The Fed's 'resolute nature' may be cause for volatility in the U.S. stock market: Strategist

PIMCO Managing Director and Portfolio Manager Sonali Pier and Lisa Erickson, U.S. Bank SVP & Public Markets Group Head, sit down with Yahoo Finance Live to talk about the economic outlook amid the Fed's additional interest rate hikes.

Video Transcript

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RACHELLE AKUFFO: And that'll do it for this session on September the 8th. So let's take a look at how the markets fared today. We saw all three major indices ended in positive territory, up for the day and for the week. The Dow up 2/3 of a percent there, up 192 points.

The S&P 500 up about the same, up about 26 points at 0.6%. And the tech-heavy NASDAQ also in the same range, 26% there, up about 70 points. And in terms of sector action, we saw the financials were leading the way today. Well, let's take a closer look at the broader markets with our market panel now.

Let's bring in Lisa Erickson, US Bank Senior Vice President and Head of Public Markets Group, and Sonali Pier, PIMCO Managing Director and Portfolio Manager. So, Lisa, as we take a look at how equities are performing right now, you still say you have a bias away from them. Why is that?

LISA ERICKSON: We are cautious on the US equity market. And it's really on the back of the fact that we've got some policy headwinds right now. Certainly with the Fed very committed to fight inflation, that just provides a tougher environment for equities to outperform.

And we see it as well in the metrics we're tracking, both on a macro basis as well as on a company fundamental basis. So if you look at a number of economic indicators or you look at what's going on with corporate earnings, they're still in positive mode, but they are decelerating over time. And again, that's a more difficult environment for stocks.

DAVID BRIGGS: Sonali, you share that pessimism?

SONALI PIER: I think it will be a bit volatile as well as difficult for stocks. I think we have a Fed that's committed to fighting inflation, which will be good in terms of getting inflation down. But the path there, it can be tumultuous. Certainly, we do expect to see further rate hikes and as soon as the next FOMC meeting later this month.

SEANA SMITH: Sonali, how aggressive do you expect the Fed not necessarily to be in September, but looking out further to October, could we see another potential aggressive hike or say-- saying about 50 basis points or potentially more?

SONALI PIER: Yes, we are expecting a 75 bp rate hike later this month. And we do think that the Fed is committed. We heard it earlier today, too, from Chair Powell that-- you know. And when you think about their dual mandate between keeping employment strong as well as curbing inflation, they really have done a good job on the employment perspective.

And so it makes sense that they are dedicated to getting inflation down. It's very high today. And even with all the effort and the expected further hikes, we still expect inflation to be well above their target through year-end, and likely even through 2023.

RACHELLE AKUFFO: And just to follow up, Sonali, what is the bond market indicating to you right now?

SONALI PIER: Certainly, I think the bond market is expecting the 75 bp rate hike on the 21st of September. But I also think we have further hikes priced in as well. You can see through today's level in rates that there has been some volatility, but we've edged higher over the last several quarters. I think when we look ahead, though, we can be more optimistic that higher level of yields is attractive for investors over time. It's more that we need to be more comfortable around where the broader economy is heading over the near term.

DAVID BRIGGS: And Lisa, we're-- S&P parked around 3,900, 4,000. Do you think we'll retest some of those mid-June lows?

LISA ERICKSON: We are expecting some volatility through year-end. And really, it's the fact that it's very hard to assess how quickly that inflation print will continue to come down over time. While certainly we're starting to see those initial signs that price pressures are moderating, again, relative to the Fed's target, it's still absolutely high.

And while, again, supply chain pressures are starting to come off, just the ability of those inflationary pressures and how quickly they adjust is in question. So with that and with, again, the resolute nature of the Fed, we do expect there are going to be some back and forth testing and volatility within the US stock market.

SEANA SMITH: Lisa, we saw the dollar pulling back just a bit but still obviously extremely strong. What's your assessment just of how big of a risk the strong dollar is right now to the markets, and especially those multinational companies where we've already heard a number of them warn about this in the previous quarter?

LISA ERICKSON: The dollar has been really strong through this year, and it does remain something we want to continue to monitor. And we expect that, again, with how affirming the Fed has been of their continued vigilance on the rate front that that really will help propel the dollar to remain at absolutely higher levels.

That being said, we are starting to see other central banks begin to kick in again. The ECB just recently, obviously, also implemented a 75 basis point hike. And so with that, you may have a little bit of the relative advantage of the dollar coming off. But again, the Fed is very resolute, and so that's going to be in its favor.

RACHELLE AKUFFO: A big thank you there to our markets panel, Lisa Erickson and Sonali Pier. Thank you for joining us this afternoon.