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Interest rates: ‘There’s big fear right now’ of hikes hitting consumers, strategist says

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Lisa Erickson, U.S. Bank SVP & Public Markets Group Head, and Sound Planning Group CEO David Stryzewski sit down with Yahoo Finance Live to assess choppy trading environments, volatility following the Fed's interest rate hikes, and the takeaways from consumer confidence readings on market outlooks.

Video Transcript

DAVE BRIGGS: Dave, what's moving the markets, or, really, a lack thereof, today?

DAVID STRYZEWSKI: Well, I think it all comes down to consumer sentiment. Jerome Powell gave us the new numbers here today on our GDP for Q1. Remember, that's a lagging indicator. And so we're now almost finished with Q2. And I don't see a whole lot of bright spots that have happened over the last three months. I think we're actually now starting to change our sentiment here. So we find ourselves at an interesting point as the sentiment is now just not positive.

Oil, every day, we're seeing it go up. People are looking at their groceries more. I've been talking to people regularly right now and a lot of people are just, by capitulation, just saying, I'm done. I'm getting out. I don't know what to do. And they kind of think the system's rigged.

So, with that being said, I think a lot of folks today are really looking at what's going up, what's going down. They're recognizing the fact that we do not have the same dual mandate probably from the Fed where unemployment was a standard. And now we're just really looking at raising rates. So there's a big fear right now in those rates rising, how that affects the consumer, their mortgage rates, and everything else along the way.

RACHELLE AKUFFO: And Lisa, this is a Fed that likes to give its commentary in between the Fed meetings, a very different era than we've known previously. How are your clients reacting to this? What are they asking you about this period of time?

LISA ERICKSON: Well, I'm pleased to say overall, it's, obviously, been a tough market, but our clients are generally holding steady. To your point, Rachelle, really, it's been a tough environment. And investors generally are just approaching the market more nervously. They see that price pressures are still elevated. And we have many indicators, both on a macroeconomic basis, as well as some individual company results, that are showing that growth is slowing. So it really is a tougher market overall. And we'll continue to watch how that data evolves, just to see, again, the potential extent of the slowdown.

SEANA SMITH: David, what do you think we'll see over the next couple of months, just in terms of volatility? Is that something that's here to stay?

DAVID STRYZEWSKI: Absolutely. As we get into the third and fourth quarter of this year, we're expecting volatility. We saw this coming, frankly, but we're just seeing sort of a deterioration of various things right now. And we find ourselves probably in a lot more of a volatile system. You know, what's up, what's down? Jerome Powell today was saying that we might see deflation in the fourth quarter in a significant way quickly. So that's a whole other thing for us to be wrapping our mind around and our head around.

So the average investor today, I don't know if they know how to play this. They're just kind of buying long. If you're young, stay invested. You're going to be fine. If you're getting closer to retirement, there's a lot of concern. Should I go into a more of a fixed account, a safe account? I can't take the risk.

Well, right now, that would not be a great move if the Fed continues to raise rates at the rate that they've said that they're going to because bonds have a negative relationship in pricing as it relates with the bonds increasing there. So that's a big one for us to be aware of. But if they don't want risk, well, then the other thing is, what are you going to do? Fight inflation? Then that's a risk-on strategy. So that's where we get into these valuations.

And we either just hold on for dear life if things don't go as well. Or we try to pick our places right now. Maybe raise a little bit more cash and then deploy back in when the market goes down. The point, though, is if your outgo exceeds your income, I think your upkeep is going to be your downfall. So a lot of people need to pay attention to their budgets today.

DAVE BRIGGS: Complicated times, and then this from Powell today, Lisa, what we don't know is whether we'll be going back to something that looks like or a little bit like what we had before. That sounds, well, anything but reassuring. What's your strategy, given that from the Fed Chair?

LISA ERICKSON: We're, overall, really cautious on the US equity market. And to your point, Dave, really, a lot of it is driving from this shift in policy. We certainly had an extraordinary period where, in response to, obviously, what happened with the pandemic, there was quite a bit of monetary and fiscal relief put on the table.

But as we backtrack, really, from that more accommodative monetary policy to really try to very firmly fight the inflationary pressures we see, obviously, there's that risk of overdoing it. And so, as Jerome Powell himself had said, Chair Powell, that this is a very difficult environment. And they're going to be doing their best to engineer a soft landing. But again, it's a narrow path ahead. And so, again, that leads really to some of our cautious on the US equity market at this time.

RACHELLE AKUFFO: David, you talked about retail investors in the midst of all this picture. Some like, should I jump into crypto? Should I keep my cash on hand? For retail investors trying to make sense of this, what's some advice they should have about the mindset they should have in this sort of environment?

DAVID STRYZEWSKI: I think patience is really what it comes down to. I think we're going to have three stages. So step one is that we need to be prepared. You know, what is the worst case possible situation for you right now? What is your strategy? What is your time frames? Of course, that's based upon someone's risk, tolerance, and horizons on things as best as we can understand.

Next thing is that we go to adaptation. We're going to have to adapt to this new environment that we're going to find ourselves in. So a higher inflation environment, a higher oil environment. Maybe we've got some industries that are not going to do as well as they've done historically. And that could be some differences in how we adapt and how we invest. And then the last thing is that we need to innovate. Innovation is going to be our ticket to the future.

And the United States has been incredible at showing up at the right time and coming out of very difficult moments. And I don't have any other expectation other than I think that we are the same type of people. I believe that we've got a lot of cash sitting on the sidelines right now, which, if things are gonna get better, if we see maybe inflation come down a little bit, then we can see some of that get deployed and perhaps find ourselves in inside of a new rally, which, again, I voted it goes up forever. But the reality is that we want to be cautious of both sides of these things right now.

SEANA SMITH: Lisa, taking a look at some of the movers today, Carnival was moving to the downside pretty significantly after Morgan Stanley cut its price target. That took with it Norwegian and Royal Caribbean. We've seen the consumer confidence numbers drop to the lowest level that we've seen in just about nine years. When you take into account that consumer behavior, the spending patterns have been shifting, how are you factoring that into your strategy and where you're finding opportunity in this market?

LISA ERICKSON: To your point, Seana, consumer confidence really has, in the latest readings, taken a step downwards. And so that is a concern because the consumer represents about 70% of the US economy. So as we look at within the US stock market, really, what that means in terms of pockets of opportunity, we, again, with our more cautious stance, are really finding some of those dividend paying stocks as more attractive.

And the simple reason why is when you have a more difficult economic environment, really being [INAUDIBLE] to receive those cash flows upfront and being in dividend paying stocks, which, traditionally, are a little bit less volatile than the broad US equity market, really makes sense at this time.