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Markets: ‘I do think we’re getting closer’ to a bottom, strategist says

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Chris Pollard, Cowen Managing Director and Head of Market Strategy, sits down with Yahoo Finance Live to check out today's market rally and recession indicators in the job market.

Video Transcript

- Joining us now for more on the markets is Chris Pollard, Cowen Managing Director Head of Market Strategy. Thank you for joining us today. So as we were saying, a very different story here. In terms of what you're talking to your clients about, whether it's inflation, the Fed policy path, what we're seeing with a decelerating economy. What are their main concerns at the moment?

CHRIS POLLARD: Sure. So obviously, inflation is front and center, especially after last week's broader print, but that's really been an overarching theme throughout the whole course of the year. The real conversational point is around the policy path moving forward in terms of the reaction to that inflation.

And we really think that when we're advising clients right now, while there are signs that we're getting closer to a point where you should have some optimism both with regard to the risk-reward in equities and the potential for some moderation in those inflationary pressures, of late, some of the optimism that the market has been gleaning and trading off of has been a result of an anticipation of a more pronounced policy pivot towards the other side next year, and we think that is a bit inappropriate given the sum total of the evidence, particularly the broader inflation print from last year.

- Look at the numbers, Chris. It's astounding. I mean, we're talking about nearly 700 points on the Dow. What rallied the markets today? Was a conversation started today about IBM and J&J and, to Shauna's point, concerns about the dollar? How do you explain this rally? Have we found a bottom?

CHRIS POLLARD: Sure. So I don't think that we found a bottom. I do think we're getting closer. I think the point about the dollar is one that's well made, and certainly, we're on the cusp of some other central bank meetings and decisions, which is taking the focus towards some interest rate differential closures as those banks move on their hawkish path and that's taking some pressure off the dollar here.

Really, what we would be saying is that look, we still haven't fully appreciated the downside within the corporate trajectory that we're going to see from both the inflationary pressures, the dollar year to date, and also the changes in the consumption patterns that we've been seeing year to date in what should be and what should persist from here. So while it is nice to see some upside and some relief and certainly we were at levels that were deemed to be both oversold and also a little bit under positioned. There had been a lot of selling, a lot of disengagement with risk more broadly.

That relief has been welcome, but also, that risk is a little bit temporary. Like we said, we are getting closer to a point where there will be an opportunity for more meaningful engagement. But I think the best way to frame the market right now is that if one is being optimistic, the market is fairly valued. And given the sum total of the risks that are still out there, fairly valued is still a difficult risk-reward proposition in our view.

- So Chris, then how should investors be positioned at this point? Because there's so much uncertainty, especially over the next couple of weeks. Lots of focus next week is going to be on the Fed announcement, how big of a rate hike we could potentially get. What does that mean for individual investors?

CHRIS POLLARD: Sure. I think look the names that have really benefited since mid-June in the last Federal Reserve meeting have been the highest beta areas of the market. Some of the names that are sort of non-profitable technology, but it would be a way to sum that up. And those names some have had very pronounced movements. And this is an opportunity to sort of pare back on some of those exposures.

I think using this time, this counter-trend movement, to raise some cash and to provide yourself some optionality for what should be a push towards new lows is what we would be advising here because, like we said, ultimately, the risk-reward proposition at lower levels is going to be one that is increasingly favorable. Certainly, recession is not our base case over the next 12 months here. And so, assuming that we can move down to a more appropriate multiple footing and one that discounts what should be a negative revision past-- excuse me-- as we move through the summer, that is going to be an interesting opportunity for investors to engage.

So finding some ability to raise some cash here, having a little bit of a defensive bias into this strength, and realizing that the movement that we've seen over the last couple of weeks is unlikely to be durable upside is the way we'd be advising. But the next push lower should be opportunity, and in our mind, specifically, if the market can find a footing sub 3,500, we would be looking to more meaningfully engage.

- Now, Chris, we know some investors, including Cathie Wood, believe we're already in a recession. We saw from the Atlanta Fed GDP Now data that they're predicting that we're already in a recession. What are some of the indicators that you're keeping an eye on outside of what would be called a technical recession, depending on what we see with Q2 data?

CHRIS POLLARD: That's right. Technical recession is certainly possible when one incorporates import export calculus within the broader aggregate demand function. Things that we would be looking for are measures that we've heard the chair mentioned in some of his past conversations, measures like the near-term yield curve. So sort of the three-month versus the 18-month forward three-month curve, which still has positive slope in it. If that starts to inverse, that would be problematic.

But also, in another point that the chair has focused on for a number of months now, and rightly so, measures like the amount of job openings relative to the unemployed population. That number is still hovering still around the 1.9 job opening for every unemployed person. That number had gotten close to two job openings at one point this year. The labor market is still extremely tight.

So those type of measures were to decelerate, those would be signs that the bi-financial condition tightening in the overall monetary policy stance shifting towards a more hawkish footing is really starting to hurt the economy in a more aggressive way. It's also important to keep in mind that the US economy, really, since last summer and certainly up through Q1 in nominal terms, was still operating with a positive output gap. So a lot of the drawdown or the weakness that we've been seeing in higher frequency data or areas like diffusion indices things like the PMIs or ISM, that's really the normalization of the economy back to trend potential from what was a stance well above that trend potential.

And so that's important to keep in mind. This is very much a rate of change deceleration rather than an absolute contraction for the US economy. Certainly, we could fall below that trend in the risk of recession has is unambiguously built over the last six months. But I think it's far too early to say that we're in a recession right now.

And though it is a nominal data point, I would point to the retail sales data from last week. There was a modest acceleration month over month, and we even saw some engagement with discretionary goods in that reading. So I think it's too early to suggest that either consumers tapped out or that labor is at a point which would be reflective of a recession. So I think that is at least a piece of why we have some optimism if we do have further weakness.

- And there we go. Above 700 on the Dow as the NASDAQ approaches up 3%. Big week, though. Tesla, United American, Snap, Twitter, Verizon all report this week. Is there a common thread among your expectations?

CHRIS POLLARD: So we would expect to see outlooks drawn down, potentially further concerning comments about hiring freezes or potentially some layoffs. Look, the economy is decelerating. That's by design. That's part of the financial condition tightening that the Fed is embarking on to bring prices under control. We would expect that the corporate outlook does start to deteriorate.

The key question in our mind is, does that start to bring down consensus? The entirety of the drawdown year to date has really been a function of multiple compressions, and the consensus outlook for earnings has remained fairly static. If anything, it's seen some slight positive upside. So we would expect the corporate commentary to start what is the beginning of some fairly pronounced downside revisions and bringing the price and earnings mix back into a more appropriate balance given the overall state of the economy here.