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Market outlook as Powell testifies before House panel

Katy Kaminski, AlphaSimplex Portfolio Manager and Chief Research Strategist joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: Katie Kaminski, AlphaSimplex Portfolio Manager and Chief Research Strategist joins us right now. And Katie, that's the messaging we're hearing from Fed Chair Powell, talking about being accommodative, really needing to stay there, not thinking about raising rates. What does that mean though, in terms of maybe if he's not able to stick to that and if he catches the market perhaps by surprise here?

KATHRYN KAMINSKI: Yeah, this has been an interesting situation, because to be honest, bonds have been extremely boring for the last couple of months until a little bit recently. We've seen some of the lowest signals for bond trends since April last year. And we're just now starting to see a pivoting in direction with the steepening that we've seen recently.

What's been very interesting today with the testimony, it's sort of stepped back and said everything's fine, but yet today, we're also seeing new highs or at least one-year rolling highs in some of the yields in the longer term bonds in the US. And the reason why people are so concerned and why he's addressing this, is the markets have said something different from what he's saying.

If you look at price direction, the reflation trade that's happened since last year, it's sounding some alarms. People are asking questions. Why has this been such an incredible move? If you look at copper prices, they're the highest since 2011. Oil has been massively moving. So if that's the case, you're seeing sort of this steepening of the curve that's just short-term, and we're wondering, could that continue at some point. We're sort of at a low point right now, but could this be the beginning of some more of a spread on the longer end? Perhaps less so on the shorter end.

AKIKO FUJITA: So Katie, if there is this divide between how the Fed chair at least publicly sees it versus how the market's interpreting it, how do you view it? If we're looking at the 10-year right now, to your point, it's above 1.4%. We haven't seen those levels since February of last year.

KATHRYN KAMINSKI: Yes, we're seeing it as this is an indication that this reflation trade has bugged the market a little bit. And you're seeing that in the equity market as well, because there's a divergence between which equities are being affected by the recent turbulence. You look at the markets today, tech is down more, things with longer term growth-oriented cash flows.

If rates were going to eventually on the longer and be going up due to inflation or something that we're not really pricing in, this could affect growth companies and tech a little bit more. So rate-sensitive industries, rate-sensitive companies are definitely affected by this. We're actually seeing that bonds are at an inflection point. And we need to keep watching to see which direction this trend is going to go.

ZACK GUZMAN: It does seem like that has been the messaging, or maybe not the messaging, but the market sense for a little bit. We've been hearing from some of these market watchers, Goldman Sachs I think moved their expectations forward in terms of when we're going to see that first rate hike. So I mean, it's been happening maybe on the back burner for a while. But what does it mean for the market? Because we're still pretty low. I mean, what's the level where maybe on the 10-year you'd start to see people think about shuffling some money from equities back over to treasuries?

KATHRYN KAMINSKI: Yeah, that's a good question. I think the level and the rates at which the Fed is either going to act on either direction are sort of up for question right now. I think it goes both directions. What's the level where they might need to intervene because yields have gone too high already? And the longer end is something that a lot of people are talking about.

And then the same sense, at what level of unemployment and what level would the Fed come in and say that we could actually consider raising rates. So right now, the indications are that they're not going to do anything for quite some time. The markets, I think perhaps the data point that's been the most fascinating to me is more just the relative moves recently, that longer term yields have been moving much more than the shorter end, which has less control by the Fed. And that, to me, is suggesting that the market and the Fed's short-term outlook could be different, and that people are uncertain about the longer term versus the shorter term right now.

AKIKO FUJITA: So Katie, let's talk about how you're positioning yourself in the context of that. We've really seen the reopening trade pick up steam over the last several sessions. I'm looking at the airlines right now. All up in a big way in the session right now. How are you positioning yourself there? And is it too soon to get so excited about these names, especially sort of given the debt level, the balance Sheet? The expectation seems to be that activity may pick up, these companies certainly have a long road ahead to come back out and dig themselves out of the hole they were in as a result of the pandemic.

KATHRYN KAMINSKI: Yes, that's a good question. And what I would say, is that we're seeing positive sentiment has been coming back in the last couple of days. There's been some turbulence. But all in all, there seems to be also some positive news. I mean, the Fed's commentary in some sense is very calming. You're also seeing some positive news about vaccines right now. Again, the Johnson & Johnson news today. And so there is some positive sentiment for some of these names that have sort of a long way to go given what we've endured for the last year.

AKIKO FUJITA: OK, Katie Kaminski, good to talk to you today. AlphaSimplex Portfolio Manager and Chief Research Strategist.