Market believes Fed tightening is in play: Strategist

The NFIB Optimism Index and Consumer Price Index, key economic data, are set to be released ahead of the Federal Reserve’s interest rate decision. Crossmark Global Investments Chief Market Strategist Victoria Fernandez joins Market Domination to discuss the state of inflation and when the next interest rate hike might start.

Fernandez explains that despite the conflicting economic data causing some volatility, “it all boils down to the fact that the market believes the Fed is in play.” With four central banks starting to cut rates, the market is anticipating a cut from the Fed, allowing momentum to continue despite mixed reports.

She believes a rate cut could come in December: “The Fed, I think, is much more nervous about cutting too quickly and driving inflation, making it even steeper than we’ve seen, than they are of a recession that could potentially come with rates that remain higher.” She notes that when there have been historically low rates, the market will pull back and that investors should be careful in positioning their portfolios in the meantime.

For more expert insights and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video transcript

So we’ll focus on the main things we’re watching this week, the inflation data and the Fed decision.

They will both come on the same day on Wednesday here to help us prepare for it.

It’s all Victoria Fernandez, Global Investments, Chief Market Strategist at Cross Mark.

Thank you for being here.

She’s in the studio with us.

My pleasure.

good to see you

So as we look at this week, you know, we’ve seen, it’s funny, stocks feel a little sideways lately, but they’re still going up, right?

So how are you feeling as we have these kinds of events coming up?

So there’s definitely a competing narrative going on there right now.

And I think that’s why we’ve seen this sideways movement in the market.

You look at some elements and we’re getting weaker economic reports.

Other things tell us like Friday’s jobs report, look, things are looking up.

But I think it all boils down to the fact that the market believes that borrowing is in play.

And we’ve heard this phrase before.

I think it’s back now.

The market knows now that we’ve had four central banks that have started to cut rates, the market says, ok, we know the Fed is coming.

We may not know the exact time of it as it changes daily depending on the titles.

But we know Fed cuts are coming.

So I think they’re getting a little comfortable and that’s allowing the momentum to continue to drive this market regardless of what the economic reports say.

The story continues

And Victoria, what, what’s your base case when you think the first cut might come?

Are you at the September camp?

Yes, I’m actually a little late.

I’m more in the December camp.

Our investment committee at Crossmark.

We have different opinions on when we think it will happen, but it’s September or December for most of us.

I think the Fed will play this very carefully.

I don’t think any of the central banks that have already cut are in this easing cycle.

Maybe it will be, we, cut it short, let’s wait and see what happens.

Maybe we wait a few meetings and we cut again and the Fed I think is a lot more nervous about tapering too quickly and driving inflation by making it even steeper than we’ve seen than they are about a recession that could potentially come with staying of higher rates.

So what equates to where will stocks go from here?

I mean, even if you know, obviously the expectations of the FED are kind of all over the map.

Right.

You know, that they will happen this year sometime, maybe, maybe even next year.

Exactly.

Does timing matter where stocks will go at this point?

It doesn’t look like the market is just going to keep going higher.

Yes, you have days where there’s a little bit of volatility and we think that’s what we’re going to continue to see a lot of volatility because nobody’s exactly sure what that path is going to look like.

But for now, the market is pretty confident that things will turn out well and is moving higher.

I think we should say, be careful what you ask for because why would the Fed cut rates because the economy is slowing down because the expectations are not, we’re going to think they’re going to be in earnings.

And historically, once we hit the first rate cut, after that, we have a significant pullback in the market.

So I think we’ll have, you know, time, we don’t know exactly for sure.

For now, the market just wants to see this process begin.

But I think we have to be a little bit careful in your positioning in your portfolio knowing that this is coming.

So be a little careful.

What, what is this to the viewers who are listening around?

What that actually means, in terms of you look at the US document right now, what looks attractive, you So we definitely want to see our clients with some diversification happening in their portfolios.

But more than just when you say that word regularly.

So we’re looking within the capital markets, you want to have a defensive play.

So, do you still have the growth names?

Some of those expensive growth names you can cut and get out.

Yes.

So you want exposure to some of those mag seven nvidia names?

Yes, you want exposure, but you all want some valuable names too.

You want some top names because we think there’s going to be market-locking volatility in some of the cash flows for your fixed income portfolio, right?

You have several components of absolute return in your portfolio.

And look, we have a lot of option clients who write our covered call option writing strategy.

Again, income generation is key now with volatility the name of the game in the market.

Interesting.

And where are you telling people on fixed incomes?

How do you stay in the money kind of, more short duration money side or where are you in that?

So you’re speaking my language Julie, aren’t you?

When we get into fixed income and for our clients, we’re really putting them in some sort of Barbell strategy now.

And locking in fixed income at those lower long-term rates when you have an inverted yield curve locking right at some of those higher rates in the short end, so that gives you that opportunity, but look, rates will not be as high as they are now on the longer end of the curve for such a long period of time.

So we would go ahead, buy some of them, have it in your portfolio, investment grade corporations, even though the spreads are narrow.

Go ahead and get some of this.

You get that steady cash flow over the next 57, 10 years.

This is a nice compliment to the rest of your portfolio.

Finally, Victoria, what about just speaking internationally?

I mean, obviously the European elections over the weekend made a lot of headlines, right?

It seems to show this shift to the right.

Do you see an opportunity there?

So we think you should dive into foreign markets if you haven’t already, because it looks like growth outside the US is continuing to pick up.

We’ve actually seen some of the cyclical names that cyclicality in the market move from the US overseas.

So find some options out there.

Banking and finance have always been good in the Eurozone, they took a bit of a hit after the election.

So maybe it’s an opportunity to get in there, but also be careful there.

I hate to use that word all the time, but you also want to because elections, we have almost 60% of global GDP in some kind of election this year, and policies can change very quickly.

OK.

Be careful, Victoria.

Thank you for joining us.

Thank you.