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The Fed won’t be ‘as aggressive as everyone believes they will be in 2022’: Strategist

Hennion & Walsh CIO Kevin Mahn joins Yahoo Finance Live to discuss market losses amid a period of volatility, outlook on the Fed's interest rate hikes, the sector actions in retail and consumer staples, and inflation.

Video Transcript

SEANA SMITH: Kevin, it's good to see you. The big question that investors are trying to figure out the answer to is whether or not we're going to continue to see selling like we've seen over the last couple of days. What do you think?

KEVIN MAHN: And similar to Emily's earlier point, both the S&P 500 and the NASDAQ Composite Index each suffered their fifth consecutive weekly loss last week. And for the S&P 500 Index, Seana, that is the longest losing streak since June of 2011. Why is that all happening? Because the markets are concerned that the Fed is going to be perhaps too aggressive to combat inflation. And that may push the economy into recession. We saw during the first quarter already a negative GDP print.

Now, while that may be revised so that it is slightly positive for the quarter, that leaves a concerning imprint on the minds of investors is that is there going to be a recession this year, or might the Fed slow down if, in fact, second and third quarter GDP slows even further.

DAVE BRIGGS: Kevin, if the markets are overly concerned about the Fed being too aggressive, why did they have that initial reaction as soon as the Fed Chair said he had, in fact, ruled out a 75 point hike? They skyrocketed that very day.

KEVIN MAHN: Yes. Yes, I think a lot of that is buy the rumor, sell the news. There was a lot of conjecture amongst multiple market strategists that perhaps the Fed would pull forward some of their planned overall rate hikes of 2022 and maybe do a 75 basis point hike, or even a 1% hike. And that did not happen. On the flip side, we also heard from the Fed that in all likelihood, there will be 50 basis point hikes at least the next two meetings.

I'm still in the camp, Dave, but I don't think the Fed is going to be as aggressive as everyone believes they will be in 2022. Perhaps by the end of this year, you'll see the market with the Fed funds target rate somewhere between 2% and 2 and 1/4%, but not 3%. And if the market pulls back to those expectations, that could be good for stock, if, in fact, the economy continues to grow, albeit slower, if, in fact, earnings continue to grow, albeit slower as well.

RACHELLE AKUFFO: Obviously, we heard Chairman Powell talking about the US economy, the fundamentals being strong enough to be able to resist going into recession. But we also saw that the Fed was really late to the game, getting rid of that word, "transitory," when it came to inflation. In terms of credibility then, what should investors be making of this?

KEVIN MAHN: It's very hard to gauge the credibility of the FOMC at this point in time. We heard with Chair Powell at that press conference suggest that a 75 basis point rate hike or higher is not on the table right now. And then just two days thereafter, we've heard from other governors suggesting that all options are on the table. I might add an additional option. As opposed to just higher increments, perhaps there will be lower increments.

What if, for the five remaining meetings of 2022, we just have 25 basis point hikes, leaving us with a year end Fed funds starter rate of 2%, as opposed to two 50 basis points hikes now than perhaps from lower amounts or less or none down the road. I think those are very real possibilities as well. So as transparent as the Fed is trying to be, it often leaves the market with a lot of confusion. And that's right where investors are right now. They're confused.

SEANA SMITH: Well, Kevin, one area of the market that is outperforming today is consumer staples. That's the only S&P sector that's in the green today. We certainly have heard a number of those companies within that sector come out with earnings over the last several weeks. And actually, the numbers looked pretty strong. Are you seeing any investment opportunity within consumer staples right now?

KEVIN MAHN: We do, Seana. In fact, one of our strategies at smart trusts are defensive equity strategies, looks to identify those stocks that have a history of withstanding market pullbacks, pay a dividend, and have a relatively low beta. One name in the consumer staples space is Hershey. We all love Hershey, and there are many good chocolate products, right? But they also pay a trailing 12-month dividend of around 1 and 1/2% and have held up very well, despite all the market volatility thus far this year.

So areas such as consumer staples, even utilities, and to a lesser extent, healthcare, may be a good defensive area for investors to consider in light of all of this market volatility, especially if they're looking for some dividend income as well.

DAVE BRIGGS: You had me a chocolate. Meanwhile, tech stocks conversely down 3 and 1/2% today and 25% year to date. Are we at the point where there is actually some opportunity in these tech stocks?

KEVIN MAHN: I believe there are. It depends on the types of technology stocks we're talking about. I think the mega cap, large cap technology names that have raced up so far and were trading at excessive valuations may still have some more room to the downside. However, some of those smaller cap revolutionary technology names that are going to be at the forefront of how the American economy continues to evolve and recover from the COVID-19 pandemic are looking pretty attractive at these levels. But you have to look for those companies that have profitability, that have a history of earnings growth, that have strong balance sheet. And if they also pay a dividend, hey, that's another sign of balance sheet growth.

RACHELLE AKUFFO: So when you look at the volatility in this market, how much of that is being driven by retail investors who are perhaps panicking more and continuing this downtrend versus institutional investors trying to be more strategic now, as they position themselves for Fed tightening and higher interest rates?

KEVIN MAHN: I think it's a battle between the two. Obviously, institutional investors or a lot of the algorithmic trading are based upon the technicals. Individual investors clearly are confronted with fears, fears over their longer term financial plan. How will this pullback impact my ability to retire at the age of 70, to put my two kids through college, or to finance that second home? This becomes very real to them.

So for those investors, they should stay true to their risk tolerance in good and bad markets. They should work with a competent financial advisor and build a financial plan, taking into consideration their longer term objectives, build a portfolio strategy to help withstand these bouts of volatility, give them that income they need along the way, but also look to selectively keep them in the market to take advantage of opportunities when they do become evident.

Because there is no green light that says the coast is clear in investing. You can't sit on the sidelines and just hope to time it right and come back into the market at the exact break inflection point. Rather, you need to build in diversification, remain invested in the market appropriately, and then stay true to your risk tolerance.

SEANA SMITH: Kevin, I want to go back to something you said earlier, there's lots of talk about a possible recession. Obviously, a lot of that would have to do with the fact of whether or not the Fed acts too aggressively. I know you were saying that you don't think the Fed is going to be as aggressive as some expect. Does that mean that you think this fear of recession, is that overdone at this point?

KEVIN MAHN: Well, I guess the fear became more real after that first quarter GD print, as a recession is marked by two consecutive negative quarters of GDP growth. However, historically, that same statistic shows that a recession doesn't start on average for 42 months thereafter. So the threat of an imminent recession seems very low, even if, in fact, we get two consecutive quarters of GDP growth. With that said, the consumer is very important to the US economy, Seana.

And if, in fact, inflationary pressures remain, remembering that this Wednesday, we get an update on CPI, and this Thursday, we get an update on PPI, if they remain elevated for much longer and if the Fed cannot combat that within a reasonable period of time, consumers may start reining in their spending.

And if consumers account for 70% of our GDP growth, that could cause the economy to slow even further, which would have the unintended consequence, of course, of the Fed slowing down and being less aggressive with respect to interest rate hikes. My fear is that they have a plan in place already to be too aggressive. And perhaps the economy is going to slow quicker than they're able to cut interest rates-- yes, cut interest rates if, in fact, it does.