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Stock market rout 'is all about interest rates,' equities strategist says

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UBS Global Wealth Management Head of Equities for the Americas David Lefkowitz joins Yahoo Finance Live to discuss what to expect in the market with interest rate concerns.

Video Transcript

ALEXIS CHRISTOFOROUS: Bring in David Lefkowitz now to the show, UBS Global Wealth Management Equities for the Americas. So, David, just want your thoughts on how today feels in terms of the selling. Is it orderly? Does it feel like there is some capitulation about to happen? Or do you think that this is, perhaps, the start of something bigger and deeper for Wall Street?

DAVID LEFKOWITZ: Yeah, thanks, Alexis. So I would say it's largely just a continuation of what we've been seeing so far this year. And if I had to sum it up, it's all about interest rates. You guys were just talking about how the 10 years hitting a COVID-era high, that has big implications for the internals of the market.

So all the companies and stocks that have really benefited from extraordinarily low not only nominal interest rates, but real interest rates also, are seeing the biggest selling pressure. Now, financials also, you know, because some concerns about elevated expenses, I think that's more particular to financials. You know, we haven't really seen broad earnings reports from the broader market yet. So we'll get a better read on that soon.

But I think today is all about-- it's really just about interest rates. And if I look at the economically sensitive parts of the market, I look at high yield spreads, look at the fact that energy is up, some of the cyclicals are outperforming today-- it says to me that the market's not concerned about growth. It's more just a repricing of the appropriate valuations in light of these higher interest rates.

KARINA MITCHELL: And so the market has priced in four rate hikes at this point. Jamie Dimon says be prepared for up to seven rate hikes. And Bill Ackman over the weekend said the Fed should consider lifting by 50 basis points at the beginning just for shocking and awe value, and to show that the Fed is credible. Where do you stand on that? And then when does inflation start to moderate?

DAVID LEFKOWITZ: Yeah, Karina, we're looking for three interest rate hikes this year with the first one starting in March, and the Fed also beginning to wind down its balance sheet-- in other words, letting the bonds that are maturing roll off its balance sheet-- so less bonds that it's holding. Basically, the market is kind of at three or four rate hikes at this point.

I think it's also important to point out-- expectations around the Fed have gotten increasingly more hawkish. In other words, the markets are anticipating the Fed getting more aggressive about normalizing policy, raising interest rates. That really started happening in June of last year, and yet equity markets are still up around 9% or 10% over that period.

So I think the equity markets can handle a more hawkish Fed, because we're still not looking at restrictive monetary policy anytime soon. Just bear in mind, the starting point for where the Fed is raising rates is extraordinarily low, especially in the context of a pretty healthy economy. On inflation, we are looking for it to moderate in the late winter, early spring.

You know, most of the inflation is coming on the good side of the economy. And goods consumption should start to moderate a bit. Supply chains catch up, that should lead to a little bit of cooling off in inflation. Plus, over the last year, oil prices are up, you know, rough numbers-- 50%. They were depressed a year ago, they're not depressed anymore.

So we're not going to see the same type of increase in oil prices over the coming 12 months. That should also help to cool off inflation. And we look at the labor market, yes, wages are rising especially in certain segments, especially at the lower end. But if you look at the broad measures of the wage market, we're not seeing yet any signs that there's kind of a wage price spiral and the Fed has therefore lost control. So I think there are good reasons to think that inflation will moderate over the balance of this year.

ALEXIS CHRISTOFOROUS: And you mentioned oil, now at its highest level in seven years. Of course, geopolitical tensions between Russia and Ukraine could be a wild card there. But, David, before we let you go, I want to get your thoughts on the bank stocks. Because we had a rare miss over at Goldman Sachs, profits last quarter falling by double-digits, similar stories last week at JPMorgan and Citigroup. In fact, Goldman and JPMorgan are the two big down performers for the Dow Jones Industrial average today. What's your outlook overall for the big banks this year?

DAVID LEFKOWITZ: Yeah, so I think we need to be a little bit careful when we look at all the banks, because the two companies that had the most increase in costs, and that was really part of the issue, are really the capital markets-sensitive ones. It's the ones that are really exposed to trading, investment banking, that kind of stuff.

That's where we're seeing some change in the business dynamics. But if you look at the core lending function, you can look at the Wells Fargo, for instance, they actually raised guidance on the fact that the Fed is going to be raising interest rates, long-term yields are higher, that helps their earnings. So you really have to get a little bit more nuance when you look at it.

We like financials. We think they have benefited from higher interest rates. We think interest rates will rise a little bit more. We have 2% on the 10-year by March. That should help the sector. And that's really what our call comes down to. And that helps that kind of core earnings-- the core lending earnings that a lot of the standard commercial banks have.

ALEXIS CHRISTOFOROUS: All right, David Lefkowitz, UBS Global Wealth Management's Head of Equities for the Americas, Thanks for being with us.