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Markets are repricing Fed rate hikes ‘dramatically in real time’: Strategist

Payne Capital Management President Ryan Payne joins Yahoo Finance Live to discuss what the market is pricing in ahead of the Fed's rate hike decision, the recent sell-off in stocks, and stock valuations.

Video Transcript

AKIKO FUJITA: But let's first talk about the Fed. All eyes on the central bank beginning their two-day meeting. And Brian, I'm thinking back to just a week ago. The expectation has shifted dramatically. It was, going into this meeting, a 50 basis point hike. Now it's 75 on the table.

BRIAN CHEUNG: Yeah, so it's been a whirlwind, for me personally. But if we just kind of rewind to the market action that we've been seeing, I mean, you know, you're looking at Fed funds futures markets this morning. This is essentially the betting markets for where Fed policy could be going. And you see right now it's about a 93% chance of the Fed going by 75 basis points at the conclusion of tomorrow's meeting at 2:00 PM. For reference, yesterday, that same figure was about 30%. And then prior to the inflation report, that consumer price index read that we got on Friday morning, it was about 3%.

Now, keep in mind this is during a Fed blackout period. We don't usually hear from the Fed officials. We got that "Wall Street Journal" report yesterday that had the word "likely" in the headline. There was no attribution in that particular story. But Nick Timiraos, who is the reporter with "The Wall Street Journal," someone who's very close with those inside the Fed, so you wonder maybe this was information that was put out there to try to get markets ready for that surprise announcement if that is, indeed, the case tomorrow. But my understanding of it is that it is going to happen probably, that 75 basis point move. And they essentially want the optionality, as they start that meeting today.

AKIKO FUJITA: Yeah, and we've heard from a number of economists as well-- JP Morgan, Goldman coming out with this expectation of a 75 basis point hike. My question to you is, why float that out there now? I mean, some would argue that the shock factor is gone.

BRIAN CHEUNG: They couldn't wait two days. They should have waited two days.

AKIKO FUJITA: The shock factor is gone, right?

BRIAN CHEUNG: Yeah, certainly. And I think that what we need to understand here is that this is such a precarious time for markets, broadly. The volatility, as we saw not even just yesterday, but over the course of 2022, has been remarkable. And when we talk about the Fed, we need to understand that what they've messaged, right, prior to essentially yesterday was 50 basis points in June, 50 basis points in July.

But we have to remember that that agreement, which was codified in the May minutes, was actually conditioned by the fact that if conditions were different, if inflation came in more than they were comfortable with, then they could change that strategy. And essentially, that seems to be what's playing out. Again, we'll get the confirmation of that tomorrow. But again, to your point about why leak that two days before the meeting, I mean, I can't get into the head of Fed Chairman Jay Powell.

But if it is, indeed, the case that he was kind of behind some of this strategy here, it's probably to get markets ready because if you kind of give the optionality of the Fed officials coming into town-- which, by the way, the meeting only started three minutes ago, OK? So this "Wall Street Journal" report preceded the members of the FOMC, the Fed presidents, coming to the table to even begin this discussion.

Well, now, at least, they have an extra bit of information, which is looking at how markets have reacted so far to what is essentially a whole blown conclusion that they're going to raise by 75 basis points. Maybe that gives them a little bit more comfort if they did want to go with that more aggressive route.

AKIKO FUJITA: Well, and then the next question, naturally, is, if they do go for 75 basis points, based off of what we heard or what we saw in the data on Friday out of concern about inflation running out ahead, well, then, what's the next lever, right? I mean, that's a pretty aggressive move--

BRIAN CHEUNG: At some point-- I mean, if 75 is the move tomorrow, you'd think that that might be the new floor, as inflation remains at paces we haven't seen since the early 1980s. If the Fed at some point wants to lower that to 50 basis points again, which would still be increasing interest rates, does that send a whole new message to markets, right? That's something the Fed is going to have to grapple with. That's why Evercore ISI is warning this morning, maybe this is going to be a mistake. We'll have to see how history bears that out.

But let's get a little bit more commentary on this with Payne Capital Management president and "Payne Points of Wealth" podcast host, Ryan Payne. You've been hanging out in the wings, just, I feel like, waiting just to jump in.

AKIKO FUJITA: In studio.

RYAN PAYNE: Chomping the bit over here.

BRIAN CHEUNG: Yeah, yeah, well, hey, you're in with us in studio. Give us your thoughts about what's been going on. I mean, this is pretty substantial, the Fed making this very quick pivot two days before the meeting begins.

RYAN PAYNE: It is, and I think what you said is optionality. And the Fed's been good at signaling ahead of time so the markets don't get spooked. And look, we've already seen a huge move in the Treasury market the last couple of days. So I think the market's already ahead of this, and that's what you want, right? You don't want the Fed to come out with a surprise decision about interest rates. And all of a sudden, the markets go the wrong way.

So I think a lot of that damage is already done. Hence Monday, we saw a cruel selloff. And I estimated it. The Dow is at, like, 30,000. You only take about 32 days for it to go zero at the pace of yesterday. Then we can-- all the assets--

BRIAN CHEUNG: Don't do this to us, Ryan.

RYAN PAYNE: And then you don't own the physical assets for nothing, right? You could own the planes for Apple, Microsoft. We can just divide it all up. But I don't think the market's going to zero, but I do think that a lot of this repricing is happening very dramatically in real-time.

AKIKO FUJITA: So what's likely to happen then? If we do, in fact, hear from the Fed yesterday-- tomorrow, coming back and saying, they are going for that 75 basis point hike, what's the reaction? I mean, we've seen the selloff over the last two days. S&P 500 now in bear market territory. Do we see a rally on the back of a little more clarity and some relief that the Fed is going to move more aggressively?

RYAN PAYNE: Yeah, and I think that's possible here, right? Because I think the dire situation is already being priced in, right? We've seen equities this year go down dramatically, especially anything that's tech related. Bitcoin right now--


RYAN PAYNE: You know, I did call a bubble on your show many months ago, but I do digress.


RYAN PAYNE: And on my podcast, I talked about that as well. But bottom line is you are getting a lot of deleveraging right now in the system. The markets are doing all the heavy lifting for the Fed. And in my mind is, look, you've got this economy that's red hot, right? I mean, look, you have unemployment's come down to a 50-year low. GDP growth over the last five quarters have been over 4%. It's like a runaway train.

And what's the Fed trying to do? They're trying to put the brakes on, and they're doing that, right? You're starting to see it. Lumber prices have come down. Copper prices have come down. So my thoughts are-- and going back to optionality is-- maybe later this year, if things do slow down, maybe the Fed can be less hawkish. And in my mind, that's pretty boarish, right? Because at some point, they surprise, and they don't hike as much as they're hiking right now. That could be very, very good for that.

BRIAN CHEUNG: Well, I guess, though, the question is, how does the train stop, though? Does it hit a wall? Or can it slow down and get that soft landing? What do you think is the outcome here?

RYAN PAYNE: I actually think the Fed is doing a great job. I'm probably not in the majority on that opinion, but I think they are slowing things down. It's not coming to a halt, right? But we're already seeing that again in some of the commodity prices. And I do think that they may get that soft landing where things slow enough that they have the optionality later where they don't have to tighten too much and take the economy off its rails and probably a good chance where we avoid a recession here, no matter what they tell you. I mean, I don't think a recession is a foregone conclusion, like a lot of the headlines are telling you.

AKIKO FUJITA: Let's talk about strategy. You're a big value guy. We were talking yesterday about, really, the broad-based selloff that we saw. Even the energy names were down. What do you do right now? Do you add to your portfolio? Are you looking-- are you finding good buys out there? I mean, what's the thing--

BRIAN CHEUNG: He's not going in crypto, it sounds like.

RYAN PAYNE: Yeah, not going into crypto.

AKIKO FUJITA: You're not going into crypto. You're not going into growth. You're not doing Tesla. But what exactly-- what's the thinking right now?

RYAN PAYNE: I think you buy with impunity here. Look, I mean, as a long-term investor, you buy when there's blood in the streets. There's blood in the streets right now. And it's kind of like revenge of the nerds. Now how horrible it is to go to a party in the last year and be like, oh, I don't own crypto. Who's making all this money in crypto? I feel left out.

Well, all the crypto bros are losing their shirt. You're getting margin calls. And that's selling off all those names that your grandfather loves or your grandmother loves, right? I mean, all those old school value stocks which have held up way better here. If you look at a portfolio of value stocks, it's down less than 10% this year. The only bear market you're seeing right now is in growth, disruptive technology, and Bitcoin.

But the reality of it is now you're getting on-- if you take tech out of the S&P 500, you're trading at 14 times forward earnings. That's so cheap. That's been as cheap as it's been in years. So I think you have a gift from the gods here as a long-term investor to buy.

BRIAN CHEUNG: Well, at the same time, though, if you're getting into value, I mean, it's not necessarily good for your portfolio because as you mentioned, you're just down single digits instead of maybe down deep double digits. I mean, you look at, for example, the banks. I mean, I saw a note from Wells Fargo. Mortgage banking income could be down 50% from the first quarter. That's one of those value stocks, right? So I mean, how much of a-- how thick of a skin do you have to have to get into that right now?

RYAN PAYNE: I don't think that much. I think we've already priced in some sort of recession if we have one, if we don't have one. I think most of the damage is done here. You may get some more selling on the downside. But at this point, you know, how much are you going to get? I think you probably see the magnitude's already been done. The damage has been done at this point. You can buy anywhere in here as a long-term investor, unless you need a yield to lunch today.

And if you're not a trader and you're an investor, like, this is a gift from the gods. You've got to take advantage of it to create long-term wealth. And for our clients, this is when you buy. You need an inflation hedge. Stocks historically are one of the best inflation hedge you can possibly have. Dividend yields are going up this year. Earnings are going up this year. And we may still have positive GDP growth. I'm still in that camp. And these are all good things.

AKIKO FUJITA: So let's end with three names, three names that you think investors should be looking at right now.

RYAN PAYNE: We just talked about the banks. And I think the banks probably have been aggressively sold here. So, like, JP Morgan's a great place to buy right now. Loan activity should go up this year. You should get a steeper yield curve at some point. I still like energy. I think energy is a longer term play. Valuations are still very attractive there. And in addition to that, since we're on Yahoo today, I even like Verizon right now. You know, I think it holds--

AKIKO FUJITA: No longer the parent.

BRIAN CHEUNG: Yeah, we're not.

RYAN PAYNE: Oh, I take that back.

BRIAN CHEUNG: Formerly, formerly.

RYAN PAYNE: Formerly, but they were great when they owned you. So yeah, I think any of those old school value names right now are great to have in your portfolio. And again, don't think twice here if you're a long-term investor.

AKIKO FUJITA: Ryan Payne, good to have you in studio.

RYAN PAYNE: My pleasure.

AKIKO FUJITA: Payne Capital Management president, "Payne Points of Wealth" podcast.