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Market strategist: There's 'a battle' going on between corporate earnings and Fed rate hikes

Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Senior Portfolio Manager, and Peter Tchir, Academy Securities Head of Macro Strategy, join Yahoo Finance Live to discuss how the markets closed on Thursday and the outlook for stocks given macroeconomic uncertainty.

Video Transcript

- And here is your closing bell on Wall Street.


- And there you have it, your closing bell on this first trading day in September. So as we can see, they did end the day mixed, the major indices. The Dow there pulling up the most. They're up about half a percent. The S&P 500 gaining about 1/3 of a percent. The tech-heavy NASDAQ still weighed down, though. Down about 1/3 of a percent. But still, all three rebounding off their session lows of the day.

Well, for a closer look at the broader markets, let's now bring in our market panel Andrew Schliemann, Morgan Stanley Investment Management senior portfolio manager, and Peter Tchir, Academy Securities head of macro strategy. So Peter, starting with you, a lot of people, a lot of analysts that we've spoken to looking at the economic data say it's just going to get worse from here. What's your take on this?

PETER TCHIR: I think in general, yes, we're going to see worse economic data. I'm very concerned about inventories. I think right now, markets rallied a little bit on the hopes that tomorrow we get kind of a Goldilocks-type number. I think people want the jobs report to be OK. So some jobs, but not so many jobs that it keeps pressure on the Fed. I think we're actually going to get a disappointing report. And I think that coupled with some inventory buildup, we are going to see a slowdown, and that's what concerns me most about the markets.

- Andrew, what do you think? Do you agree?

ANDREW SLIMMON: Well, I think there's a battle going on. The positioning is very negative, and certainly understandable why when you hear Jerome Powell say what he said. But the flip side is we had a very powerful rally off that low in June with tremendously good breadth. And some of the risk-on characteristics lead some of the technicals to look pretty bullish, even with this pullback. So I think that's really the battle that's going on. And I'll tell you, you get these types of intraday reversals like we do today, that tends to be a pretty good short-term sign. I think that's why we're getting this push-pull.

- And so following up on that, Andrew, then, obviously if you're in equities, this has been a tough year already. What's your outlook then since you still know that there is still going to be a lot of volatility for the foreseeable future?

ANDREW SLIMMON: Yeah. So look, I'm a long equity-- I run a mutual fund equities. My view has been you want to make sure you have plenty of defensive equities in your portfolio because it's going to be a lackluster year. I've predicted that since the beginning of the year. Lackluster to the extent that the Fed is pivoting to reducing money supply. It is taking down risk. And look at today. All the high-risk stocks, tech, got obliterated. You just got to be very careful the types of stocks that you own in your portfolio.

Having said that, we've had such a washout short term that I think the market could be setting up for a bounce in the fourth quarter into year end. So I don't want to get too bearish here. I think when the market ends the year, it will be higher than it is today. It's just not going to be a great year. And that's because we have this battle between corporate earnings that continue to come in better than what many of the bears expect. But the Fed's reducing liquidity. And that's not good for risk assets.

- So Peter, if the economic data does start to get worse, if the jobs report is weak on Friday, how do you expect the market to respond? What can we expect just in terms of maybe the trading action that we could see over the coming days?

PETER TCHIR: So I think for the next few weeks, we're going to be in a more traditional bad news is going to be bad for markets, good news is going to be good news. So if we can get a OK employment number so that the Fed can back off a little bit, that'll be fine. I think if we get a very weak employment number, markets may do a knee-jerk reaction where they rally because that takes the Fed off the table. But then I think they'll realize, OK, this is potentially bad economic data.

And the two sectors I'm really watching-- one is just, as a whole, I completely agree with the other guest, is as we do quantitative tightening, I think what that's going to allow everyone to do is move slightly down the risk spectrum to get the same sort of expected returns. So you can move from disruptive stocks to big tech, you can move from big tech to dividend stocks, dividend stocks into high yield, et cetera. So I think that's going to weigh on risk assets for a period.

And I'm really watching cryptocurrencies because we're continuing to see weakness. I think there's a real chance that we see Bitcoin break through this current level, get below $10,000. And I think that's actually going to be very problematic for the economy this time around because it's going to go along with all these disruptive stocks. There was a lot of wealth destruction that's occurring. You've seen it in the housing market too where housing is weak.

But also, all these companies that were in that disruptive sector in crypto, they were spending a lot of money. They only had one thing on their mind. That was growth, growth, growth. So they were allowed to spend. They could buy rigs. They could do cloud services. They could do whatever they needed. If they have to start focusing on earnings and retaining cash, I think that's going to be a further slowdown to the economy. So I think crypto could fall. And I think it's going to impact markets more broadly.

- And Andrew, we have heard from other analysts they're expecting crypto to fall. Obviously, others still more bullish on it, regardless of what they're actually seeing at the moment. And then also, what are you watching with consumers and consumer discretionary?

ANDREW SLIMMON: So, look, the way you make money in my job is to find stocks that are out of favor before they come into favor. And everyone talks about the fat pitches. But, usually, it's in the past tense. Oh, it was a fat pitch to buy energy stocks when the forward curve was negative. It was a fat pitch to buy travel leisure stocks when they were all shut down from COVID.

Well, what's the fat pitch right now? Look at consumer sentiment. It hit a 46-year low in July. And that means that the direction of change inevitably actually is higher likelihood of improving in the future. And that's why we had a better consumer sentiment number in August because oil prices came down. So I think you have to take that and start to question, well, what stocks reflect this horrible consumer sentiment? And could that actually improve in the future?

And I think there are plenty of consumer discretionary stocks that are down 40%, 50%, 60%, 70% from their highs. And could they have a better future if you see oil prices come down a bit, if you see food prices come down? Commodity prices are telling you already that things are-- inflation is coming down. I think that's the next fat pitch. But it never feels comfortable at the time. It always seems obvious after the fact.

- Monday morning quarterbacking, always the easiest job. A big thank you to Andrew Slimmon there and Peter Tchir, our market panel this afternoon. Thank you both.