Treasury market, inverted yield curve ‘yelling at the Fed’ amid rate hike fears: Strategist

Mill Street Research Chief Strategist Sam Burns joins Yahoo Finance Live to discuss how markets closed Friday, Fed policy, inflation and other economic data, and the moves in the bond market.

Video Transcript

[AUDIO LOGO]

JARED BLIKRE: It looks like we got 10 seconds to the close, so here is your closing bell for this week.

[BELL RINGING]

AKIKO FUJITA: And there you have it, Santa Claus ringing the closing bell on this Black Friday, obviously signaling the start of the holiday season. How appropriate is that? All right, Black Friday, Santa ringing the closing bell.

As we look here, a bit of a mixed picture at the close. Consumer prices eased in October, raising optimism for smaller rate hikes ahead as the Fed attempts a soft economic landing still. The risk of overtightening is taking a firm hold in the minds of US consumers.

Joining me now to weigh in is Mill Street Research's Chief Strategist Sam Burns. Sam, I have to take the cue from the closing bell. Are we going to see a Santa Claus rally going into year-end?

SAM BURNS: I think there's a reasonable chance that we do see some further rally. I think the stocks-- stock prices kind of want to go up from where they've been. I think the end of the Fed tightening cycle and the slowing in inflation may give a little bit of reason for a bit of a Santa Claus rally. I think we'll probably still be trapped in the kind of a wide range that we've been in for much of this year. But I think there's still a little bit more upside ahead here.

RACHELLE AKUFFO: And, Sam, how would you describe sentiment at the moment, especially given the earnings season that we're just coming out of?

SAM BURNS: Yeah, I think sentiment, in general, for investors, as well as for the analysts that are producing earnings estimates, has been quite bearish and is just now starting to sort of stabilize and turn up a bit. All eyes have been on the Fed and concerns about how far they'll go with their tightening cycle, if they'll go too far. Certainly, the Treasury market and the inverted yield curve is kind of yelling at the Fed right now that they're in the process of potentially making a policy mistake and raising rates too far.

But I think so far, earnings are holding up OK. Earnings estimates have come down quite a bit from where they were, but they're still relatively stable from-- on a year-over-year basis. So I think there's still enough stability in the economy and in earnings to allow sentiment to improve from where it's been. People were very, very bearish kind of mid-October, and now that's starting to improve. And that's usually a fairly good sign coming off of heavy pessimism like that.

AKIKO FUJITA: Sam, let's talk strategy a bit more. Retailers certainly in focus on this Black Friday. It sounds like there's a bit of a mixed picture going into the height of the holiday season. Yes, the discounts are there, but also inventory is high, and consumers have to be convinced to buy in, especially at a time when we've seen still very high inflation. When you look at the retail space, who do you like and who do you think is best positioned?

SAM BURNS: Yeah, I think you're right. A lot of the retailers now have gone from having too little inventory to having too much, in some ways. And a lot of the inflation now is not in the prices of goods, things you find on the shelves. It's really in the prices of services, rent and housing, to some degree, and things like going out to eat. I think a lot of people's money is being spent in other areas and not on the goods that are sitting on store shelves right now.

So-- so, yeah, there's very much a mixed bag in terms of retailers and consumer discretionary overall. We're starting to see a little bit more spending on some of the electronics and things like that. But a lot of the things that general merchandise retailers have slowed down. So I think you have to be very careful in terms of looking at which firms are doing well and which industries because consumers have to make choices now. There's not enough money to buy everything.

RACHELLE AKUFFO: And in terms of investment right now, is it still the time to stay defensive given that we still have a lot of uncertainty ahead of us?

SAM BURNS: Well, I've started to become a little bit more positive, a little more overweight in equities in my asset allocation recommendations. So I think it's probably time to be a little less defensive than you were, not necessarily be very aggressive. I still think, for instance, that large caps will probably be better than small caps overall given the tightening cycle that's still going on and where rates are.

But I think that there is some scope for things like financials, banks to lead. I think some industrials are areas that could lead. And then if you do want to have some defensive exposure, I think places like utilities are probably a good place to be there. So I think it's definitely going to be a mixture of some more cyclical areas that can outperform, but you'll still see some defensive areas that have support, particularly if the commodity prices stay high.

AKIKO FUJITA: Yeah, I mean, that was my question, what about energy? You look broadly, they have been among the best performers. Are we going to continue to see those earnings come in at record levels the way they have because of where oil prices have been?

SAM BURNS: Yeah, I think energy certainly still has pretty good earnings support for now, certainly. And if oil prices stay near where they are, oil companies can make plenty of money. And most of them are not reinvesting in new drilling and things to increase output, which is essentially what their shareholders have told them to do given the longer-term trends looking out 5 or 10 years.

So I think it's a tricky situation. The short term looks pretty good for energy still, but the longer term is maybe less so given the trends in demand. So some investors may be looking at the short term more than the long term right now.

I'm a little more neutral on energy now after having been overweight for a long time, just because of the volatility in oil prices and the sensitivity to things like OPEC and Russia are risks there, I think. But-- but overall, yeah, energy is probably a good place to keep some exposure. It's a volatile area, so it's not a low risk holding. But I think it's probably got some support for a little while longer.

RACHELLE AKUFFO: All right, well, great getting your insights. Mill Street Research's Chief Strategist Sam Burns. Thank you so much. Have a great weekend.