Market strategist: 'The story is the bond market' as Fed turns hawkish

WisdomTree Global CIO Jeremy Schwartz joins Yahoo Finance Live to break down the rebounds in the stock and bond markets, the Fed's interest rate hikes, the U.S. dollar's strength, tech stocks, and the price action in commodities like crude oil.

Video Transcript

BRAD SMITH: With that final hour of trade, for a deeper dive on today's market action, let's bring in Jeremy Schwartz who is the WisdomTree Global chief investment officer. Jeremy, just to kick things off here, because we could spend a little bit more time on this today, especially with the bond market, as Jared was laying that out a moment ago, what is your perspective of where we find ourselves in this moment in the bond market?

JEREMY SCHWARTZ: So much of all of what we just talked about. I mean, all of the market is centering on bonds, interest rates, the fed, and inflation. And so what you've had is sharply rising rates, certainly at the short run and sort of anticipation of an aggressive fed. We're coming up to the fed meeting and they've been starting to price in, Powell teased out we're going to get 50 basis points, basically setting the stage for 50. And you might see more dissenters of James Bullard, the St. Louis fed president. He's one of the most hawkish members was--

They could descend in favor of 75. We don't think the full fed is at 75. But you're definitely getting this new tone of inflation as a problem. And so then you see that rising rate spilling out to all the equity markets. And it's feeding-- you just mentioned energy as this perennial-- it's been a leader all year long and sort of rising commodity prices feeding inflation.

The more expensive segment of the market, when you say the mega growth stocks, which are relying on far duration cash flows, being hit by this fed of a more hawkish rising rate, it's causing the discount rates to cause multiples under pressure. So it's really the story is the bond market and its implications across all markets.

DAVE BRIGGS: And Jeremy, we went through that with Jared as well as the dollar. What is the dollar value levels telling us right now?

JEREMY SCHWARTZ: Well, I think it's part of the same story in some ways is that the fed is hiking, Bank of Japan you could say is the exact opposite extreme. The Bank of Japan is keeping their 10 year fixed at 25 basis points. And there's questions like, can they keep it there? But the yen in the last five weeks went from 115 to 128. We're going back to levels that they haven't seen in a decade, and sort of the weakest levels of the yen.

Now you're starting to see this in earnings reports. If you go back to last night's reports and Google coming under pressure, there's questions about Russia and Europe. But there's also questions about the currency impact. And you're seeing a hit from a strong dollar. They had a lot of global earnings. A strong dollar makes that transition as a headwind. And but it's the opposite if you're in Japan. If you're Toyota selling the yen, the yen has come down. They have a lot more yen based revenue.

So I would expect some positive earnings surprises in Japan in particular with some of these global markets. And it comes back to a lot of people think they invest overseas for a down dollar bet. And I've been saying this for a decade or more that that's the wrong move, that you kind of want the stocks, because you don't want the currency, which is called it a currency hedged approach to many of these markets. But the strong dollar is certainly having a lot of peaks across earnings season. And I expect it will as you start to get to Japan's earning season.

RACHELLE AKUFFO: So then when you look at some of the traditional safe havens in this sort of environment, usually things like bonds, where do you see the safe havens and perhaps the opportunities at the moment?

JEREMY SCHWARTZ: Well, in the bond market, there's been no-- that's where everybody went to hide forever. And there's been no place to hide in the bond market. Some of the long duration bonds were down more than the NASDAQ for a while. And it's showing you how much the growth stocks were selling off. The only place that's really been a cushion there is floating rate treasuries. We have an ETF USFR. It's positive on the year.

And it's sort of the best bond play in my view for rising rates because those floating rate treasuries reset every week. And so it's actually already started to anticipate this 50 basis point hike and will continue as there's more 50 basis point hike coming down the pike in our view. So USFR is the one place in the bond market that's doing well. We'd be still cautious of duration. There are some people who think with the sharp rise in yields, some of the model portfolio providers we watch have been adding to duration.

We've still gone to shorter duration. We added to USFR in some of our models for that type of sense. And I think that's going to be the play throughout at least the next few months as the fed is turning pretty hawkish as the number one priority.

BRAD SMITH: OK, so what about the equity markets amid the earnings season that, yeah, Microsoft was good, but for some of the other tech names have been dismal?

JEREMY SCHWARTZ: It's being consistent. When I say the bond market is having the implications across everything, I'm going to say consistent that the growth rotation, the mega growth rotation, still has pressure from the most expensive part of the market. And so you've seen, if you have any questions on earnings, Facebook, the last report had a lot of questions on earnings. And that stock fell in half.

And that's not an expensive stock anymore. That's now become a cheap stock. But they still have now come under pressure. I think some of the mega tech stocks are actually a pretty reasonable multiples when you look at Google and Alphabet. They're actually a pretty reasonable multiple. That's not the stocks coming under pressure we're talking about. I'm talking about 50, 60 times earnings, 100 times.

They have very high multiples to sales or even no earnings, the unprofitable tech segment. That's what's coming under the most pressure from these rising rates. The big tech stocks are now actually getting to be more reasonably priced.

BRAD SMITH: But should they still be getting a growth multiple, Jeremy?

JEREMY SCHWARTZ: I mean, they are still growing more than the market. So I think they-- like an Apple, Facebook, Google, Microsoft, yeah. They do have sort of secular trends behind them. And I do think they do deserve a more than market multiple.

DAVE BRIGGS: Wherein lies the opportunity here, Jeremy?

JEREMY SCHWARTZ: Well, I still think value stocks, high dividend stocks, are probably the place to be for this fed. And so throughout the rest of the year, I think there's going to be more volatility from that. And so I think dividends have been the single number one factor that matters. I think that's going to continue to be the case until you get to sort of peak fed. And we're not quite there yet. And so I think the dividend factor is the number one opportunity. And that's in the US, globally, things with high cash flows today are what's going to be driving performance.

RACHELLE AKUFFO: And what's the top question that you're getting from some of your clients at the moment?

JEREMY SCHWARTZ: It's all these same questions about, where do you go? Where do you hide out from the fed? Is the commodity market still-- is that overdone? We're getting that question a lot because that has been a place that was so dead for so long for the last decade. It's been terrible to be in the commodity market. And that's one of the things feeding inflation. You get 20% to 30% gains in some of these commodities. And the dynamic is different than it was historically.

I mean, before, it cost you 7% to 8% a year to roll commodity futures for the last two decades. And so you understand why people didn't want to invest in oil as an ETF. I see you showing the oil prices. That was a very bad place to be for much of the last decade. The last 18 months, much better from the bottom when it went negative. It's been a consistent rise in oil prices.

But now, you're getting paid to roll these commodity futures instead of costing you 7% a year. And so I think commodities are another place if you say, inflation is a risk, rising commodity prices are a risk. And I do see that as the case. I think that's another place to go from this inflation dynamic.

DAVE BRIGGS: Good stuff. Jeremy Schwartz, WisdomTree Global. Appreciate your time, sir. Thank you.

JEREMY SCHWARTZ: Thank you.

DAVE BRIGGS: Coming up, Meta earnings are out after the bell today. We'll tell you what we'll be on the lookout for right after our break.

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