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May CPI report ‘really took any kind of idea of pausing rate hikes off the table’: Strategist

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Cameron Dawson, CIO at NewEdge Wealth, and Omar Aguilar, CEO and CIO of Schwab Asset Management, join Yahoo Finance Live to discuss how the May CPI data may influence the Fed's rate hike decision and the market sell-off.

Video Transcript

[MUSIC PLAYING]

DAVE BRIGGS: And there is your closing bell on a very difficult [? day ?] to start this week, a couple of days away from the Fed meeting. And here are your numbers to close this day, the Dow dropped 874 points, 2.8%. The S&P is as we mentioned, in full bear market territory, down 20 plus percent as it falls 3.87%. The NASDAQ dropped 530 points or 4.7% on a very difficult Monday.

Let's talk more about the markets after that check brought to you by tastyworks, with Omar Aguilar, Schwab Asset Management, CEO and CIO, and Cameron Dawson, Fieldpoint Private, Chief Market Strategist. Cameron, we'll start with you, is this irrefutable proof that the Fed needs to rethink their previous positioning and raise the Fed rate 75 points on Wednesday?

CAMERON DAWSON: I think that Friday's CPI report really took any kind of idea of pausing rate hikes off the table. That was something that was being entertained last month when we saw the market rally. But given the fact that there is no slowing in inflation, it really makes the Fed's job very difficult to argue for any kind of accommodation.

So it's interesting this afternoon we saw the market take a bigger nosedive when an article came out talking about that 75 basis points could be on the table for Wednesday at the FOMC meeting, it was written off completely, backed by Powell saying that they wouldn't consider it in June or July. But certainly, we're starting to price it in. Which just shows that the Fed is being pushed to pull forward rate hikes and really slam the foot on the brakes of this economy.

SEANA SMITH: Omar, what do you think the Fed should do? Lots of debate whether we should see that 75 basis point hike. Do you think it's warranted?

OMAR AGUILAR: Well, you know, clearly you know, the Fed has a difficult decision to make because, on the one hand, they realize inflation is not as transitory as they thought last you know, year, with the data that we saw at the end of last week, it clearly confirms that this inflation is more sticky than what everybody thought. On the other hand, you know, I think their forward guidance has always been on this concept of data dependency. And when you put those two together, you know, the discipline that they have you know, created and have in a way put in front of the market is that these 50 basis points is probably something that they will continue to [? that, ?] even though the odds of a 75 basis points this Wednesday are higher than they were you know, on Thursday of last week, I think they'll still maintain their discipline and they mostly will be hawkish in their discussion after the meeting.

RACHELLE AKUFFO: So Cameron, as we've seen, inflation not peaking yet, what is the play here in terms of defensive plays or, is it better to just sort of hold onto your cash until some of the dust settles?

CAMERON DAWSON: Well, certainly we're seeing rotation into defensives. You could see that today, where everything was down. But you saw areas like utilities and staples and health care outperform more cyclical parts of the market. So that's a fairly consistent playbook that we normally see during market corrections. And the next point is really layering in quality into portfolios because what you're trying to find is specific instances of companies that are resilient in uncertainty like this, that they have the resources to be able to navigate cycles, meaning that they have strong balance sheets, that they can buy back shares on the cheap or that they can do opportunistic M&A.

And the last point in that is that we really can't pay any price for that quality. Because when the Fed is tightening, valuations get hit invariably. And so what you want to make sure is that you're not buying names that are trading at still are elevated multiples. And that's one of the reasons why we continue to see growth underperform value, where tech stocks underperform the market because if you think of growth, it's still trading at a 32% premium to the market despite its underperformance this year. So we think that there's still some air to come out of those growth, techie, kind of innovative type of multiples as we move through this liquidity tightening cycle.

DAVE BRIGGS: Omar, I hate to dwell on this looming decision on Wednesday but with inflation at a 40-year high, consumer confidence at an all-time low, the S&P down 20% year to date, and the NASDAQ 30, if that's not the conditions for a 75 point hike what is?

OMAR AGUILAR: Well, it's a good point. And you know, the consideration here is that we're in a period of big transitions and the transitions in this particular cycle have gone very fast. Go all the way back from the recession in 2020 and when you actually think all the transitions that we're going now from tightening conditions, lower liquidity, overall going into the last phase of the economic cycle, they have been you know, going pretty fast.

And the bigger transition here is going from a goods-level economy to a service-level economy that started after the reopening after the pandemic. I think when you think about the concepts of what the Fed is putting into context is how much of this is timing for that goods inflation eventually to go away or at least to be reduced in something that they can control and they can control by reducing demand towards the services part. I mean, certainly, they don't have control over commodity prices, they don't have control over certain parts of the inflation picture but they do have control over trying to reduce and destroy demand so that they can figure out that that is going to take some time. So the bigger question becomes if you shock the market right away knowing that it will take a lot to try to catch up to the inflation figures, then eventually you will basically just spook the market even further. So I think it's just more how much you can actually put the brakes on without necessarily [? dipping ?] this too fast into the last part of the cycle.

SEANA SMITH: And Omar, we certainly have seen a lot of the jitters that investors have right now when you take a look at the market's action today with the Dow-- with the S&P excuse me-- closing well below 3,800. We know that level was so critical, that psychological level, for so many traders out there. Now that we've closed significantly below that at 3,749, what's the most important level that you are paying attention to when we try to gauge whether or not some of the selling pressure is going to continue?

OMAR AGUILAR: Well, we don't necessarily look for a specific number or the [? specific ?] technical number. What we basically look at is what does that mean for the long-term strategy. And particularly days like today you know, what we encourage investors is to basically rebalance their strategy in a systematic way so that they can take advantage of some areas, for example, on tax-loss opportunities that allow us to rebalance their strategy and take a proactive stance towards when you can see these kind of market sell-offs.

During this part of the cycle, we observe a significant amount of levels of volatility. And what we try to encourage our investors is that this is not a good time for us to try to guess when the bottom of the market will be or when you try to time where the next rally will come. This is the time to maintain that discipline where you can actually rebalance and use this volatility in a way to just try to get back to your long-term portfolio strategy.

RACHELLE AKUFFO: And Cameron, what are the most common questions that you're getting from clients at the moment?

CAMERON DAWSON: I think clients are still asking if they should be reducing risk at this time. And I think Omar makes a really good point, which is that we don't want to be selling into fear and selling into a capitulative flush. We think one of the greatest errors that investors can make is that they sell after a correction and then they're too scared to get back in because they missed the first part of the next move. So it's really about taking a long-term perspective.

That doesn't mean do-- not doing anything we certainly have been rotating to quality all year. And we're starting to look for opportunities where we're kind of-- we're sharpening our pencils on our shopping list because a level that becomes much more attractive to us is somewhere close to 3,400, 3,500. That's the 200-week moving average, that proved to be a very important support level in corrections all through the prior cycle. But from a fundamental perspective, that gets us back down to the pre-COVID highs.

And so if we think about where earnings were pre-COVID in 2019, today's earnings in 2022 are 47% higher. So even if we start seeing those earnings being revised lower if a recession really does present itself, we think we have quite a bit of buffer. And so at 3,400, 3,500, we might not get the ultimate low but we certainly are setting ourselves up for to-- a few years out to have a much more attractive place to be adding to positions. So we think we'll be much more opportunistic once we start nearing those levels.