Jas Thandi, Aon Partner of Portfolio Strategy, and WisdomTree Global CIO Jeremy Schwartz sit down with Yahoo Finance Live to talk about how markets are handling the Fed's raised interest rates, alternative investments, and rising prices in oil commodities.
- That was the closing bell sponsored by Tastyworks, Dow, S&P, and NASDAQ, all closing to the downside in a down week for the markets, as [INAUDIBLE] was just pointing out today.
Dow closing off at 349 points off the lows of the day. S&P off just around 1 and 1/2%. Then NASDAQ, a lot of those larger tech companies taking a hit as we see rates get a boost, but NASDAQ off just around 2 and 1/2%. We want to bring in Jas Thandi, Aon partner of Portfolio Strategy, and Jeremy Schwartz, Wisdom Tree's Global Chief Investment Officer.
Jas, let me start with you because a down week for the market. Certainly, we have been in a downtrend, we can say, over the last several weeks. What's your takeaway from the action that we saw today?
JAS THANDI: Thanks for having me. I think one of the key things is that you see markets really gravitating between growth scale and like [INAUDIBLE] inflation [INAUDIBLE]. For me, this week has been characterized by markets really tending towards that inflation continuing to remain high, but also what the Fed has to do to take to really combat it.
So it's and we learned some of that from the jobs report. So the jobs report wasn't that comforting this morning, which I think triggered some of the [INAUDIBLE] down market moves, and that was really driven by jobs growth remained strong. We saw a very good report, but with some hints of some softening in there.
And what this means for the Fed is, and which is what's driving markets, is really what the Fed has to stay the course. I mean, there's no room for kind of a dovish overturn for the Fed. So it means that markets are continued to adjust to this higher rate hiking path, and that's what we're seeing play out with the sectors and tech stocks selling off and the market being dragged lower over the week.
- And Jeremy, let's get your reaction to the big story of the day. That would be the morning's headline numbers here. What are your thoughts on this?
JEREMY SCHWARTZ: Yeah, I agree a lot with what Jas said. The big story on the air has been this inflation and the market coming to realities and grips. The market was very unprepared for what the Fed had to do.
You even hear [? Yellen ?] admit she was wrong on inflation recently. And the Fed is getting appropriately tight, and so we had thought there would be a correction in the big speculative growth stocks whose multiples had to contract with discount rates going up, valuations coming down, but we think a lot of that is now being reflected more appropriately.
People sort of are expecting the Fed to tighten very aggressively, and so we could be-- we think that this sell-off that we've seen could be coming towards an end. We're getting more confident the market's appropriate pricing what the Fed will be doing.
- So then Jeremy, following up on that, because we got two warnings-- at least two-- from pretty large CEOs this week, Jamie Dimon basically calling for that we should be bracing for an economic hurricane. Elon Musk is saying that he's a little bit worried. I think his exact words was he feels super bad about the economy right now. Are some of those fears then overblown?
JEREMY SCHWARTZ: Well, I mean, you understand their fears and you've got rising input prices. That's what's driving the inflation. Rising commodity price has been the key story for part of that. And then supply chains being constrained, and all those factoring into that.
And the Fed is trying to tighten make financial conditions tighter, so I understand their concern. I think the valuations in the market have come down a lot. We're still positive on earnings, you could say. If there's a risk to the outlook is really earnings collapse. The economy gets much worse much faster, but you know where unemployment is, the underlying trends there.
I mean, we do think that you will see more layoffs coming. You haven't really seen any of that. You saw maybe Elon doing some of that getting ahead of that comment, but we do think earnings are going to be fairly robust. And with that view, we would say the valuations have compressed enough.
But for sure, the risk is the recession takes down earnings much more than we're considering right now.
And Jas, there's really only one question on investors' minds. What do I do now? Everybody's taken-- most people have taken a drubbing this year. Do we brace for capitulation hedge? Is there anything, any bright spots that you like for opportunities right now?
JAS THANDI: Yeah, that is the question, and we are down a lot. I think for our clients, which is mainly institutional clients, they're really reducing reliance between equities and bonds. So typically portfolios have been built on this idea that bonds and stocks move in opposite directions and that creates ballast, but for us now clients know, and one of our key concerns is, that as we look forward and we see a risk inflation environment-- and that's not to say moving into like a 1970s [INAUDIBLE], just for the path of inflation is much more uncertain. It's really lessening the dependence on that.
So for our clients, it's really about moving into markets where you are insulated from that and can benefit, so things like infrastructure, private credit and obviously, the institutional space.
For the retail space, I think it's harder because there are less places to hide and that's just a fundamental fact, but I think we will start to see some more sector differentiation and style differentiation, which is one thing that is open to play with for everybody. But for our clients, it's definitely a move away from most public markets and more into the alternative space.
- Jeremy, what do you think? Where are you seeing opportunity right now?
JEREMY SCHWARTZ: I agree on it's been a challenge for the traditional 60-40 commodities. I think are another thing I would add into Jas's alternative list, I think given rising inflation is the key risk to the markets, I would still think about commodity exposures. The cost to roll these futures are not what they used to be, where it costs you 78% a year for two decades.
You have now sharper backwardation, where the futures prices are below the current prices, and so I think commodities are one solution to some of those inflation challenges. Other sort of liquid alternatives, managed futures strategies, are another where they can ride trends up and down and go short things, like bonds, as they have been all year.
But I think even classic high dividend stocks. You say, what are the factors that are working? It's been a mega sell off in growth, but high dividends are high dividend fund is up almost 10% on the year. So you do see that opportunity for factors to do well. I think values could continue to do well in light of all this uncertainty that we have.
- And Jas any other alternative investments that you like right here? We're talking about commodities. We've done that. We have crypto. We also have a volatility, real estate, anything in those arenas.
JAS THANDI: Yeah I, think Jeremy mentioned things, some macro hedge funds, alternative stocks, playing trends really anywhere where you can capitalize on differentiation between asset classes is, I think, is where you'll see opportunity.
And for the last 10 years, it's been a one way street. There's been no other gains in town. I think now we're seeing opportunity for those strategies to work, and also potentially, a move into more active type strategies, where people can really add value from picking the winners and losers.
Because I think the one thing that we'll see for sure in the environment going forward, is that there will be winners and losers, and you'll want to be able to capitalize on those trends and be able to make some returns from that.
- All right. We're going to have to leave it there, but really appreciate your insights here. Jas Thandi, Aon partner of Portfolio Strategy, and Jeremy Schwartz, WisdomTree Global Chief Investment Officer.