Retail investors ‘so programmed to buy the dips’ caused market to rally, strategist says

Michele Schneider, Marketgauge.com Partner and Director of Trading Research & Education, joins Yahoo Finance Live to discuss how to invest in the market on a dip, energy market pressures, the job market, recession concerns, the Fed's interest rate hikes, and inflation.

Video Transcript

EMILY MCCORMICK: Michele, thanks for joining us this afternoon. I want to first ask about the price action that we've been seeing in US stocks. Even with today's losses, the S&P 500 is still up five out of the last seven trading sessions. What do you think is the biggest driver of volatility right now that we've been seeing across markets?

MICHELE SCHNEIDER: I think it's really a battle between the retail investor right now that is still so programmed to buy the dips, thinking that things actually got to a fair value. And then the reality of the fundamentals that we have-- the Fed really hasn't really done that much, but if they're saying what-- they're going to do what they're saying, could actually drive us into somewhat of a recession, although I don't think so. And then, of course, the inflation and the war and the higher energy prices.

So this disconnect gave us a rally from the lows to about mid-point to where we were at the peak highs. And that's kind of a normal type of rally at this point. Whether we consolidate and go up from here, hmm, maybe. I'm more in the camp that we probably will work our way down and find this trading range that will continue to be very choppy and nagging and volatile for a while to come.

RACHELLE AKUFFO: And amongst all this choppiness, obviously, with one eye on what's happening with inflation, now you said in your notes that you don't see a recession in the cards, but rather, this period of stagflation. But could a 50 basis point hike be the tipping point into recession? Or are the fundamentals of the economy strong enough to withstand such aggressive action from the Fed at the next meeting?

MICHELE SCHNEIDER: Well, of course, it's hard to have a crystal ball, but I'm counting on a couple of things because we're in an atypical period, having come out of COVID. Number one, of course, is the fact that we have a labor market as such where typically, in a recession, you will start to see a lot of layoffs. And we have a situation where we still have 10 million jobs that need to be filled. And of course, part of our supply chain problems has been that a lot of people haven't gotten back to work yet, particularly in the transportation or in the trucking business.

And the other reason is that we are coming back from a period of really, basically, being at home and regardless of what's going on in terms of new COVID scares that have emerged, people want to get out, and they want to travel and they want to go back with their lives. So these rising gas prices haven't really impacted things like transportation and some of the stocks in the transportation sector as much as one would think. Now, will that change if they go up a half a percent? I think what we're going to see here really, again, is maybe another dip down, but at some point, this sort of trading range or this floor. And if we do have any kind of recession, it would be very short-lived and, again, stagflation, which can last a lot longer.

DAVE BRIGGS: Michele, how do you think--

EMILY MCCORMICK: Michele, speaking--

DAVE BRIGGS: Oh, excuse me. Go ahead.

MICHELE SCHNEIDER: Keep them coming.

EMILY MCCORMICK: Well, and speaking of--

DAVE BRIGGS: I was going to ask you about the--

EMILY MCCORMICK: --a 50 basis point rate hike, how low is the bar right now? What do you think needs to happen on the economic or geopolitical fronts to signal to the Fed that that bar has been cleared and a frontloaded rate hike is what's on the table next?

MICHELE SCHNEIDER: I think it should have happened already, quite honestly. I think they should have been less concerned, especially as we saw a surge in the market, as we went through the summer and into the late fall of 2021. That was probably the first opportunity because at that point, even though oil wasn't necessarily going crazy, we could see it in industrial metals, we could see it in food prices, and so they kind of missed that first level. And so at this point now, I think they've lost a lot of credibility.

And if they raise by a half a percent, it may not even be taken so seriously at this point. It certainly should have hurt certain areas, obviously, and particularly, as we're seeing now with mortgage in the housing industry. But overall, I think that the Fed at this point, unless they went even more aggressive on their rate of change in terms of how fast they raise the rates, that would be something to keep an eye on. But they're looking like they're going to keep it relatively slow.

DAVE BRIGGS: Michele, you referenced history in your notes, dating back to the post-World War II era. Have we learned from history, or are we bound to repeat it?

MICHELE SCHNEIDER: Well, we seem to be bound to repeat it as human beings in general. But the reason why I brought up the point about World War II is we had two different types of inflation. We had the kind of post-war inflation because, obviously, there was just a stop of producing a lot of goods because everything went to the war effort. And then we had the late '70s inflation, which was on the heels of rising oil prices and geopolitical concerns.

The Fed acted differently in both ways. And back in postwar war, they limited the availability to credit, and they reduced the balance sheet and they reduce the money supply, but they didn't tighten. Now, in the '70s, of course, Volcker tightened tremendously, as we know, and that put the kibosh on the whole inflation thing.

And here, the Fed is kind of trying to feel which way they want to go. And I think that that's really where the history now mistake can be made more to repeat kind of with the '70s, where things go out of control, because I don't think the Fed really knows yet which way they want to go. And that's part of the problem. And that's one of the reasons why we're seeing the market even holding this rally of the last, as you said, five out of seven days.

RACHELLE AKUFFO: And Michele, you mentioned geopolitical issues. Obviously, the Russia-Ukraine conflict still ongoing. In your notes, you said you're watching what's happening in the forex markets. What are you keeping an eye on in terms of opportunities there?

MICHELE SCHNEIDER: Well, this is premature, so I will admit that. But I find it intriguing because there's been a lot of buzz about the US dollar. The US dollar right now, of course, have been a safety haven. And as we know, petrol is priced in dollar. And there's been buzz about the dollar actually being a bit too strong, that there's a lot of global skepticism about the dollar remaining the world currency, and also China now talking to Saudi Arabia, which they've done before, but about pricing the oil from Saudi Arabia in actual Yuan.

So this got me interested in the euro. Now the euro with the Ukraine situation is going to remain under pressure. But every time the euro gets on par with the dollar, we see a bounce. We're not that far away. So one or two things are going to happen. Either the euro is going to break under-par, in which case everything I'm saying will be wrong, but on the other hand, if it can hold here above par and start to move up, and we start to see the euro, let's say, through the FXE get back over 103, that's going to tell me that the market is foretelling perhaps that the Ukraine situation and the oil situation will resolve, or at least, abate, and that the euro might be really undervalued and ready for a big pop.

DAVE BRIGGS: Michele Schneider from marketgauge.com, appreciate you. Thank you.