There may be too much accommodation and “hope in the market,” says the strategist

Chris Konstantinos, Chief Investment Strategist of RiverFront Investment Group, and Geetu Sharma, Founder and Investment Manager of AlphasFuture LLC, join Yahoo Finance Live to discuss Fed interest rate hikes, inflation, new economic data and Russia’s grain and energy markets.

Video transcription

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RACHELLE AKUFFO: And there you have it, the closing bell for this first trading day in August. Let’s take a look at how the major indices fared. An unstable day, as Ines said. We see the Dow lose about 45, 46 points. We also see the relatively flat S&P, losing about 1/3 of a percent. And NASDAQ is also relatively flat, losing around 21 points. But certainly not the momentum we saw to close the month of July.

Well, let’s break it down with our market panel. We introduce Chris Konstantinos, Chief Investment Strategist at RiverFront Investment Group, and Geetu Sharma, AlphasFuture Founder and Investment Manager. So, Geetu, I want to start with you. In this type of climate, where markets really digest a lot of different data points and try to manage their projections for a recession, how do you advise clients in this type of environment?

GEETU SHARMA: I think … thanks for hosting me … the market is definitely very uncertain right now. We have interest rate risk, recession risk and high inflation. And given what we’ve seen so far, it makes sense to be cautious in portfolios and be very careful about the type of risk we’re taking. We definitely don’t want to take the risk of high leverage, because if we see interest rates rising, it can impact highly indebted companies and affect their cash flows and ability to pay.

So we’re advising our clients to focus on quality, quality defensives, quality growth, especially many of the stocks they have – they look very attractive during the sell-off. And if the business model is still resilient and cash flows are solid, financial flexibility is high, this is where we think investors should be.

DAVE BRIGGS: And, Chris, you are focused on surrender. And luckily, you carry an acronym with you. Who is PATTY and why do we pay attention to her? What is he telling you?

CHRIS KOSTANTINOS: You know there’s nothing strategists appreciate better than a silly acronym, right? Yes, so PATTY stands for Pay Attention To The Yield. And just like [INAUDIBLE] said a second ago, there are so many uncertain things right now that are beyond the control of investors.

But one of the things you have some control over is how much of your portfolio’s return comes from the combination of bond coupon payments and stock dividend payments. And so, just like he said, I think you want to focus on companies that have good free cash flow generation capabilities and those that are using that high free cash flow to increase dividends.

Same thing for fixed income. For the first time probably in my entire career, we are getting constructive on fixed income. And we are finding attractive value in long-term Treasuries and short-term high yields for the same reason because we are finding attractive yields. And so this is the piece of your portfolio that if you sharpen your pencil and be careful to have stocks that can pay you back, that’s the piece you can control, that piece of yield. So PATTY, pay attention to the yield.

SEANA SMITH: Chris, what do you think of the market reaction so far to what we’ve heard from Powell? Because we certainly saw a rally on Wednesday afternoon, Thursday and Friday. Today, however, there seems to be some concern that perhaps investors have gone too far thinking the Fed will change sooner than it is. What do you think?

CHRIS KOSTANTINOS: To be honest with you, I was pretty skeptical of the initial market reaction to Powell’s comments. They seem to anchor on this idea that he said, well, the rates are neutral. But I think the market misunderstood that or maybe Powell could have explained himself a little better because I think what he was saying was that when you keep inflation in check, a neutral rate of around 2 and 1/2% over the 10 year, that might be the right rate.

But right now, inflation is clearly not in control, right? Whether you are looking at a main number, a central CPI number, a PCE number, all of these numbers are well outside the bounds of what the Federal Reserve would consider normal.

Therefore, I think the market found his comments a little too accommodating. I think the Fed is heavily committed to trying to catch up. I’m behind right now. They are trying to recover the curve. And I think that means a lot more interest rate hikes in the future.

RACHELLE AKUFFO: And, Geetu, what do you think the market is telling us about the Fed’s ability to maintain this landing? And if we have … if we continue to have perhaps a stronger recession, how are you positioning yourself for it?

GEETU SHARMA: So it looks like the market is thinking that the Fed will turn very soon, that the continuing slowdown in economic data will force the Fed to slow or stop its rate hikes, reduce inflation. And the market expects the low rate environment to continue that we’ve been in for the past 12, 13 years. And like Chris said, I think maybe there is a little too accommodating, too much hope in the market right now.

Yes, we are seeing that some inflationary dynamics look better right now, such as possibly food inflation, which could potentially come down with this green deal that happened in Russia, Ukraine and the first ship that sailed. But at the same time, gas prices are still very high. And as you were mentioning earlier in your report that housing … house prices are still going up 17% and rental data is still going up 9%, 10%. Many of the inflation segments are still quite high. So maybe we could see a slowdown in inflation numbers. And I think the market is encouraging it.

Now, we … the economic data is still slowing down. And surely, there is a risk that we could go into a recession. For sure, the yield curve tells you. But the chances of a soft landing are really there.

And if we see a normalization of the inflation rate, maybe not at this 8%, 9%, but if we get to 5%, 6%, the economy … and the economy keeps moving forward, then it could be a good one. economic context. It is a slowdown, but not necessarily a recession. And I think in that environment, we can expect rates to stay a bit high too and not go back to zero levels.

DAVE BRIGGS: Chris, on Geetu’s comments on inflation peaking or not, we are seeing a notable drop in crude oil, WTI down 5%, Brent down 4% today. Do you think inflation has peaked? Could we continue to see inflation declining throughout the month, particularly in our energy sector?

CHRIS KOSTANTINOS: I think there will be some downward pressure on inflation in the second half of this year. I mean, one of the things we monitor here is the global shipping rates. And what I’ve noticed is that they’ve actually moderated quite a bit over the past few months. However, they are moderating from a very, very high level. And I think this is where the problem lies, right?

Even if inflation does moderate a bit, I’m not sure it will moderate enough to fundamentally change the Federal Reserve’s policy. And we all know that Fed policy and interest rates really drive the prices of many stocks that we all follow in this show in the short to medium term.

So I’m not sure it will be enough. I think it will happen. I mean, I think you have some cheap cooling that we’re already starting to see. I don’t expect the Russia-Ukraine situation to improve much, but maybe there is some decent news on grains in the near term. However, I still think that if you step back, the general context for inflation is likely to be higher for longer.

SEANA SMITH: Geetu, when you look at the consumer, the consumer is so critical here, especially in the second half of the year with the economy slowing regardless of whether or not consumers are willing to continue spending some of those higher prices. What’s your reading?

GEETU SHARMA: I think the consumer is still spending. They are just choosing what they want to spend on. They certainly aren’t buying as many assets as they did during the pandemic freeze and when they were stranded at home. Now they travel more. They are doing more leisure activities. They are coming out. They are eating out.

So given the strong job market, wage growth, rising participation rate, the consumer is still making money, generating positive cash flow, and choosing what they want to spend. Companies, if you look at the companies’ reports, many companies have reported positive top line growth and bottom line growth in dollar value terms, although they are facing a slight drop in margins due to cost pressures. But they’re not talking about a decrease in overall consumer spending. So I think it’s going well for now.

SEANA SMITH: Geetu Sharma, Chris Konstantinos, thank you so much for joining us.

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