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Market strategist: The Fed is ‘the primary piece of the puzzle’

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Ryan Nauman, Zephyr market strategist, joins Yahoo Finance Live to discuss tech stocks and the Fed.

Video Transcript

- Let's stick with this market conversation and bring in Ryan Nauman, market strategist at Zephyr. Ryan, always good to see you. I want to start with this route in tech stocks. Lower to start 2022. At the same time, we've got Treasury yields fueling greater concern I think about growth and profitability this year. What is your take on Big Tech at the moment?

RYAN NAUMAN: Great. Thank you for having me on, Alexis and Karina. And Happy New Year. You hit the nail on the head right there with the yield curve. I think that's really what's playing a role with tech. And hindering tech really since the end of December is this steepening yield curve. 10-year Treasury yields have climbed to around 1.65%. And that spread between tens and twos has widened. So that's the primary driver there to the lagging of techs over the past couple of weeks.

- And, Ryan, Happy New Year to you. Wondering what you expect or want to hear out of the Fed minutes that come out in just over an hour from now. And I love the way that you very succinctly put it in your note. The Fed is walking a really tight line. And can they actually stick the landing? And I'm wondering, do they follow through on what the dot plot suggests that we see three rate hikes this year?

RYAN NAUMAN: Yeah. That's a great question. And that is my-- we have the COVID concerns. But right now, the primary piece of the puzzle that I'm watching is the Fed and going to be the Fed minutes. Markets don't really react too greatly to when the Fed starts hiking rates. It's the pace. And if the Fed really increases the pace of interest rate hikes-- and maybe there's a couple of price hikes in there to tame inflation-- that's when we could really get an impact on equity markets and we could see a pullback, a steep pullback if the Fed surprises and tightens policies too quickly. So those are the statements that we're going to really want to watch.

And when you look back at 2009, we've been on this fantastic bull run, this bull market. And since 2009, there's only been a three-year time period-- 2016 to 2018-- where interest rates have not been at that 0 to 25 basis point band. How are markets going to react when all of a sudden we start increasing rates, which have boosted this fantastic rally since 2009.

- Yeah. I think you're right, Ryan. There is sort of the younger investors, right, a generation of investors don't know what it's like to invest in an environment of higher interest rates. But I do want to ask you about Citi's prediction because analysts at Citigroup are predicting the S&P 500 is going to end the year above 5,000, breaching that level for the first time. It's not terribly far away right now. About 225 points. But they think that corporate earnings are going to be able to deliver. Do you agree, given the fact that inflation will probably stick around a little bit longer and companies are going to have to deal with higher interest rates this year?

RYAN NAUMAN: Yeah. That's a great question. I'm not that optimistic. I'm a little bit more cautious moving forward into this year. I do not believe-- you know, when you look back at March 2020, equities have been on that one-way trajectory. And it's been up. But looking forward this year, I think economic growth is going to slow. And we're going to have tighter monetary policies which are not going to support asset prices that we've seen since March of 2020.

I think you're going to see some appreciation during the first half of the year. I do agree earnings will be strong. But I don't think they're going to be strong enough to offset higher interest rates, tighter monetary policies, and slowing economic growth. So my throughout the year is more flatter equity growth. Not a huge spike. More muted growth moving forward.

- And then, Ryan, we had an analyst on yesterday-- Eddie Gabor-- who said the rising yield rates that we're seeing right now is all a sort of head fake. I'm wondering, do you agree with that? Or is there now some sort of more meaningful rotation away from growth? And then do we start looking at value at this point?

RYAN NAUMAN: It's a great question. And I do believe it is a little bit more of a head fake. We could see yields, 10-year yields, rise a little bit. But traditionally when the Fed increases interest rates, the markets take that signal as lower inflation or falling inflation and slower economic growth. So typically during an interest rate hiking environment, 10-year yields fall, and the yield curve flattens.

And I think that's going to start taking place later this year. We will see the 10-year yield fall slightly as investors anticipate slower economic growth and lower inflation. And that could benefit value, which-- or your value stocks and growth stocks. I, personally, like the quality factor more than growth versus value as interest rates increase, borrowing costs increase for corporations. I like the quality factor more than playing that growth versus value trade moving forward.

- I want to switch gears and talk a little China for a minute, Ryan, because tech stocks there, also off to a pretty bad start. The Hang Seng Tech Index now suffering its biggest decline since July. What's your take on tech in China, but more broadly, China as a play for investors in 2022?

RYAN NAUMAN: China's interesting. There's always many dynamics to China, whether it's geopolitical, their relationships with the US, and just growth. One thing that concerns me moving forward with China is just continued supply chain issues. Can we unkink some of these supply chain issues and get the flow of goods increased? And I think that will help with China.

I'm a little bit more muted in terms of China. I like some of the other plays, like Taiwan and other spaces in the emerging markets better than China. But it's one of those things that's a good diversifier. You don't want to completely eliminate the second largest economy in the world from your portfolio. You want to stay diversified. But I would not overweight it moving forward at this point.

- All right. Ryan Nauman, market strategist at Zephyr. We appreciate your time today. Thanks so much.