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Market volatility is ‘likely to continue’ in the short term, strategist says

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Kevin Nicholson, RiverFront Investment Group Global Fixed Income CIO, and Anwiti Bahuguna, Columbia Threadneedle Investments Senior Portfolio Manager and Head of Multi Asset Strategy, join Yahoo Finance Live to talk about how markets are responding to the Fed's interest rate hike strategies, Chinese supply chain concerns, and the fixed-income market.

Video Transcript

[BELL RINGING]

- And that was your closing bell on Wall Street. Not much to clap about. And you see the numbers. It was a rough way to start the week. Let's bring in our market panel to talk about it. Kevin Nicholson, RiverFront Investment Group global fixed income CIO, and Anwiti Bahuguna, Columbia Threadneedle Investments senior portfolio manager and head of multi-asset strategy. Glad you're both here today on a rough start to the week. Kevin, what are the markets reacting to?

KEVIN NICHOLSON: The markets are reacting to, A, well, the dovish Fed last week and the fact that the Fed hikes, but they took 75 basis points off the table. And so in our view, that means that the Fed is going to have to do more later down the road. And that puts them even further behind on the inflation front.

Also, the market is reacting to a non-farm payroll number that showed that the Fed is going to continue to hike. And it hasn't thrown the Fed off its path. And so I think today you're starting to see a bit of a capitulation to the realization that the Fed is going to continue its march to fight inflation, and therefore we're going to see some more downward pressure on equities.

- Anwiti, what do you think this means for equities? Is this volatility that we've seen most recently, is that here to stay?

ANWITI BAHUGUNA: Yes, indeed, I think in the short term the volatility is likely to continue. By the way, thank you for having me. Wanted to say that. We need some more clarity from real data. So far, markets going on a vacuum of information on inflation. And it's just focusing on worries about inflation. So we are worried about what happens with the lockdown in China and supply chains and the ongoing war and the impact it has on commodity prices.

In the meantime, in the absence of any new data on inflation, what we are focused on is just the lack of this information. And we continue to see relentless selling, as you mentioned, over the last few days pricing in a lot of these worries. But we have an inflation print on Wednesday. And we are looking for some moderation in that number. And that might be a point that markets focus on this week and stabilize.

- So then, Kevin, talk about some of the questions that your fixed income clients are heading your way. What are they most worried about?

KEVIN NICHOLSON: I think most of my clients were worried about whether or not the fixed income portion of the portfolio will ever actually hedge the equity portion again because what we've seen thus far this year is that you've had greater price depreciation than you've had annual income generation. And so that has given you negative returns in a balanced portfolio. So what my clients want to know is whether or not it's the right time to step into fixed income and at what part of the curve should they be on if they do enter fixed income markets at this point.

- Anwiti, the Dow down 11%, the S&P 16%, and the NASDAQ down 25% year to date. Where exists the opportunity in all the losses?

ANWITI BAHUGUNA: So, Dave, that's an excellent question. And I think I want to sort of piggyback on something Kevin just said. In balanced portfolio, which is what we manage in multi-asset portfolios, we've seen a lot of pain on both the equity side and the bond side.

So as of last month, we actually increased our fixed income allocation because we think a lot of the Fed's pricing on interest rate side is very much reflected in the fixed income market. So we increased duration and added to fixed income in our balanced portfolios. I think commodities continue to be a hedge for inflation worries if they are to continue beyond the next few weeks.

And really until last month, bonds were not a good hedge. But at the levels of rates that we are seeing them now, they are providing hedge on a day like today when markets are now worrying, as Kevin mentioned, that maybe inflation will lead to a growth slowdown. And that's what we are seeing today. We have seen a bond rally after a really long time. And that's a decent thing to hold in portfolio when you have growth worries.

- Kevin, when we talk about growth worries, the possibility here of a slowdown, I guess how big of a drop or how big of a slowdown could we potentially see, at least in the short term?

KEVIN NICHOLSON: I think in the short term, we can see the S&P get down to the 38,000, 37,000 levels. One of the things that is concerning for us right now is that we're starting to see the trend actually decelerate the 200-day moving average. From a technical side standpoint at our firm, we follow three important rules of don't fight the Fed, don't fight the trend, and beware of the crowded extremes. And right now, two out of those three rules are being violated. I mean, the trend is turning negative. And we've been fighting the Fed because the Fed is not on investors' sides right now. So that is creating the bearish sentiment for us right now in the markets.

- And Anwiti, I want to ask you about strategy because obviously just because the stock is cheap doesn't necessarily mean it's a good buy. So in terms of the strategy that you're using to determine where is a good place for investors to put their money, what strategy or formula are you using?

ANWITI BAHUGUNA: Yes. Excellent question. Not everything cheap is fully discounting what's happening in the market. But I think as I mentioned, we think the rates market is fully discounting the Fed action. Similarly, parts of the equity market have actually gone way beyond what the growth worries might be. One of the areas we like within equities, we continue to have a barbell of a defensive US equity allocation along with liking emerging markets where I think a lot was priced in, not just this year, but even last year or so. So at this point, we are adding to emerging markets. We are adding to S&P 500.

- And, Kevin, whether it be the sell off we're seeing or the CPI number that we'll get later this week that Anwiti referenced, could anything change the calculus of the Fed?

KEVIN NICHOLSON: I think that the thing that could change the calculus of the Fed is if between now and their next meeting there's going to be two opportunities to see inflation prints. And so if we see a deceleration in those two CPI prints, then I think that that may help to change a little bit of the hawkishness of the Fed at this juncture. But right now, I just don't see that happening just because of the fact that you still have China locked down.

The thing that we must remember is that the Fed can control the demand side of the curve, but they cannot control the supply side. And that's the part that we really need to get going so that we can get rid of these supply chain bottlenecks and actually try to bring prices down that way because the supply side of the equation is what's really driving inflation at this juncture.

- Our thanks to Kevin Nicholson, RiverFront Investment Group's global fixed income chief investment officer, and Anwiti Bahuguna, Columbia Threadneedle Investment senior portfolio manager and head of multi-asset strategy.