Market outlook: There are ‘forces happening right now’ beyond Fed moves, strategist says

RSM Chief Economist Joe Brusuelas and Wheelhouse Chief Investment Officer Ann Berry join Yahoo Finance Live to discuss the jobs report, the outlook for Fed rate hikes, and what it means for markets.

Video Transcript

BRIAN SOZZI: All right, Ann Berry and Joe Brusuelas are still here with us, diving into this jobs report, this worse-than-expected jobs report. Ann, let me start with you here. We're seeing NASDAQ futures weaken off of this report, just continuing that selling pressure that arguably kicked off Wednesday with that rise in yields. At what point do you come in here and you start buying some of these tech names?

ANN BERRY: I think I'd wait a little bit for the moment, Brian. One of the things that's really important is going to be earnings season coming up in the next couple of weeks. And so I think seeing how the fundamentals are doing, particularly some of these big growth names, these direct-to-consumer names, a lot of the new entrants onto NASDAQ after the bump of 2021 IPO year, seeing how these companies are actually performing now when it comes to moving towards cash generation, moving towards increased profitability--

Once those fundamental pieces of data come out, that's when I'll start looking to pick winners and start seeing where some of the noise is shuffled out as these valuations begin to crack.

JULIE HYMAN: Yeah, obviously, there's a lot of data yet to come here, including on things like inflation. Joe, just to take a step back again and put a fine point on it, which I think it's important to do with a report like this, Brian Cheung was just talking about the revisions to both types of surveys. And again here, we've got this disconnect between the non-farm payrolls and the unemployment rate. Because one is data from companies, payrolls, one is data from people that are surveyed by the government.

So talk us through that disconnect between that 3.9% unemployment rate and a disappointing 199,000 addition in farm payrolls.

JOE BRUSUELAS: OK, so inside the household survey, it's an attempt to account for a much broader demographic, a much broader population, which is really at the heart of why we're seeing this disconnect. For the second straight month, we've got a tale of two surveys.

My sense is that people, largely white males who are independent contractors, are going back to work because demand is robust out in the labor market. In the household survey, it increased by 651,000. Now, from an economic point of view, that's a statistically significant increase.

We saw 168,000 people entered the workforce. That's why the unemployment rate fell to 3.9%. Yet, when they go ahead and do the surveys of the actual employers, we're getting a little bit less of an increase.

So really, again, this is just going to be disappointing. Until we have a situation where we can use actual data, we're going to continue to have these discrepancies from time to time. And it's going to end up largely dissatisfying to the investment, trading community, and most of all policymakers.

BRIAN SOZZI: Ann, are we just making too much over these looming rate hikes from the Fed and stocks just might be OK?

JOE BRUSUELAS: You know what, even if the Fed goes ahead and hikes rates by 75 basis points this year, Brian, that still means that, on a real or inflation-adjusted basis, rates are going to be negative. That's extremely accommodative. Policy rates still going to be in a position where money's going to be easy. As demand ramps up, you'll be able to expand capacity.

Now, my sense is we're going to get to a point here in about four or five months where inflation really begins to back off, as we see some year over year base effects. And then there's going to be a much more bigger discussion around should the Fed do two or three rate hikes.

But in between now and then-- and we'll see it next week-- you're going to see a 7 handle on the CPI. And that'll reinforce the arguments of the hawks and those in the fixed income community who would like to move back to a different policy regime at the Fed.

BRIAN SOZZI: Ann, what do you think about that? Are we just making too much of these rate hikes?

ANN BERRY: Well, I think that we've got to consider the fact that the rate hikes impact different sectors, different kinds of stocks in different ways. So if you think about energy, if you think about financials, we've seen those sectors go on a real tear once the specter of looming rate hikes started to hover.

So it's important to focus on them. But where I'm looking is really trying to unpack which sectors are going to be impacted favorably versus unfavorably by rate hikes. And at the end of the day, Brian, I still think, despite this, we've got inflation coming from other areas. We've talked about wage inflation a little bit today. But one of the things we haven't talked about is this is a year where minimum wage increases have gone into effect across a number of states in the country.

I think some of the biggest employers in the country, such as the Walmarts and the Amazons, push forward bigger wage increases than we've seen in a very long time. So I think there are other forces happening at work right now beyond just the Fed movements.

JULIE HYMAN: And so Ann, how is all of this translating into your sector recommendations and weightings? Are you avoiding the Amazons and Walmarts of the world? I mean, the trade that has been in effect the past few days, as we've seen rates go up, has been people have been avoiding tech. Banks have been doing well, for example. Is that the kind of weighting that you're looking at as well?

ANN BERRY: Well, the majority of my time is spent looking at consumer-facing businesses, so whether that is in retail or consumer or tech. Walmart did very well over the last couple of days. A number of the retail players have started to look and get greater visibility as looking relatively cheap, particularly started to pivot more into tech as they managed to do so well on the e-commerce front. And they're looking to build on that success moving into 2022.

Tech has been very difficult, Julie, to your point. Amazon is a name you just threw out there. Amazon saw relatively muted returns in 2021 relative to other big tech names. I'm actually looking now for value in tech. I've been looking for value in PayPal. I've been looking for value in some of the other mature, well-capitalized, strong balance sheet tech names, which I think are going to come back into favor over the rest of this year.

It's the newer names where there were very optimistic outlooks for aggressive growth that came to market really at the peak in the middle of last year, that's where I'm starting to stay away and starting to look for value in other places.

BRIAN SOZZI: Point well taken. Ann Berry, Wheelhouse chief investment officer and Joe Brusuelas, RSM chief economist, thank you both for hanging around for a really extended period of time. Have a great weekend.