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Markets ‘are appropriately discounting’ the Fed being ‘behind the curve’ on rate hikes: Strategist

Acorns Chief Investment Officer Seth Wunder joins Yahoo Finance Live to discuss how the stock market is faring after Fed Chair Jerome Powell's speech on Friday on the next moves by the Federal Reserve to fight inflation.

Video Transcript

- Seth, it's great to see you. So certainly, Powell making it very clear last Friday that the dovish pivot that may be many investors, may be what the market was hoping to see, likely won't happen. What does this mean for equities over the coming months? Should we anticipate more selling ahead?

SETH WUNDER: Yeah, I mean, it was a no choice move, right? I mean, he quasi-pivoted maybe a little bit earlier than he should have. But if you were wanting to clap last year, I mean, the fed was talking about inflation being transitory, and they really didn't know what they were talking about.

And so at this point, for them being hawkish in that position, it allows them to basically put the line against-- or put the wall up to say we're not going to back down from inflation at this point. Most risk assets didn't move, right? So yeah, the markets gave back. The stock market gave back some of the summer rally, but we're still 10-plus percent off the lows.

But if you look at the bond market and you look at the spreads between 2-year yields and 10-year yields, in most of those, most of those movements last Friday were fairly benign, and even today, the same.

And so whether there's more future selling in the markets to come, you know, we'll see. I think it's going to depend a bit more on the jobs data, future commodity price moves, and so forth. And so let's take it for where it is, but let's also just remember that if you go back to 1982, the markets rallied dramatically before Volcker took the foot off the pedal against inflation. So there's reason for some optimism ahead.

- Since we're hearing a lot about a number of 3,600 as a new low, do you think we'll retest those early to mid-June lows?

SETH WUNDER: It's not an abnormal thing for the market to retest lows. It has that sort of healthy backdrop to see where there are buyers and sellers. We are going into some of those seasonally choppier months of the year, but there are no rules. I mean, we don't have to retest.

It's obviously not lost on any of us how negative the sentiment is at the moment, and we'll have economic data over the next couple of weeks that will give some tea leaves for where the Fed will be, not just at the September meeting, but really when you look at the rest of the meetings throughout the year.

So should our expectations be a retest? Sure. But if we're pleasantly surprised by that, then that would be a great outcome.

- So Seth, do you think the markets are correctly pricing in the risks right now, given what they saw from the Fed?

SETH WUNDER: I do, yeah. I mean, if you look at-- I mean, look at inflation at the moment. Unleaded gasoline has been flat to down now for about six months. Most of the commodities leading indices have stabilized over the last several months, as well. You've seen a lot of the inflationary data, whether it be at the PCE level or CPI, have all normalized and have stagnated month over month.

I mean, the markets are appropriately discounting the idea that the Fed is likely going to actually be behind the curve on its rate increases, and so the opportunity for some relief is in front of us. But for the moment, while there's a bit of uncertainty given where overall bond markets are saying that we're likely to be a bit more of into a recessionary camp into next year then we are worried about inflation, that seems to be the appropriate stance for us to take at the moment.

- Hey Seth, there's certainly has been lots of talk from the Fed about the labor market, how the fact that we need to see the labor market begin to cool in order to get inflation under control. We're going to get that jobs number on Friday. What are you anticipating we will see? And when do you think we will see maybe the labor market substantially weaken or at least to what the Fed is anticipating that we could see?

SETH WUNDER: Yeah, I would actually argue that people are fixated on this in somewhat of an incorrect way. We have had very high levels of employment or low levels of unemployment, and yet have had low inflation in the past. And so this "have to break the labor market in order to achieve their goals" dynamic is not necessarily a certainty.

I mean, I understand why the Fed chair is conditioning people for that, and that's a smart way to set expectations. But the reality is that the energy markets and the derivative impact of the energy markets through the economy that are is a fundamental problem that we're facing at the moment, which is outside the Fed's purview.

And so we'll see. The job market broadly seems to be quite strong. If we have a little bit of a softening or so forth, it doesn't seem to be at an alarming rate at the moment, certainly that there's opportunity for continued consumer spending.

I wouldn't be shocked if we can start getting into a narrative around a little bit of a Goldilocks dynamic, where the job market suffers just a touch, energy markets and so forth and commodity markets pull back a bit more.

And so we can still have this healthy baseline economy with a little bit of higher rates and still economic strength, without having to tip over into some sort of economic mess. And that would certainly be the best outcome for both investors and for Americans.

- Given that dynamic, Seth, that you just described, could we be at risk of the Fed over tightening?

SETH WUNDER: Absolutely. I mean, they are so determined on tightening until the job is done, data dependent and backward-looking and so forth, I think the markets will anticipate their job for them quite quickly. So we'll see what's in front of us from a risk asset point of view.

And at the same time, let's not forget, there's not just the rate market. There's also QT that's going on at the same time. So they run their risk. They're running fast. It certainly is always easier to unwind the moves that they make than it is to catch up, so I don't blame them for where they're at. But that is the poignant risk that I think we all should be aware of.

- And Seth, how are you identifying the good opportunities in this market?

SETH WUNDER: Well, the easiest thing at the moment is to recognize that the diversified angle of just looking at the market more broadly is the opportunity that's presented in front of us. If you look at-- take the early '80s, for example. I mean, trying to pick subsectors when the market funds, the relief rally, and so forth can be very difficult, and the rotational aspect of subsector dynamics, particularly between tech and commodities or energy-oriented stocks, is hard.

And so if you think about just the average customer or the average consumer or the story of the average investor. I mean, sticking with a diversified framework, whether it be the S&P 500 or something broader like the Russell 3000 or so forth, makes a ton of sense. And so I don't-- I wouldn't overly focus on either subsector's stock specific ideas right here.

- Seth, we're going to let you go. We hear your kids screaming in the background. It sounds like you might be needed back there. Both Dave and I, and Rochelle, too, are very accustomed to what that's like, working from home. Seth, thanks so much for joining us. We really appreciate it.