits down with Yahoo Finance Live to talk about upcoming CPI data, inflation, recession indicators like the labor market, GDP outlook, and the Fed's rate hikes.

Video Transcript

DAVE BRIGGS: Joining us now, Shawn Snyder, Citi US Wealth Management's Head of Investment Strategy. Shawn, you do have to answer that question. Did you make a Prime purchase? But after that, you can go ahead and tell me what you think the markets are waiting for. Are they holding their collective breath, waiting on that CPI number?

SHAWN SNYDER: Well, I think that's exactly right. I think investors don't want to make big moves ahead of tomorrow's CPI print. The White House did come out and kind of warned about it, said it might come in higher or hotter than we expect. So I think investors are naturally somewhat nervous about it. And I think they're in a wait-and-see kind of pattern.

And we also have a lot of earnings coming up. So right now, it makes sense to kind of sit tight, I think.

SEANA SMITH: Shawn, what are you expecting from then inflation print tomorrow?

SHAWN SNYDER: Well, Citi's forecast, I believe, is 8.9%, which would be up from 8.6%. But I do think kind of the big news of today is at least that oil prices are down sharply. And you guys just mentioned gasoline prices falling as well. So I think if-- and I realize that's somewhat reflecting recession fears.

But if you can keep oil under $100 a barrel for a while, then that will bring down inflation. That could be good.

RACHELLE AKUFFO: A lot of people are wondering if we're speaking a recession into existence. You have investors like Cathie Wood saying we're already in a recession. Atlanta Fed GDP now predicting the same. Meanwhile, the Fed is predicting a rebound in growth in Q2. What is the best metric to actually use until we do get that official GDP data?

SHAWN SNYDER: Well, listen, there's a lot of metrics you can look at. Two things I look at are leading economic indicators. If you look at that on a year on year basis, it tends to go below zero before we get the onset of recession. Right now it's at about positive 3%. So it's not signaling an imminent recession.

And there's also kind of a lesser-known tool called the Sahm Recession Rule Indicator that kind of measures a three-month moving average of the unemployment rate when it rises 0.5% above its 12-month low. And I know that's very complicated. But what it signals is that the labor market is quite strong.

And if you look at recessions in the past, so 2001, for example, we never got two consecutive quarters of decline. And same thing global financial crisis. It was actually marked that the recession started December 2007, but we didn't see two consecutive declines in economic growth until the fourth quarter of 2008.

So in both of those instances, the labor market actually proved to be the better metric. And I think that might be the case this time as well.

DAVE BRIGGS: And if the labor market is the better indicator of a looming recession, where do you think that level would have to get for it to feel, for it to appear a technical recession?

SHAWN SNYDER: Well, if you look at the Sahm rule, and it says 0.5% above its relative low, we're still at a relative 12-month low, 3.6%. So in theory, I guess, if we got an unemployment rate of 4.1%, that would mean the labor market is weakening enough that it could potentially mean you're in recession.

We're not there yet. I think labor markets are going to remain fairly strong throughout 2022. But when we get into 2023, I think that's probably a different story. And to me, that's what it's going to be either critical that the Fed swerves in time to avoid a recession or not. And that'll really be the determining factor, I think.

SEANA SMITH: Hey, Shawn, what does all this mean for Fed policy? 75 basis points, is that pretty much a done deal, you think, at the end of the month?

SHAWN SNYDER: I think it is. We saw the last inflation print come in hot. And then they also reacted to the US Michigan Consumer Inflation Expectations five years out. It ticked up. And then it actually got revised back down and ended up not going anywhere at all. But then they leaked a 75-basis point rate hike in response to that.

So I think another print that comes in hot would simply mean another 75-basis-point rate hike. I think the market is already comfortable with that. So I expect that's what we'll see.

RACHELLE AKUFFO: In this sort of environment where the Fed is clearly focused on bringing down inflation and not really keeping an eye on what that means for equity markets, in your notes, you say time in the market is more important than trying to time the market. We heard BlackRock warning about not buying the dip, saying the 60/40 stock-to-bond split doesn't work at the moment. What is history showing us in terms of what should be the best strategy in this sort of environment?

SHAWN SNYDER: Well, listen, so timing the market is difficult to do. You literally have to be an expert. And even the experts can't really get it right.

So since 1990, if you simply missed out on the 20 best days of the market because you tried to time it and you missed out on the best days, your return goes from 10.8% annual return to 6.3%. And eight of those 10 days, eight of the 10 worst days are right next to the 10 best days, within two weeks. So it's really difficult.

And when you see volatility like this, often the worst day is often followed by a really good day. So timing the market's not the best way to do it. Our recommendation to our clients at Citi US Wealth Management is to look at more defensive portfolio positions, dividend growers.

If you look at the S&P 500 Dividend Aristocrats Index, it's performed quite a bit better than, say, the NASDAQ. Also fixed income, I think, belongs in a portfolio. Bond yields have come down a bit. We're seeing investors more interested in fixed income, particularly US municipals and intermediate-duration credit. So I think those defensive positions, consumer staples, health care still make sense until we kind of get the all-clear on this recession.

SEANA SMITH: Hey, Shawn, what about overseas, specifically China because I think there was a lot of opportunity? We saw some of the rally and some of those Chinese-related names over the last couple of weeks. But now over the last couple of days, we've seen rise in COVID cases over there triggering some fears that we might see more lockdowns ahead. How are you looking at the investment opportunity there?

SHAWN SNYDER: Well, I think it's responsible for, at least partially, part of the decline in oil today on fears that China may be in for a little bit of a rougher ride. But our economists actually think that China's economy maybe had kind of bottomed out in May, and the economic activity sort of bottomed at that point, and that it may start to accelerate in the third quarter and fourth quarter, not up to the 5 and 1/2 percent GDP target that they would like.

But I think they're kind ahead of us in the economic cycle. It seems like they're sort of coming out of it with stimulus starting to kind of take hold. So I think they're a bit ahead of us. And I think equities are going to respond to that.

RACHELLE AKUFFO: And what are your expectations in terms of earnings as they start to roll out this week, given that they're not obviously keeping pace at the same time with the current market activity that we're seeing?

SHAWN SNYDER: Yeah, so the earnings, it's going to be a really interesting earnings season because there seems to be a disconnect between what the stock market is telling us and what analysts' expectations are telling us. So the consensus is saying that earnings per share for the S&P 500 are going to rise about 10% this year. And yet the market is down 20%. That doesn't really make a whole lot of sense.

But if you look at the second quarter and you strip out the energy companies and the great earnings that they're having, then you actually get a negative 3.8% EPS print year on year in the second quarter. So if you strip out energy for the full year, that earnings estimate comes down to about 4 and 1/2 percent. I think that's fairly realistic with an economy that's maybe still growing at about 2% real GDP.

To me, the real big question is what's going to happen in 2023. The consensus has an 8.3% target, I believe, for 2023. I'm not sure we're going to get that if we do enter a recession. I think even energy may be negative. You tend to see sharp drops in crude oil in those types of scenarios. So I think that's really going to be the real big question and maybe the next leg down, if we do get one.

SEANA SMITH: Shawn Snyder, always great to hear from you, Citi US Wealth Management. Thanks so much for joining us.