Schwab Center for Financial Research Managing Director of Trading & Derivatives Randy Frederick joins Yahoo Finance Live to discuss the expectations for the Fed’s upcoming FOMC meeting, tech stocks, inflation, rate hikes, and volatility.
- Welcome back, everyone. An ugly CPI print surprised the markets earlier this week, signaling that the Fed could be even more aggressive in its fights to curb inflation. Our first guest this morning says that another 75 basis point hike is now a near certainty. Joining us now in studio we've got Schwab Center for Financial Research Managing Director of Trading Derivatives, Randy Frederick.
Randy, thanks for joining us in studio here today. First and foremost, I mean, the expectation from the markets now is not necessarily that it's just going to be one outsized hike. It's 75 that you're saying is baked in. But now even after the 75, what does that timeline look like?
RANDY FREDERICK: Well, so there was about maybe-- it had crept up to almost about a 90% probability that we were going to get a 75% basis point hike next week. After that CPI print, now it's 100%, and in fact, there's already some talk about it potentially being a 1%. I don't think that's going to happen.
I've kind of tracked the futures contracts that look at this for that-- for about the past eight years that they've been around and only when the probability exceeds 60% has it ever been accurate, but it's always right at that point. With only about a 30% probability, I kind of feel like the 3/4 point hike is almost a certainty.
But then we have another hike potentially on November the second. My hope is that will fall down to about a 1/2 a point. And then there's potentially one in December that I think could go down to a 1/4. So I kind of feel like this is the last 3/4 point hike that we're going to get, but it doesn't mean we're done. And we're going to be close to 4%, if not at 4%, by year end.
JULIE HYMAN: Randy, what we've continued to see is that technology shares have been hit especially hard when we get either an inflation print like we saw on Monday or, and they usually go together, of course, expectations of the Fed's going to be more aggressive. Connect the dots for us. Why is that happening? Is it because there's concern about consumer spending, although this affects enterprise software companies too usually? Or is it because of a sort of liquidity question?
RANDY FREDERICK: So there are a number of factors that affect technology stocks. One is, technology is an enormous part of the market. It represents about a 1/4 of the entire market. Secondly, most of the brand new companies that come out are tech companies. They have no income. They have a lot of hope, a lot of potential ideas. They're growth stocks. So they trade at exceedingly high multiples, if not infinite multiples with no profits.
So they have debt and that debt has to be rolled over. And the higher rates go, the more that expensive that debt gets as they continue to roll it over. And so therefore it puts the pressure on them quite a bit. If you are an established company, a leader in your organization, and when we talk about tech, you've got to take out sort of the mega-cap techs, the ones that have gigantic balance sheets.
JULIE HYMAN: But those guys went down on Monday too.
RANDY FREDERICK: Yeah, a little bit.
JULIE HYMAN: A lot.
RANDY FREDERICK: The rising tide and-- well, will always affect everyone. But if you think about the ones that have been decimated the most since last year, some of them are down 60% to 70%, it's mostly the smaller newer upstart type techs. The big mega-cap techs are actually holding in there quite nicely.
BRIAN SOZZI: So where else-- where else can you hide out? If big tech with companies with good balance sheets, lots of cash, if they're getting slammed, is there any place to hide?
RANDY FREDERICK: There are a couple of places. Obviously, energy has been the vast outperformer this year, without a doubt. There's only two sectors that are actually in the money this year and it's energy and utilities. Energy is up something like 40%. Utilities is up a couple of percent.
Utilities have been a hot space. It is kind of an area where I think you need to be a little bit careful because valuations have gotten a little bit high in that area, but utilities also tend to be an area where you get a lot of dividends and dividends have been very, very popular lately. That kind of goes against conventional wisdom that when you can get income in the debt market that dividend payers will lose value, that hasn't happened at all this year.
And I think it's partly because not only are they dividend payers, but they're also the defensive areas, right? Consumer staples and utilities tend to be an area where people go when the markets are rocking. We've been nothing but rocky for the last nine months. So that's an area where I think there's still some place to go.
The area we think has the potential to be an up and comer here is financials. And the reason for that being obviously higher interest rates. Once the rates stop moving so much and they settle down, financials will benefit greatly from higher rates because they can expand that gap between what they charge for people who borrow and what they pay to people who save. And it's that margin that make-- that's where most-- more financials make most of their income.
- One of the things that we've also been discussing is this concept of the personal inflation rate, and how much inflation is actually impacting individuals, and what kind of the longer standing implications of that may be. How do we ensure that on the other side of whatever the Fed's policy looks like fully enacted that we do have enough ground to rebuild off of on the other side of that?
RANDY FREDERICK: Yeah, so a couple of things to keep in mind is that incomes, wages go up when inflation go up, and we've seen a lot of that already. But when inflation starts to come back down, those incomes will not come back down. You rarely get salary cuts.
I mean, it happens on rare occasions. Usually companies are more likely to lay people off. But as our incomes have grown when inflation went up, we will then be better off when inflation gets settled. That's the first thing.
The second thing is, and I think we got some data today, retail sales, consumer spending, things like that, they've held up incredibly well. All of the-- almost everyone except for maybe the bottom 20% or so, we're still spending. We're taking vacations. We're traveling. We're buying things. We're remodeling our homes.
We complain a lot. That's one of the things I think is really important is that we talk a lot about consumer sentiment, but that's an attitudinal measure. Yes, we're all grumbling and grumpy, but we're not pulling back on our spending. Whereas our behavioral actions, our retail sales, our consumer spending, all those sorts of things have held up quite nicely.
So inflation isn't as bad as we're kind of all, making it out to be, except for the people at the bottom end of the scale. The ones who couldn't work at home when they wanted to. The ones who still have to fill up-- fill up a big large pickup truck because their welders and they're-- and they're plumbers, and they're builders, and things like that. They're going to struggle. There's no question.
JULIE HYMAN: So all said and done, what's priced into the market right now?
RANDY FREDERICK: Well, I think the market is pricing in again an interest rate somewhere close to 4% by year end. But I think--
JULIE HYMAN: So it's doing it appropriately? It's pricing it in correctly?
RANDY FREDERICK: I do think so. Yeah. And we had an awful day the other day on Tuesday, don't get me wrong. But-- or I guess, yeah, when the consumer price index came out. But keep in mind, we had four big days right before that. That move did not even wipe out the previous four days movement.
So it basically just put us back to where we should have been before the optimism about, for some reason, everyone expecting a lower print took hold. So I think we're going to be in fine shape. I think we're going to have some more volatility.
I believe until we get to that November Fed meeting, at that point, if we get 1/2 point hike, I think at that point consumers and investors will be bullish again. We don't need rate cuts in order to be bullish again. All we need is just something to pause a little bit.
BRIAN SOZZI: Point well taken. All right, Randy Frederick, Schwab Center for Financial Research and Managing Director of Trading Derivatives, thanks for coming to studio. Appreciate the time.
RANDY FREDERICK: My pleasure.