Will Fed Chair Jerome Powell's rate hike forecast put a damper on the market's FOMO rally? Smead Capital Management CEO Cole Smead and ProShares Global Investment Strategist Simeon Hyman sit down with Yahoo Finance Live to share their takes on market outlook, the impact of further Fed tightening, and S&P 500 expectations.
Video Transcript
- Now the FOMO rally glitches. Stock futures tick lower as investors expect more interest rate hikes ahead from the Federal Reserve. Chair Jerome Powell reiterated to lawmakers on Thursday that the Central Bank expects to raise rates one or two more times this year but at a slower pace to avoid tipping the economy into recession. Will the market downturn continue, and are investors pricing in more tightening? Let's bring in Simeon Hyman, ProShares Global Investment strategist, and Cole Smead of Smead Capital Management, CEO, on this conversation.
Simeon, we're going to start with this question to you. The downdraft the FOMO rally faced a headwind this week. Is this a temporary bump in the road in your view?
SIMEON HYMAN: Well, I think Powell has come to save the market. Notwithstanding the seven names that people are talking about, but I think he's come to save the other 493. Because if you look at what's happened over the last couple of quarters to the S&P 493, let's call it, there's been a decline in earnings and a shrinking of margin that's primarily driven by inflation. And it looks like he's getting the job done at this point. Break even inflation just one year out is 1.8%. Will a couple of more hikes on the short end make people a little nervous? But we've got to get back to that 2% inflation, so that companies can start to make real earnings growth again.
- Cole, do you think the Fed should be done raising rates at this point? Simeon just mentioned that 2% inflation target. We're still more than double that at the current level here. Is the fight for the Fed over just in terms of raising rates? And I guess, what do you see as that policy going forward?
COLE SMEAD: Yeah, well, I think, to follow on what Simeon said, I think where I would disagree is using the market to understand where we're going has been a terrible guide for two years. So those same futures curves you just mentioned, they were what the fool followed. And the fool looked and said, this is transitory and obviously missed inflation altogether, as the Fed did, I might add.
So I think it's a very untenable position that the Fed sits in. just so we're all on the same page, it sucks to be Jerome Powell frankly. But the reality is it's going to be very tough to put a baby back into the womb. I mean, that's never happened with motherhood, and therefore, it's probably never going to happen with this.
And one thing I'll add. The Fed's out of bottle because we have the largest consumption age group in America. We call millennials. They are in the consuming age of their life. And that is not like anything of the last 20 years. It's really you'd have to go back 30, 40 years to find something like that in a Fed model.
- Cole, I want to follow that then and ask, so are you saying that the Fed needs to hold the line and not continue with this path of future rate hikes?
COLE SMEAD: I'm saying the Fed's biggest trouble is they cannot derail the economy successfully right now. We've seen that they can impact asset markets. The bond market got crushed. I mean, we want to talk about the bear market that we saw in stocks the bond market got destroyed. So we know they can affect asset markets. But right now, I mean, go look at low end wages. The third and fourth quartile of wages in America are doing the best. They're outpunching inflation. They're seeing real wage gains. How bad can the economy be when the poorest people in society are winning so much?
- So Simeon, how should investors then be looking at this just given the fact that there's so much uncertainty out there, there's so much unknown in terms of what the Fed's next move is going to be. And then not only that, but also how the market is going to interpret anything that comes out of the Fed's mouth?
SIMEON HYMAN: Sure, well, the stability that we've seen if we don't want to look at the stock market, we look at the bond market. And what we see is stability at the longer end of the curve. The 10-year has barely budged. Rallied to about 3.5%. It was at 4%. Now it's at 3.75. That means that earnings multiples, PE multiples are likely to be static. But it does mean that everything's about earnings. And earnings have been shrinking.
But there is a place in the market where earnings have been growing. We focus on the S&P 500 dividend aristocrats. It's our ETF ticker, NOBL. Those are companies that consistently grow their dividends over time, and they have pricing power. And while the S&P 500 has been shrinking earnings, those companies have been growing them. So you have to find growth in the marketplace even while there's a sort of a little bit of a long tail for inflation, even if it's just another year or so.
- And speaking of just the tale of inflation. With inflation expectations where they are now, where are you expecting us to land economically?
SIMEON HYMAN: Well, the good news is that if break even inflations have come down, but at least up to the two-year, we have higher treasury rates, that means that real interest rates are pretty high right now, in fact higher than they usually are. That's going to be contractionary. So that should definitely put some brakes on the economy. Cross fingers, it looks to us what's the difference between stagflation light and a soft landing? We're going to be likely somewhere between plus 1% and minus 1 on GDP. So somewhere in that meh economic environment.
- Cole, where do you think we'll be by the end of the year when it comes to equities? We've seen a number of the banks, Goldman being one of them, Bank of America, RBC, just to name a few, that have actually raised their year end targets for the S&P in the last week or so. Do you think we're headed much higher from these current levels?
COLE SMEAD: Yeah the idea that we're going to end the low rate regime with a cute little bear market, that is garden variety and adorable. It's just not going to happen. We're probably going to see a nasty bear market by the end of this roiling because I mean, if you can get 5.25% or 5.5 or 5.75 at some point later this year risk free, how unattractive do a lot of things out there look? And I'm not talking about just stocks.
So I really think that's the problem, is the opportunity cost now haunts investors. It doesn't help them. And the reality is there are narrow places in the market where you can go make really good money. Energy is great. It's just, to Simeon's point earlier, it's smaller than apple. So the question is will the seven names that he mentioned destroy the market by year end, or will the other 493 in some way be able to allay that problem? And we just don't see that happening. We think pain has got to finish nasty euphoria. It's like we saw with SPACs and IPOs and the Reddit crowd.
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June 23, 2023 at 10:18PM
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Fed's Powell has 'come to save the market': Strategist - Yahoo Finance
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