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Inflation is ‘enemy No. 1 for the Fed,’ strategist says

Truist Chief Market Strategist Keith Lerner joins Yahoo Finance Live to discuss Fed Chair Powell’s Jackson Hole speech, inflation, recessionary risks, investor sentiment, and the outlook for markets.

Video Transcript

BRAD SMITH: Continuing the conversation here, we're tracking stock futures. They are higher as of right now for the US major averages following three straight days of losses for the markets since Powell's hawkish tone at Jackson Hole. Inflation continuing to be enemy number one for the Fed as noted by our next guest Keith Lerner, Truist chief market strategist.

Keith, always a pleasure to speak with you and get some of your insights here. First, let's go back to Friday, where we had Fed Chair Jay Powell out there in Jackson Hole. And in 8 minutes, in just 8 minutes, rattled the markets so much that we're still seeing the impacts even here through Tuesday, and perhaps we'll see exactly where Wednesday nets out as well.

KEITH LERNER: Yeah, well, first of all, great to be with you all as usual. First, I think some context is helpful heading into that speech. In mid-June, this market was pricing in a recession, down about 24%. It went from pricing in a recession to pricing in a soft landing, a pretty optimistic scenario at the highs. And that's why heading into that speech, our view and advice to our clients was this was a good time to trim equities because we were pricing a lot of good news.

And that-- Powell's meeting or his speech was really consistent what we've been talking about. The scar tissue from the last year of inflation means the Fed is going to be much more conservative in providing support to this market than they have the last 10 or even 20 years. So I think that's a really important point. The scar tissue means the game has changed.

BRIAN SOZZI: Keith, I'm going to try hard. I'm not going to ask you how inflation and rate hikes will help or won't help Bed, Bath & Beyond. We'll save that for an off-chat conversation. But look, September is now here, my friend. How do you think the market is going to perform versus historical norms, given where we are in the rate hiking cycle?

KEITH LERNER: Yeah, well, it's a good question. I mean, historically, September is the worst month of the year. The only thing I will say, Brian, we've been more on the negative side. Short-term, we have corrected about 8% in two weeks. And one of the indicators we just looked at this morning showing the percentage of stocks in the S&P that are oversold now is about 70%. That's the most since those June lows.

So I actually think short-term, we'll probably find some stability here. I do think that September and October into the midterms will still be kind of choppy waters. But again, after the selling pressure, at least, I think we'll probably see a little bit of a reprieve, at least some stability here near-term. And that's what we're seeing today. Things don't move in a straight line.

BRAD SMITH: Are there any sectors that you are convicted to still have some type of positioning in or even increase the position in?

KEITH LERNER: Yeah, you know, the sector side, what we're having right now is really a lack of leadership. So I don't know if it is really high convictions within the sectors right now. I would say where we've been focused on mainly has been more in the defensive areas, like staples, like healthcare, that can kind of manage through this kind of slowdown in the economy, expect more of a shopping market. We also like energy, and we've been overweight energy for over the last year. That's coming under a little pressure here short-term, but I still think the structural positives are still there.

But I think the one thing we'll be looking for, especially this month and over the next maybe few months, is, where does that leadership come from? Right now, almost 50% of this market is concentrated in growth, tech communications, and discretionary. For this market to actually get some legs, you'll need to see some participation from those groups. And at this point, we haven't seen it as of yet.

BRIAN SOZZI: Keith, when you talk to investors, what are some of their top concerns, besides what's going on at the Fed?

KEITH LERNER: Yeah, I think it's inflation is enemy number one, just like it is for the Fed. And so I think that's top of mind. You know, recession talk is out there quite a bit. I mean, the overall sentiment is still on the negative side, Brian. You can see that in the surveys. You can see that even in some of the fund flows here more recently as well. So I think people are concerned about just this-- all the complexity of this market cycle that we're in. And people are just concerned about the downside in the market. So I mean, I guess one asset for this market is, people are already braced for bad news.

BRAD SMITH: Keith, just while we have you, we continue to hear about more layoffs that are coming forward. And this morning from Snap, as we've also been parsing that with some of the private payrolls data that's come out from ADP, what do you think the likelihood is that we actually do hit an unemployment rate eventually and at what time scale perhaps that we hit an unemployment rate at about 4 and 1/2% or even as high as 5%, as some economists have called for?

KEITH LERNER: Yeah, I'm not an economist per se, but I do think the main thing is that unemployment rates are likely going to move higher and that the Fed's actually projected that. The question which you brought up is a good one, is, you know, how soon. With all the central bank tightening, with all these super-sized hikes, it's hard not to see the economy slowing by the end of this year and early into next year. So I do think we're going to see some upward pressure.

But interest in this week, the JOLTS report job openings actually went-- increased. And that's the opposite of what the Fed has wanted. So I think the stronger this labor market stays, the more of a pressure that the Fed is going to continue to have to push rates higher. So I do think that employment will weaken towards the back half of this year and into next year. And I think that's going to be an overall negative for the market as we move again later into this year into next year.

BRIAN SOZZI: Tough job for the Fed, indeed. Keith Lerner, Truist chief market strategist, always good to see you. Have a great Labor Day weekend.

KEITH LERNER: You do the same. Thanks so much, guys.