Market strategist explains why investors should still be ‘a bit on the cautious side’

Akshata Bailkeri, Bruderman Asset Management Equity Analyst, and Eric Freedman, U.S. Bank Asset Management CIO, join Yahoo Finance Live to talk about how the market is reacting to economic data, the Fed's interest rate hikes, international markets, and geopolitical impacts on commodities.

Video Transcript

[BELL RINGING]

- There's your closing bell on Wall Street, and a wonderful way to wrap up your week on a high note. Yes, a sight for sore eyes as all three closed in the green. And look at the NASDAQ, a monster Friday. Let's talk about it with our market panel on a Friday. Akshata Bailkeri, from Bruderman Asset Management Equity Analyst, nice to see you. And Eric Freedman, US Bank Asset Management CIO. Akshata, we'll start with you. What is it rallying on, in particular the NASDAQ? What do you attribute it to?

AKSHATA BAILKERI: I mean, part of this is a relief rally. You know, you're seeing some of the-- some of the names that come up are the consumer discretionary and technology. And some of these were very, very hard hit in the earlier drawdowns. And some of the higher quality names are seeing the rightly so uptick that they deserve on that front.

RACHELLE AKUFFO: So then, Eric, in terms of your investment style, where you're still seeing a lot of this volatility, we seem to be getting closer to a turning point. What should people be thinking?

ERIC FREEDMAN: We'd still be cautious. We think the turning point is really an open question at this juncture. We're probably between what we would call two repricings. Repricing one is the Federal Reserve-induced repricing. When the Fed says they're going to raise rates, every other asset class has to move down in price and up in yield. So we're really in the middle of that. There could be a turning point there, depending on what the Fed decides to do in terms of communications.

But the next repricing, again, the risk of a potential more downside, is if we start to see higher commodity costs as well as higher borrowing costs structurally trickle into the real economy and stay there for some time. So do think that we're in a deeply oversold condition that can last for a day or two, but we would still be a bit on the cautious side right now thinking that there's more potential downside ahead.

EMILY MCCORMICK: Akshata, how would you characterize the current economic backdrop? Because on one hand, we have a decade's high rates of inflation. Yet, on the other hand, we have a still solid labor market and still strong consumer balance sheets. So where are we right now?

AKSHATA BAILKERI: I mean, you know, I would agree that we're not really at the bottom of the sell-off. You know, the markets have been volatile, and we haven't seen that volatility throughout. So there's-- you know, it's suggested that we haven't reached the bottom yet. But in looking at, you know, overall economic conditions, are we at a risk for further major drawdown? I wouldn't say so.

Like, markets are implying a rapid and significant compressions in earnings growth. And although that might be slowing down in the coming quarters, the forecast is sufficiently strong over the next two years to avoid a larger drawdown. And the Fed is managing-- has already indicated that they're flexible-- they have flexibility in dealing with inflation numbers as they come in and getting that inflation back down to the 2%.

- And, Eric, you had two ifs in there, and one was the Fed language. What do you expect out of the Fed, two, three 50-point rate hikes? Do you expect a 75?

ERIC FREEDMAN: We think 50 basis points is probably the prescribed rate for the next couple of meetings. And so we have to-- have to say, what if? This is an environment where people who come in with a lot of certainty have been humbled, and rightfully so. So our base case is that we get into a degree of a mild economic slowdown. So I'd say to your exercise segment earlier, if the treadmill was at a seven or eight at the end of last year, we're probably at a six right now, maybe a five, slowing down to a four. Doesn't mean we're going to stop. It doesn't mean we're going to reverse.

But we do think that the Fed is in a tough position here. They have to thwart inflation. The CPI data on Tuesday was not positive in terms of a slowdown in inflation. Same thing with the PPI data on Wednesday. So I think what that means is the Fed's bias is going to be to tighten, not loosen. And so that's that second repricing scenario we have to think about. But again, we would be in the camp that 50 basis points is more realistic, but probably jawboning towards the potential for more and perhaps even higher rates deeper into next year.

RACHELLE AKUFFO: To Akshata then, as we're seeing markets essentially pricing in that they're expecting more 50-point-- 50 basis point rate hikes, the Fed saying that at this point, taking the 75 basis point hike off the table. What are some of the questions that you're getting from clients about how they should be positioning themselves right now?

AKSHATA BAILKERI: Yeah, I mean, you know, investors are asking like, should we stay on the sidelines? Should we continue to invest? And for us, our understanding is that periods like this of extreme bearishness, the sentiment is very bearish, tends to generate longer term outperformance while investing rather than periods of extreme bullishness, right? Investors should continue to stay invested. You know, it's really hard to time the bottom necessarily. But, you know, [INAUDIBLE] investors are, especially for equities, are overly pessimistic about economic outcomes. So staying invested in high quality names, whether that's in tech, health care, or consumer staples, especially health care and consumer staples for the more conservative investors, is the right move.

EMILY MCCORMICK: Eric, when you think about the opportunity for US equities versus international equities, are you seeing any potential opportunities outside of the US? Or are the geopolitical risks, the concerns around China's COVID-related lockdowns, is that keeping you on the sideline when it comes to international?

ERIC FREEDMAN: I'd say that we are structurally underweight international versus domestic equities. That's just the way that we've constructed our portfolios for lots of reasons I won't bore you with. But in the very near term, international equities could be helped by the value factor that they have. They tend to have a lot of consumer staples, a lot of financials, and a lot of entities that tend to, again, be a bit more biased towards value. We think that bid towards value is going to persist.

So also think that the key variable on China specifically is certainly the lockdowns. Very difficult to gauge how that's going to play out. But the bigger variable is Xi Jinping's third term, which is a phenomenon which is going to happen in Q3 of this year. China would be in a tough position economically not to do as much as they can to amp up growth. So our viewpoint is that you can't get overly bearish on the EM space right now. It is certainly a subject to what may happen in China with Q3. But again, we think that over time, you still want to be predominantly invested in the US.

Also think-- last thing I'll say is this, currency-wise, the dollar is not a train that I would step in front of. It is a-- there's lots of reasons why we think the dollar will probably appreciate in value. So even keeping in mind that if you own international equities and you don't hedge that back, you could own some currencies that do depreciate versus the dollar. So bottom line is that there could be a bit of a value bounce, something that we don't think is sustainable over time.

- And, Akshata, let's piggyback off that and geopolitical events. How do you believe they impact the markets in the months ahead?

AKSHATA BAILKERI: I mean, it's hard to predict the turn-around for how the impacts of some of that geopolitical risk. Obviously, commodity prices are high. You've seen Russia, Belarus, and a lot of the other major countries being exporters of a lot of commodities. And you've seen, you know, like Nutrien and other fertilizer companies really spike up on that. So that's going to be an area of focus that we'll keep an eye out for if tensions ease geopolitically over there so we may see some relief on the commodity side.

But again, you know, that is very difficult to predict in line going forward. And, you know, seeing from earnings itself, company-- a lot of especially consumer staple companies have noted that they had-- they do expect some of their commodity price inflation to continue in the second half.

RACHELLE AKUFFO: And, Eric, when you look at how some of the bellwether companies have performed in terms of earnings, do we get a sense of what we might expect from the next quarter's earnings, given that obviously consumers are only going to want to pay so much for so long and inflation is still so stubbornly high?

ERIC FREEDMAN: You know, the earnings picture has actually been pretty sticky and pretty positive. So we think that we'll probably see $230 of operating profit for the S&P for this year. If we're wrong, that could fall down to $222.15. But we probably think that the bigger issue on earnings would be a 2023 story, not a 2022 story. So our viewpoint is that the sectors that may really benefit would be mobility-based sectors. So think transportation, airlines.

We actually are big fans of infrastructure. You get some utility exposure. You also get some reopening exposure, as we're starting to see people travel and increase their travel budgets, unfortunately, sometimes very necessarily because what's happening with airline fares right now, we think those are places that you can be involved with. But to get to your question, earnings in particular feel good for this year. I think that there's probably a little downside of 2023 numbers, but 2022 so far looks solid.

RACHELLE AKUFFO: All right, well, a big thank you to our market panel. Akshata Bailkeri there, Bruderman Asset Management Equity Analyst, and Eric Freedman, US Bank Asset Management CIO, thank you for joining us today.