FOMC: ‘We’ve never had an economy contracting’ while the Fed tightens, strategist says

Calit Advisors Partner Lenore Elle Hawkins and Lisa Erickson, U.S. Bank SVP & Public Markets Group Head, join Yahoo Finance Live to discuss market reactions to the Fed's 75 basis-point rate hike, as well as looking at tech stocks like Qualcomm.

Video Transcript

RACHELLE AKUFFO: Well, joining us now for more on the markets is our panel, Lenore Hawkins, Calit Advisors partner, and Lisa Erickson, US Bank senior vice president and head of Public Markets Group. So, Lisa, I want to first start with you. What are your biggest takeaways from the movements that you're seeing from the markets, given that we have seen markets sort of reverse this stance the following day after we hear these Fed comments?

LISA ERICKSON: Well, for today, Rachelle, I think to your point, really, what's going on is a little bit of a relief rally. We've had some difficult news, really, over the past few weeks. But as we've gone into earnings season, we've had lowered bar. And people have really been able to respond positively to results that weren't as bad as feared.

And then if you move to the [INAUDIBLE] today, we had, I think, a very similar reaction where people were a little on edge about what could have been [INAUDIBLE] was he was really reiterating much of the message that he's had before, which is vigilant on inflation, labor market provides some room for continued tightening. And so, really, what we saw was the markets reacting positively to that message.

SEANA SMITH: Lenore, what do you think of today's rally? Because like Lisa was just saying, a lot of this has to do with what we heard from Powell, the fact that maybe the pace of rate hikes will potentially slow in the future if we do see inflation come back a bit. Was this jump justified?

LENORE HAWKINS: What we've seen, as I think you guys just mentioned, that we've seen, often, the day of the FOMC minutes are released, the market goes up. And then the day after, it reverses that. Because I think if you dig into the details of their statement, it was really interesting to see that they were actually more negative on the economy than we've seen in a while. They pretty much admitted that the economy is in a different position than they expected it would be at this point.

And yeah, they raised the full 75 basis points, but they'd already promised they were going to do that, so I don't really read much into that. What I do find interesting is that they're commenting on the economy slowing, but the job market is still strong.

Well, it's interesting to see that initial jobless claims are up over 50% from the lows. And that's traditionally been a very strong recessionary signal. And I would also tell people to keep an eye out for any downward revisions to prior non-farm payroll reports because we tend to see that when the economy is shifting direction. And I would expect to see some of those downward revisions.

DAVE BRIGGS: Lisa, no fewer than five reporters tried to get Jerome Powell to weigh in on the definition of a recession. While he punted on that, he did acknowledge that he does not think we can be in a recession with this robust job growth, as Lenore said, north of 400,000 jobs per month. Do you agree with that assessment? And could tomorrow change that, pending that GDP number?

LISA ERICKSON: We are concerned, really, about where we are headed with growth overall, and whether we end up in a technical recession or not. If you look across indicators, what you see is, the economy has been slowing.

And while the labor market remains quite strong across a number of other sectors, we've been seeing the trends in both top-down indicators, as well as corporate earnings, moving in a decreasing trend. And so we are cautious moving forward because of that. And on top of that, again, while the markets reacted well to Chair Powell's message today, the Fed is nonetheless tightening. And that provides another headwind to the stock market.

RACHELLE AKUFFO: So Lenore, when we do get that GDP print tomorrow, how do you expect the markets to react?

LENORE HAWKINS: If it comes in where I expect it to come in, I think the market is going to get really nervous because, typically, when we've seen this kind of movement, both in the market and what we're seeing in the economy, the only way that this turns around is if the Fed reverses course, stops tightening, and actually starts to loosen, because we're really in uncharted territory. We've never had an economy contracting. We've never had so many indicators going negative while the Fed is actually tightening.

So it's tough to say just exactly how this is going to pan out. But if we get a bad print tomorrow, the market is probably going to be nervous, and it ought to be nervous. A lot-- we're seeing home prices falling down significantly. Consumer sentiment is pretty grim. Capacity utilization is falling. That tells us that's a deflationary thing. And while supply chain problems are actually getting worked out, we're seeing those inventory levels building up. And like we heard from Walmart and Target, they have to start cutting prices. All of that, those are all warning signals.

SEANA SMITH: Lenore and Lisa, hang on one second. We want to get to Allie Garfinkle. We have Qualcomm out with its earnings report. The stock off afterhours. Allie, what can you tell us?

ALLIE GARFINKLE: Seana, with Qualcomm, we have mixed results today. Revenue top line, we have a beat of 10.93 billion versus 10.87 billion expected. Adjusted earnings per share, bottom line, 2.96 versus 2.86 expected. So looks pretty good, but shares are actually falling at Qualcomm based on the guidance for Q4. So not what people were expecting.

It's worth noting also that Qualcomm, as it extends its partnership with Samsung, is reporting actually at the backdrop of a global chip shortage, inflation, rising interest rates, which can affect corporate purchases, and of course, the tech route. Qualcomm has been trying to diversify, so kind of a mixed story over here for Qualcomm today.

SEANA SMITH: It certainly looks like that. Again, the shares off just over 3% afterhours. Allie, thanks so much. Lisa, let me get your reaction to what we're seeing so far from the tech sector and some of these semiconductors. So Qualcomm falling here. A lot of that has to do with guidance. The earnings that we got from Microsoft and Alphabet yesterday was enough to satisfy the Street, but they weren't great. We're waiting Meta. They're going to be out any minute. What do you make of where things stand, more broadly speaking, in the tech sector?

LISA ERICKSON: --has seen a more difficult season would have been anticipated a few quarters ago. And I think what we're really seeing in the earnings reports is the fact that there really was a pull forward during the initial start of the COVID pandemic. People thought that this could continue on, that there wasn't necessarily going to be a diminishing of the demand. But we are seeing some economic normalization, where people are going back to more in-person experiences, as opposed to just online.

So that remains to be seen as we continue to report out if those trends continue. But again, I think the big picture here is that we are seeing, while maybe a secular tailwind to continued use of technology, some slowdown in the demand here in the intermediate term.

DAVE BRIGGS: And Lenore, if you have a reaction to Qualcomm, please add to it. But I want to ask you also about, to Seana's point, Microsoft and Alphabet disappointing. They missed on the top and the bottom line. And look at their stocks today, right? Microsoft up nearly 7%. Alphabet up nearly 8%. I've tried my whole life to set the bar low. It's easy to leap over it. Maybe that's the strategy now on Wall Street. But what do you make of those two stocks bouncing on misses?

LENORE HAWKINS: Oh, obviously, the expectations were that it was going to be even worse than it ended up being. And I think what we are seeing is a real readjustment in expectations because let's face it, I mean, tech stock pricing really got just into the ridiculous stratosphere during the pandemic.

We had a crazy situation where people are-- suddenly, the economy is massively adjusted, and then a ton of money is thrown at it in the form of all that federal spending, the stimulus. And we also had monetary policy go crazy. So there's just a ton of money gets thrown at people while they're stuck at home. And you got a lot of buying that was really out of whack with what would have normally happened. So now all that's trying to readjust.

But when you look at a company like a Qualcomm, keep in mind that the Senate just voted 2 to 1 in favor of a package that's going to subsidize research and funding on US chip and advanced tech sectors because there's all this concern with onshoring, bringing that technology back into the domestic market. Keep in mind that in the '60s, the US produced around 40% of the world's chips. And today, about 80% are produced in China, with the remaining 20 just across the rest of the world. So there's a really great tailwind for domestic companies like Qualcomm.