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Inflation: 'There's a very systematic pattern taking place here,' strategist says

Linda Duessel, Federated Hermes Senior Equity Strategist, and Larry Adam, Raymond James CIO, join Yahoo Finance Live to discuss how the markets closed the week, the Federal Reserve's inflation plan, and the outlook for the economy.

Video Transcript

[AUDIO LOGO]

- Here's the closing bell at the New York Stock Exchange.

[MUSIC PLAYING]

- All right, that does it for today's trading day and the trading week. All three of the major averages ending the day in the red, like Ines was just saying. Dow closing off its lows of the day, but still off 337 points. S&P off just over 1%. The NASDAQ off 1.3%.

In terms of the sector action, 10 of the 11 sectors closing to the downside. Energy, the only sector holding out with gains. Technology, the worst performer for the week. And we, of course, have seen that reflected in the NASDAQ.

All right, let's talk about what this all means here. We have Linda Duessel. She's joining us now from Federated Hermes, senior equity strategist, and Larry Adam, Raymond James CIO.

Larry, let me start with you. Certainly that massive reversal today is something that's jumping out to us, but we've been in this steady downtrend, right? S&P, NASDAQ, Dow, all lower here for the week. What does that tell us just in terms of what we could expect here over the coming weeks when there's still so much uncertainty?

LARRY ADAM: Well, first of all, I guess we could go back in time, back to 10:00 this morning with a much better way to go into this long weekend, but what I think happened today is that we rallied up to the 50 day moving average. We failed to break through it, and then it just took really that one headline around lunchtime with the closure or indefinite closure of Nord Stream. And that's really what took us lower into this weekend. And with low-low volume and a lot more volatility, that's really why we saw the sell off.

Again, this is just one day. I think that when you look at what's going to happen over the next 6 to 12 months, I'm actually a little bit more optimistic on the equity markets, because I think the first half of this year was all about questions. I think we're going to get the answers during the next six months or so.

And what I mean by that is I think inflation, right, it's been a big concern, I think it's going to be on a steady downward trend by the end of this year into next year. I think the Fed's tightening cycle is going to end, either by the end of this year or early next year. And then the midterms, they'll be over. And one little important point to note is that 12 months after the last 19 midterm elections in the post World War II era, the market's been up every single time. So I'm actually looking for some better performance over the next 12 months.

- It doesn't do as much, because 11 of the last 18 Septembers in a midterm election year have been rough. So, yeah, as long as you can wait out September. I think you had a good point, Larry. We should have just called it a week at like 10:00 AM.

Linda, how do you see that reversal? It was already falling ahead of that Nord Stream news. How do you see it?

LINDA DUESSEL: Well, you know, I like Larry-- I like Larry's attitude very much. I like to be around upbeat people. And we're a touch more, a touch more concern over here at Federated Hermes in Pittsburgh.

You know, it is, it's the end of a summertime trading week. It's going to be a long weekend, wouldn't care too much trust the volume too much at all, and look really into September, which is historically the worst month of the year, and September and October, two of historically the most volatile months of the year.

I also like what Larry referred to in terms of the midterm elections coming up. There's a good long-term history that after the midterm elections. You tend to do well, at least, in through year end as you have that bit of uncertainty behind you, but where we're much more saying, we're about to actually be worried, much more concerned is how long it's going to take for the Fed to really beat inflation.

We think it's going to be persistent as it was in the '70s, if not as high. And each move the Fed makes, it takes about a year to make its way into the economy. So '23 in our view could be a very interesting year.

- And so, Larry, obviously with the jobs data coming out this morning stronger than expected, how much does that change the narrative for the Fed though?

LARRY ADAM: I don't think it changes it all that much. In many ways, I think there was some good news that came out of that report. First of all, show still healthy job creation, which is decelerating, but still 300,000 jobs is a good thing for the economy, because it will help consumer spending. The unemployment rate went higher, but it went up for good reasons, right, because more people were actually looking for a job.

And probably the most important part of that was the fact that wage pressures are starting to slow. They're only up 0.3% a month over month. And I think the Fed's going to like that. As far as inflation goes, I actually think that the inflationary pressures are going to decline and decelerate.

I think there's a very systematic pattern taking place here, first commodities. They've started to go down, right, whether it's been oil, lumber, things that people have been looking at, copper. I think that then went into goods. And we saw that over the summer with a lot of the discounting that's taking place.

Now, we're in the process of seeing some food and service prices starting to come down as we go into the end of this year. And then I think next year, you're likely going to start to see rents decelerate, because you're already starting to see some of the cracks in the housing market. And those rents tend to follow about a year later. So I think the path is there for these-- at least for inflation to decelerate by the time we get to next year.

- So, Larry, does this give you, I guess, a little bit more confidence that the Fed could potentially orchestrate and successfully navigate a soft landing?

LARRY ADAM: Yeah, well, so our economists thinks that we could have-- there's a 60% chance of having a recession next year. His next highest probability is that soft landing that you're mentioning, 35%. But I think it's important, when you talk about a recession, he's talking about the narrowest, mildest recession we have ever seen in the US. And some of the reasons for that are the fact that when you look at the job creation, right, we've just now gotten back to the levels of employment that we were prior to the pandemic.

So you're not going to see the massive layoffs that you typically see in a recession. When it comes to business spending, you haven't seen the big spending by businesses where are you going to see a big drop off. So I still think that if we do have a recession, it's going to be fairly mild. And I think the Fed-- I think they've done a nice job navigating this.

I know they get maligned a lot, but I think they've had some tough cards when you look at some of the policies that have been coming from Washington. It's really hard to put the brakes on an economy with monetary policy, when, in fact, you had some significant fiscal stimulus still in the pipeline.

- And, Linda, I want to ask you-- obviously, we talked about what's been happening with the Nord Stream pipeline. Do we expect some of the domino effects and the pressure that we're seeing in Europe to then also continue to weigh and pressure the US economy as well?

LINDA DUESSEL: Yes. I think the way that it could pressure the US economy is through those multinational companies of ours who sell all around the globe. And to the extent that Europe has a recession and maybe even a severe one, that could reverberate for sure to the extent that China continues its zero-COVID policy and continues to see a weakening economy. Now, that's the second largest economy in the world that, again, can put pressure.

We are lucky to be in the United States, the strongest country probably around the world. But in order to have a really extended economic cycle, you want the rest of the world to do well. And these are economic headwinds.

Price of energy we think still is exposed to go up and potentially a lot this winter. That's a ubiquitous number, the price of oil all around the globe. So this is an inflationary part that could come back and bite us again in the winter.

- We'll certainly be keeping an eye as we head into hurricane season as well. A big thank you to our market panel, Linda Duessel and Larry Adam. Have a great weekend, and a great holiday as well.