Stock market volatility: ‘We don’t think the bumpy ride is over,’ strategist says

UBS Head of Equity Derivatives Research Stuart Kaiser joins Yahoo Finance Live to discuss market volatility, earnings, inflation, and the outlook for Fed policy in 2022.

Video Transcript

JARED BLIKRE: Welcome back. It has been a year of gut-wrenching volatility in the markets. And investors want to know, is the bottom in just yet? Here to help us answer that very question is UBS's head of Equity Derivatives Research, Stuart Kaiser. Stuart, thank you for joining us here. Always good to see you.

I'm looking at the market, actually. The market is pricing in more and more rate hikes, it seems, every week. And we have inflation as this bogeyman. Then we have some earnings mishaps, if you think Facebook.

All in all, the NASDAQ was off about 20%, 19% plus from its highs. But it's recovered a bit. And you're not ready to call the bottom yet. Why is that?

STUART KAISER: Yeah, we're not. And good morning, Jared. I think our viewers the first few weeks of this year were driven much more by macro concerns-- higher interest rates, pricing the Fed, inflation, and things of that nature. And since then, we've had a window of opportunity here where earnings took over.

And, obviously, Facebook was a big selloff. But a lot of the other tech companies reported really strong earnings and allowed the market to recover. Now that that's over, we've had about 70% of S&P earnings and about 80% of tech earnings have now reported.

We do think the focus shifts back to the macro side of the ledger with inflation this week. And to your point, there's been a lot of macro uncertainty. The ECB, the Bank of England both tightening alongside the Fed now, as well as a series of high inflation prints that we expect over the next few months.

So you put that all together, we just-- we don't think the bumpy ride is over. Whether we retest the lows, I think, is obviously open for debate. But our view is the all clear is not in yet. And the markets will continue to be volatile as we move through the month of February.

BRIAN SOZZI: Stuart, you mentioned Meta. What do you think the aftermath is after a report like that?

STUART KAISER: It depends stock by stock, right? Some companies will quickly respond to a selloff like that through buybacks and things like that or through reassuring guidance to try to support the stock. I think if you look bigger picture from a macro perspective, when you get these kinds of volatile market shocks, it usually does take the market a period of time to recover from them.

The previous-- not last week, but the previous week to that, you had five consecutive days of intraday volatility that would have ranked in the top 5% since 1982. And when we looked at the history of those types of situations, it took one to three months for the market to completely recover. So whether that applies directly to the single stock level, I think it depends on a case-by-case basis. But I think what that does tell you big picture is when you get that kind of shock, there's usually a reason for it. And it does take investors a bit of time to get comfortable reinvesting.

JARED BLIKRE: And then what kind of all-clear signals are you looking for? You mentioned that phrase before. If we're expecting that it's going to take maybe one to three months for the market to recover, how do we know when we arrive at that point?

STUART KAISER: Yeah, I think that's the million-dollar question. From our perspective, it would be, frankly, the markets just simply behaving in a more rational fashion, right? We've had very volatile markets, both close to close and intraday. We had a steeply inverted VIX term structure.

And, frankly, from a fundamental perspective, we believe we're in a period where the forward outlook for growth is decelerating. And inflation has not yet reached its peak. And we don't think it's going to peak for a few months.

So I think, look, some clarity on the inflation outlook would certainly help. Some clarity on the policy outlook, obviously, would certainly help. The Fed seemed to intentionally want to leave a lot of things on the table to give themselves flexibility. But flexibility from the market's perspective means a wide range of outcomes.

So I think, frankly, here, it's we need to see the data continue to improve, inflation to stabilize. And then this is a little bit qualitative, but just more clarity on where policy is going to go for the next few months, because those forecasts, both from the Street and from the Fed themselves, have been quite fluid over the recent history.

BRIAN SOZZI: If I told you, Stuart, that later this week when we get that CPI results, it will, again, come in hotter than expected, that would mark 9 out of the past 11 times that will, in fact, have happened, maybe over 7% increase year-over-year on the headline, what do you think the market reaction would be?

STUART KAISER: Look, I think if we get another above-consensus print, the market's not going to respond positively to that, because they're going to have to ratchet up the hawkish pricing of the Fed yet again. And, to your, 7% last month, the market is looking for something 7 and 1/4% or higher this month and we think you may get a similar print next month, so I think that's the biggest challenge with inflation, frankly, is we've had a lot of very strong prints. We've been beating consensus.

And, frankly, the end is not clear in terms of A, when we're going to see the peak, but B, when we're going to be confident enough to call the peak. You're not going to believe me if I say inflation peaked in March. You're going to want to see a couple of data points after that.

So, again, another above-consensus number. And we're actually a little bit below consensus for this week, to be clear. But I think another above-consensus number, the market would react negatively that, because you would just have to increase hawkish Fed pricing. And it would either delay the time we get to the peak or perhaps increase what people think the peak is going to be. And I don't think either of those things are particularly positive for equity markets.

JARED BLIKRE: And Stuart, I'm going to shift gears here. We're lapping the whole GameStop Reddit phenomenon one year in here. And in your position, studying equity derivatives, stock options and whatnot, I'm just wondering how the character of the retail trader has evolved over the last year, if you're still seeing those flows from some of those retail investors in the same trading manner that they were a year ago?

STUART KAISER: It's a great question, Jared. Look, about two weeks ago when tech earnings were about to kick off, we did see a bit of an increase in retail participation in options markets. But, to be honest, that increased participation was coming off what would have been the lowest levels we had seen in 12 to 18 months. So we have seen a little bit of a pickup during earnings. But we are still, again, at the lowest levels that we saw during 2021 or slightly a bit above them.

So for whatever reason, and there's a lot of people that speculate why retail gets involved versus doesn't get involved, but that participation has declined meaningfully. I think it is interesting that it didn't really rebound too much during earnings, especially when those popular tech stocks were reporting earnings, right? That's a time you might have expected retail to get more engaged from an options perspective. But I think the quick headline here is it's up a bit relative to where it has been, but still at what you would call 12-month lows.

JARED BLIKRE: All right, we have to leave it there, but really great stuff from you. Glad you stopped by here, Stuart Kaiser, UBS head of Equity Derivatives Research.