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Market rally: Fed Chair Powell ‘snatched victory from jaws of defeat,’ strategist says

Cornerstone Wealth Senior Investment Analyst Sean Bandazian and Opimas CEO Octavio Marenzi examine the conditions surrounding fresh market gains following Fed Chair Powell's latest rate hike comments, while also discussing the market outlook, inflation, and mortgages in the housing market.

Video Transcript


- Here's the closing bell for today, Wednesday, November 30.


DAVE BRIGGS: Oh, it's the 99th Annual Tree Lighting. Seana, would you just see how glorious it is.


DAVE BRIGGS: Look at St. Nick dropping the left-handed hammer. You got the polar bear on stage. We need some Christmas music.

SEANA SMITH: Wine, looks like champagne bottles there in the background too.

DAVE BRIGGS: Man, that gets me in a Christmassy mood. I haven't been in one in a while.

SEANA SMITH: So does today's gains.

DAVE BRIGGS: So does today's greens because they look like a lot of Christmas trees.

SEANA SMITH: There you go.

DAVE BRIGGS: Right? Green arrows pointing up. 730-point gain in the Dow, a 3-point increase in the S&P, and check out the NASDAQ. As you might imagine, related to interest rates, the words of Jerome Powell. 4.4% gain on the day for the NASDAQ. Wow. We're all in a Christmassy mood today. Let's talk about it with our guests today, Wealth Senior Investment Analyst Sean Bandazian, Opimas CEO Octavio Marenzi. Octavio, good to have you. Let's start with you and your reaction to those numbers we just put on the board. Was anything surprising to you from the words of Jerome Powell today? And how do you justify that much green?

OCTAVIO MARENZI: I'm baffled. I don't know how you justify that much green. I mean, I listened to his speech, and I thought the whole thing was an enormous non-sequitur. If you go through it, he basically said about seven different times, inflation is bad. It's terrible. It's too high. We need to get it down. We're going to do everything we need to get it down. He also made a stunning admission that all the forecasts had been wrong, basically, for over a year. So the Fed and the private sector had basically been expecting inflation to come down. We've been hearing that for over a year. So admitted our models are poor. We have poor forecasting ability. Inflation's too high.

And then in his final paragraph, in the final couple of sentences, he said, and therefore, we're going to moderate increases, in terms of the interest rates. I didn't see how that followed from what he had said before. The first part of the speech sounded, like, really bad. I thought the market's going to take it really badly. But at the very end, he basically-- he snatched victory out of the jaws of defeat that he set up himself.

SEANA SMITH: He certainly did. And it looks like it was enough for the markets. They were just looking for that one line. They finally got what they were listening for. Sean, what do you think? Do you agree with that sentiment?

SEAN BANDAZIAN: Yeah, I completely agree. You know, the reaction was certainly surprising, to say the least. I was just looking at Fed funds futures before I came on the show, and there really wasn't a whole lot of movement in the expectation of future interest rates as well. I think everybody was expecting a break from 75 basis points. And while Powell did acknowledge that inflation is somewhat easing in certain areas,

I think what the market seems to miss in its reaction is the Fed's focus on the labor market and the delta-- or the difference that exists between wages and their inflation target. So certainly surprised by this as well. I see this as bit of a positioning being offsides and kind of a continuation of maybe a seasonal rally.

DAVE BRIGGS: Yeah. Octavio, and a lot of times, we'll see the air kind come out of this the following day. Is that what you expect in the weeks ahead?

OCTAVIO MARENZI: I suspect so. As people sort of sift through this and say, what does it really mean, ultimately, I think they'll come to realize that focusing on the final sentence of his speech was maybe the wrong place to emphasize and focus. And if inflation doesn't come down, well, then we're going to expect the rate of increases to go back up again. So that's what you're going to see how we-- things unfold in the next few weeks and months.

But I'm expecting, yes, this is a bit of a false rally again, that this is not going to be sustainable, that basically we have a long inflation fight ahead of us, and it's by no means won. And Jay Powell admitted as much, like I said, in the first part of his speech. But then he basically changed course entirely.

So I think focusing just on that one thing is absolutely the wrong thing to do. And I think it seems that is what the market is doing. But I think this is not going to end anytime soon. The interest rate increases are going to keep going. And Jay Powell also emphasized we don't know where we need to go, how high we need to go. It's unclear. And there's a big lag and big uncertainty between interest rate increases and the effects on the economy, and he admitted that as well, which I thought was quite insightful and surprisingly honest of him to actually say that.

SEANA SMITH: So, Sean, what does all this then mean from an investor's perspective? Because if we're not expecting these gains to last, that there certainly is a lot of uncertainty over the next couple of months, is it smart for investors to stay defensive at this point?

SEAN BANDAZIAN: Well, I think it depends, right? I think it depends on your time horizon, your age, your risk tolerance. I mean, bear markets and bear market rallies, which is what I think we're seeing today and for the better part of the last six or so weeks, provide opportunities for all different types of investors, right? Short-term traders can take advantage of dislocations. Long-term investors have plenty of opportunities to buy area of the market-- areas of the market or companies that they like that have sold off. But in particular, there's definitely opportunities to pivot.

And, you know, personally, at Cornerstone, we've used this strength in recent weeks to do a few things. And one of them, as you mentioned, was pivot to more defensive areas of the market ahead of next year. In particular, we still really like health care. There's obviously a lot of pricing power and an inflation beneficiary, in a sense. And we're also looking to pivot and ramp up our international exposure, both developed and emerging.

So I think there's certainly a lot of opportunities to look at, the success and the returns in the US market for the better part of the last decade, and pivot to some other areas like Europe that look a little bit cheaper and that are on a little bit of a different cycle, right? They're probably in a recession now. So there's certainly some different opportunities. The UK looks really cheap and attractive as well. So definitely pivoting to more defense in the US and looking elsewhere.

DAVE BRIGGS: Octavio, we've started to see some tech layoffs, more today with DoorDash. We've seen Amazon and Meta and Snap. But the housing sector might be the one area where we're seeing these higher rates do the most damage. How much more pain do you feel is ahead for the housing market?

OCTAVIO MARENZI: Well, I think if you look at the overall US housing market prices, if you look at the Case-Shiller Index, which is not the most up-to-date index, it's basically come down about 3% from the heights. Though if you look at individual markets like the Bay Area, San Francisco is down 10%. And probably that was the reading at the end of September. Now by the end of November, I suspect we've gone even lower than that. So we're probably down 12%, 15% in that market already.

So there's a lot more pain to come. And I think what we've seen is, of course, the Fed has jacked up interest rates, and that has had a direct impact on mortgage rates and basically priced a lot of people out of the market. But what the Fed has also done is basically bought well over a trillion dollars' worth of mortgage-backed securities, and that is just money that flowed into the housing market in early 2020.

And the Fed is still sitting on this enormous portfolio of mortgage-backed securities. And they've promised they're going to sell it off and fight inflation by drawing down their balance sheet, but they haven't done that yet. So they've been sitting on this enormous portfolio of mortgage-backed securities. They've reduced it by about 2% over the course of the past few months. But it's been basically sort of homeopathic doses of reduction. Once they start to do that, if they start to do that, they'll drive mortgage rates even higher. And that was going to weigh very, very heavily on the housing market.

So in the housing sector, I think we've got a lot more pain to come. People are starting to finally realize there's not as many buyers out there. They don't have the means to buy them, and they're holding them. And we've seen the volume of transactions come down very, very significantly, particularly on the West Coast, where in the million-plus range, we've seen a reduction of about 45% in terms of sales. And that is quite dramatic. So we're seeing a major shift, sort of tectonic plates shifting in terms of the US housing market. And I think that's going to be translated into far lower prices in the coming months.

SEANA SMITH: Octavio, Sean, always great to have you. Thanks so much for joining us here this afternoon.