Welcome now, Joanne Feeney, partner in Advisors Capital Management, and Liz Ann
Sonders, chief investment strategist at Charles Schwab.
So welcome back, both of you, to Wall Street.
Let me start with you, Liz, and what happened this week.
I feel like we got hit by a Mack truck. So I think it was probably mostly
technical, the reversal that we saw yesterday on an intraday basis in the
first part of the day. You did see the swoon take the S&P to
below 35, 17. And I'm not a technician, but that level
was important because it was a 50 percent retracement of the post pandemic
move higher. And that probably kicked in a
combination of buying hedges being taken off, some short covering and that fed on
itself through the end of the day. Maybe you could point to the move down
in yields yesterday, the move down in the dollar.
But that could also help to explain today's weakness, too, because you saw a
reversal there. So join a fear on a noise.
I think it's fair to say the equity markets there, but on Friday, actually,
they gave up pretty much everything they got back on Thursday.
So when you net net when you get through it all.
What did we learn this week that should affect the marks of a longer term?
You know, David, I think what we learn is that there's still a lot of risks out
there facing the future of the global economy, not just here in the U.S.
And those two price reports we got, the BPI and the CBI reinforce the view that
inflation is going to be a really hard challenge for the Fed to solve.
There also seems to have removed any wiggle room that people think the Fed
has. They're really going to have to be
adamant about raising rates to try to constrain liquidity, try to discourage
consumer demand in order for inflation to get under control.
There's not a lot of room for them to do anything but raise rates now for the
next at least couple of meetings. The market finally perhaps is digesting
that. And there's a lot.
Sorry, go ahead, please. I.
I think Julian's absolutely right. And I think there have been these
moments where it seems like whether it's in reaction to things going on in the UK
that the markets almost cheering for or looking for some sort of financial
system accident because of the messaging from the Fed, from Powell, that they're
not going to step in because of financial market weakness across any of
the asset markets or just volatility, but financial system instability, maybe
what could bring the Fed back in. But even in a situation like that, what
they may do is use the tool of their balance sheet or repo facilities versus
doing a pivot anytime soon on rates. And I'm not sure that's been fully
digested by the market yet. You know, there could be certainly more
digestion to come, particularly because the risks that are out there are really
unusual. You know, it's not just the inflation
problem, right? The U.S.
has a labor shortage, born of the pandemic, born of early retirees, born
of a lack of legal migration, immigration into the U.S.
And that problem is not one that the Fed can solve.
And so they still have very high consumer demand and a shortage of supply
no matter what the Fed does to try to curtail demand.
There's gonna be spillovers, too, also curtailing the recovery of supply from
the pandemic. So they're sort of fighting this problem
without having all the tools that are needed.
And, you know, the risks that are out there haven't really abated in many
ways, although finally we're starting to see earnings estimates come down and
market expectations adjust to those risks.
Was I wonder whether part of the problem we have right now is it's not all bad.
There are parts of the economy that actually continue to be quite strong.
It's sort of like we've gone from a unipolar to a multipolar world.
We've gone to a multipolar economy. It feels like we haven't.
I think that's what's particularly unique about the pandemic.
The nature of it, how it unfolded is that we we've been in this rolling
cycle. So during the throes of the pandemic,
when all the stimulus kicked in, both on the monetary side and on the fiscal
side, that stimulus and demand associated with it was forced to be
funneled into the good side of the economy because of the absence of access
to services that became the breeding ground for the inflation with which
we're still dealing. Then as you saw reopening, you saw that
pared down demand on the good side, you saw pent up demand on the services side.
That tends to be the stickier components of inflation.
So even though we're seeing disinflation now on the good side, we've got it on
the services side. So it's very different than your typical
slowdown, downturn, recession, whatever you want to term it, because at least
the last two, the Covid recession, the global financial crisis, in essence, the
bottom fell out all at once in the economy.
This is happening in a unique way because it's sort of shifting through
the economy and hitting pockets at different times.
And some areas of the economy are still expanding, even as some parts like
pieces and smartphones, where a lot was purchased during the years of the panic,
the worst of the pandemic. Now those sales coming down, but look at
auto production. That industry is still suffering from a
lack of the chips needed to finish off cars.
And they're putting cars in inventory waiting for that last ship to arrive,
for example. And the semiconductor companies that
supply them still have a very long runway of demand ahead of them.
So there are parts of the economy that are still expanding, while others are
being hit by lower consumer demand from high inflation, from the change in
sentiment, from spending on goods to services.
So that's why I think it's become very hard to say, well, what kind of a
recession might we get? Is it going to be broad based like
recessions in the past or is going to be more specific where lower middle?
And, you know, consumers suffering from the higher and trade is suffering from
deflation really curtail their spending like Wal-Mart saw.
Right. But whereas the higher end retailers are
doing fine so far. So it is a very challenging time to
forecast where the U.S. economy is going and how much
unemployment might be created because of this constraint on liquidity from the
rate increases. That means it's still possible to find
potentially investments that do lead to to growth overall, even the near term as
some of these industries continue to recover.
And you know, Joe, and to your point about the the the upper end is in better
shape as witnessed by what the retailers are saying.
There's also that potential pressure just on psychology because of the wealth
effect, given that even though the excess savings story has merit up the
income spectrum, they're also challenged by not just equity market losses, but
bond market losses, real estate losses. So I think that's why I think we ought
to be careful about extrapolating that excess savings up the income spectrum as
a guaranteed feed into the consumption side of the economy.
I think even there, there might be some hesitancy.
John, last thought here I will talk about when is the market bottomed out?
What is the bad news bottom out? When do we know we've got it all out?
We know how to deal with the world from here.
Well, I think you almost never know that ever.
I mean, think about the risk the global economy is facing, right?
It's not just the US and inflation problems globally.
Right. We have the war in Ukraine and there are
some maybe a low probability, but very large risks associated with that.
And then you have China and there continuing 0 Covid policy, which seems
to be having rolling disruptions to supply, which don't help our inflation
problem. And now we have more of an economic war
against China with the latest round of restrictions on exports of semiconductor
equipment and high level chips. And the real question there is, will,
there'll be retaliation from China in terms of restrictions against access to
the Chinese market, which is still, you know, hope to be one of the fastest
growing markets in the world. And now we might find that U.S.
companies don't get access to that. So.
So we shouldn't assume that the worst is is in at this point.
And we should expect that markets are going to continue to be volatile as some
of those risk get realized or clarified.