September CPI report ‘gives the Fed no wiggle room,’ strategist says

Advisors Capital Management Partner & Portfolio Manager JoAnne Feeney and Baird Investment Strategy Analyst Ross Mayfield join Yahoo Finance Live to discuss the September CPI report, the issues ahead for the Federal Reserve, rising inflation, market swings, and the outlook for a recession.

Video Transcript

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JARED BLIKRE: And here's the closing bell on Wall Street on this Thursday right before my birthday, by the way.

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SEANA SMITH: We hope Jared's birthday does help the good news here continue with the rally on Wall Street. Dow up 827 points. S&P up 2.6%. NASDAQ up just over 2% today, a huge reversal from what we saw shortly after the open here. Taking a look at some of the sector action that we're seeing today, all 11 of the S&P sectors moving to the upside, some of the largest gains coming from energy, financials, and technology.

Here to take a closer look at the action that we saw today, let's bring in Ross Mayfield, Baird investment Strategy Analyst. We also have JoAnne Feeney, Advisors Capital Management Partner and Portfolio Manager. Great to see both of you. Ross, let me start with you. Just in terms of the reversal that we saw today, the bad news is good news here for the market, what do you make of it?

ROSS MAYFIELD: Well, look, I'm a-- I'm a long-term bull. I'm an optimist. But reading that CPI report, I found it difficult to find any good news. Core CPI accelerating, broadening out presents a real problem for the Federal Reserve. So to me, maybe this was a sell the news type of event or just a sentiment positioning reversal, but it doesn't change the path of the Fed.

It doesn't change what they have to do over the coming months. And so maybe a lot of it was priced in getting near those 2022 lows. However, it's hard to find a lot of good news out of the CPI report this morning. I'll take the good day when we can get it. But maybe if there's good news, you can tell me where it was.

RACHELLE AKUFFO: So, JoAnne, hopefully you can help us figure this out given how much stickiness we saw in this CPI report.

JOANNE FEENEY: Well, you know what, when I was a kid, I used to play Twister. And you have to be pretty skilled at Twister to figure this one out, I think. But bending over backwards a little bit, one can imagine that this print showing how resilient and broad inflation is and the challenges of the labor shortage and wage pressures does make it very clear that the Fed has to be adamant about solving this problem. It gives the Fed no wiggle room, which means that the Fed is going to raise rates and continue to raise rates until it solves the problem.

Now for the long-term economic health of the United States, that's a good thing because it really means that we're going to get this inflation problem under control. The Fed's not going to have an opportunity to pause or to go light. So that might be something that's convincing investors that, OK, the Fed has no choice. They're going to have to solve this problem, not going to be any wiggle room. There's no chance they're going to pause and make a mistake.

You know, so longer term, it could be that investors are saying, OK, the bad news is all in at this point. There's no room to maneuver around this. Fed's going to have to go raise rates. They're going to solve this problem. Longer term, we're going to have inflation come back towards that 2% target, and that's going to be good for the ultimate economic growth in the United States economy, which means maybe it's time to get into these companies that ultimately are going to do well in a healthy economy.

We know there's a lot of cash sitting on the sidelines. And we've seen it before over the summer with these little tentative dips and rallies, is it time to get back in, to own these stocks because a lot of them have gotten cheap? So I think it's partly all the cash that was sitting on the sidelines. And now I think it's conviction that the Fed will have no choice but to be adamant and determined about solving the inflation problem. And, ultimately, that's good for the long run health of the US economy.

DAVID BRIGGS: JoAnne, I'm outstanding at Twister. Far be it from me to solve this riddle, though. I cannot even begin to explain that rally, but there is some optimism in your voice. Ross, do you see any opportunity?

ROSS MAYFIELD: Yeah, absolutely. Well, look, with sentiment as negative as it's gotten, positioning as negative as it's gotten, valuation both in fixed income and in stocks approaching something like we haven't seen in quite some time, I think, yeah, there's some real opportunity if you're a long-term investor to start legging in to-- if you want to kind of average in during this volatile time. So, yeah, I mean, there are sectors we like, sectors that we think have tougher roads ahead.

But overall, I mean, if you're a long-term investor, we haven't seen a starting point like this in quite some time. Now, it might be a rocky road in the near term. But we're long-term optimists, so if you want to look at sectors, energy leading today, I think, is a really good example of a sector that's been leadership, that has a really good trend, is going to have some really good earnings quarters over the next few years-- or next few quarters.

On the flip side, the fact that the NASDAQ trailed today, I think, is emblematic that some of those big-tech names are still-- still have a lot to work through before they become kind of the tech names that we're used to over the last decade again.

SEANA SMITH: JoAnne, you teased some of your picks too. Give us an inside scoop. What do you like in this market?

JOANNE FEENEY: Yeah, so, you know, when you're potentially heading into a recession, even if it's not so severe as some we've seen in the past, one way to help your portfolio during a time when some stocks are going to be weaker, they're going to be more reliant on consumer spending in the short term, is to move towards stocks that have the growth opportunity that's really structural.

Like, we still need more data centers. We still need more internet capacity. There's a lot more use of the internet from not just consumers but firms, IoT devices, whether that's cars or factory equipment. So that's something that still needs lots of investment, and so the companies that enable that, whether it's parts or chips or software.

Cybersecurity is another area which is going to be under continued pressure. You know, Palo Alto is one of our favorites in that cloud data center space, whether it's a Broadcom or an Amazon. I know it wasn't one of the ones that rallied today, but they're a critical provider. And it's mostly traded down on the retail side.

And then you can go to a real contrarian play and look at home builders because the fact of the matter is with rental costs so high, as we saw on the CPI print, people have to live somewhere. And this millennial generation needs housing. And as rents get more expensive, that makes housing, even with high mortgage rates, something that becomes more palatable.

What we're seeing is them trade down, getting rid of some of the extras on those new homes, and buying something cheaper to help offset the high mortgage rates. So we really like Lennar. It's trading at 5.8 times. And we think that you'll be real happy with that kind of purchase over the next three-plus years, and potentially even sooner.

RACHELLE AKUFFO: And, Ross, I know you said you take the longer view. But for some people who perhaps have a shorter time horizon, where do you see opportunities?

ROSS MAYFIELD: I mean, near term, I think the volatility is likely to continue, and we are headed towards some sort of economic slowdown. I mean, that is the intention of the Fed. Whether it's a soft landing or a hard landing, there is a slowdown coming.

And so you want to position defensively, and you want to position with leadership. Now, that's kind of a more near-term tactical view of it. Again, I actually think at these rates, at these yields, treasuries, some investment-grade debt starts to look really attractive.

But on the equity side, like I said, I think energy is leadership. I think being a little bit more defensive in the near term probably makes some sense because the Fed will continue to raise rates, at least into the first quarter of next year. Inflation, as it proved today, is broad, is still a problem.

And so we're headed towards a slowdown. Even if milder by historical standards, and we think that's the case, given where the labor market is and given the consumer position, it's still a slowdown. There still will be some contraction of earnings. And so you want to position for that in those kinds of sectors.

RACHELLE AKUFFO: And certainly the Fed not going off course, especially with this latest CPI data. A big thank you to our market panel, Ross Mayfield and JoAnne Feeney. Thank you so much.