more insight in early morning trading activity. I'm joined
by steve Sosnick, chief strategist at interactive brokers,
Steve It's been a rough year for the market here
today. I mean, the S&P 500 just in
this last month, that fell by 8.4% in June
and 20% year to date. What is your take
on the first half of this year? Is there
any concern, you know, the Feds demand destruction
really could send us into an even further selloff in
the markets? Um Good morning Alicia, that's not
the most rosy way to start the start the week
start, we'll start the new quarter. But yeah
, that's that's basically sums it up in a nutshell
, essentially this year was this year reiterated the idea
of don't fight the Fed for most of 2020 and
2021. You followed the Fed as they were Lowering
rates and being relentlessly accommodative and that was one of
the best periods of risk assets that we've ever seen
essentially since 2009. The Fed has been almost relentlessly
accommodative because there really hasn't been much inflation. The
few times they haven't been, we've seen some hiccups
. Well, this time, the Fed really needed
to reverse course they pumped a lot of money into
the system, inflation was coming through the Ukraine situation
was certainly, you know, one of these exogenous
outliers. Um that made things worse, we were
already shaping up to be to be in a situation
where the Fed was going to need to fight inflation
. They do that by raising rates and withdrawing some
of their liquidity from the market place. That's never
a good time for markets and that's why we saw
this general trend toward risk off, you know,
there's a lot of nuances in there. But the
basic one is the money, the monetary pump stopped
flowing. The Feds obvious inflation target is 2%.
I don't think there's a single person out there that
thinks the Fed will will hit 2%. I mean
right now it seems to be on pace to hit
closer to like 6% by the end of the year
. We obviously know there's gonna be rate hikes at
each meeting. Do you think, you know,
given that 6% is still way off from that 2%
threshold that an inter meeting hike, you know in
August is what's gonna be needed to tame inflation.
And do you think the Fed actually does that because
it would be in line with a more hawkish stance
. Um I'm gonna say no to the inter meeting
hike. The reason there would be the Fed really
doesn't like surprising markets. I think they, I
think they kind of, you know, I hate
to say the word lucked out but but I'm talking
from a Fed governors point of view, I think
they wanted to raise rates 75 at the last meeting
and then the market sort of beat them to the
punch. So they were able to do it.
Um You know, bear in mind the Fed doesn't
, yes, inflation is a monetary phenomenon at many
levels, but the Fed doesn't control a lot of
the things that are creating the inflation. You know
, we're seeing it in non core factors such as
food and energy, which is sort of outside the
Fed's bailey with to a certain extent. So I
actually think that they're not going to necessarily do the
sharper interest rate hike. I if they're going to
be a bit more tough on inflation, I would
expect to see them ramp up the quantitative tightening that
they've announced. It's another one of these things,
they're dipping their toe in about reducing their balance sheet
. What they've been doing was buying, They've been
buying bonds, mortgages, and government bonds, you
know, at$90 billion 47.5 billion a month.
But that's kind of a glacial pace for something that's
grown so fast. So I think if we're going
to see a surprise, it would be a surprise
to have more aggressive quantitative tightening. That's also not
a pleasant thing, mind you, but it would
be a different characteristic than an interest rate hike to
your point a moment ago. The Fed has not
wanted to surprise the market, but that is truly
led to a Fed that hasn't been trusted by the
market and it certainly has been delayed because it's it's
it's seemingly fearsome are fearful of the market's kind of
reaction. I mean even I go back to transitory
when the bed was talking about that and the market
blocked it for for you know, even having the
idea that that that inflation will be transitory and for
the idea for such a long time. And the
Fed came back afterwards and said, oh, never
mind about transitory and each step along the way for
the last two years, it has just been late
to the game to the point now where many out
there are saying, listen, the Fed is late
to the game on these rate hikes and now,
you know, trying to have these more aggressive rate
hikes only makes it more risky for us to dip
into a recession. And now we've got talked this
week more than than ever before about the fact that
we may already be in a recession. Do you
see the Fed at some point decoupling its concern from
the markets and just doing what is needed to be
done regardless of how the market reacts. Given that
we've already pulled back so dramatically. Well, you
made some great points in that question Alicia. Um
yeah, they've been slow and that's the problem is
I think a lot of people recognized you know,
six months ago that they needed to be, you
know, instead of talking about transitory instead of talking
slowly that we needed to be getting into actual action
and that's why I say with the quantitative tightening,
you know what they're dipping their toe, They've been
so afraid of markets and and and and with good
reason because over the last 13 years, the times
they've tried to withdraw with liquidity or the times they've
surprised the markets in any way, in a negative
sense, it's been relatively disastrous. Well, guess
what? They have to do it now, we
need to take our medicine. The times they were
doing it before was sort of preemptory sort of to
reload the ammunition in case it was needed again Right
now what we need here most is some real action
on on the inflation front. The problem now is
markets are sussing out recession, partially because of the
, just the drag that that they're taking, you
know, the slow drip here. Um you know
, the the we had a negative GDP in the
first quarter of negative 1.6. The Atlanta Fed now
forecast for the second quarter is negative one that came
out yesterday. So yeah, the N. B
. The N. B N. B. E
. R. Um the group that officially declares recessions
is a bit more nuanced, but the general and
the general mindset, it's two negative quarters, well
, we may be looking at two negative quarters in
hindsight. The Fed certainly raised rates during a bear
market and maybe and may have ended up raising rates
during recession, You only know that in hindsight,
but that's a really tough period of time and that's
why we're, that's why, you know, we're
in the funk that we're in. You said a
moment ago that I made some really good points in
that question. I will tell you this yesterday,
I was in a cab and those points that I
made, I brought them up because I was having
that conversation with my cab driver and those are the
points that my cab driver was making just to show
how transparent it seems. Um that the Fed's reaction
has been so tied to the market maybe to the
detriment of kind of the overall action that the Fed
should have taken. Um That being said, let's
dig into kind of the market a little bit more
in terms of, you know, where the struggles
are and where the opportunities are, where do you
, where are you watching in terms of, you
know, areas of the market that are gonna have
longer than expected declines and where are you watching for
incremental gains or signs of rebounds? Well, I
think, you know, a lot, a lot
depends on the labor picture of some of the big
tech companies. I think a lot of them over
expanded. You were talking about meta before. Um
, and so I think they've got some headwinds,
they're going to probably get into some cost cutting when
you see companies doing that. Yes. You know
, it's, I guess good for their bottom line
, but not good for the economy and not telling
a great story about the company. Um I think
right now is everybody's hunkering down and that means consumer
staples, that means that means that the type of
stuff that you need to go out and buy regardless
. For the most part, people still do have
money most, you know, the employment numbers are
good, most people were able to build up their
savings and curb a lot of their debt during,
during the last couple of years, which is great
. Um and so you know, but but people
are, people are deciding to be a bit more
cautious with their dollars and cents and so I think
you want to stick to the stuff that that has
, you know, that has lasting demand. I'm
going to say like a Procter and Gamble or Clorox
something of that nature. Um or you know,
or, and or companies that have a decent dividend
, which by the way include a lot of those
companies because if you have a company that pays a
dividend and very importantly has the cash flow and the
earnings to support that dividend that they don't need to
go out and borrow to pay the dividend, but
if they have the money on hand and the steady
earnings to support a dividend that provides you a lot
of ballast in a downward market and you know,
as you go up um you know that you're still
gonna, you've locked in that yield, so to
speak really quickly before I let you go here,
I just want to touch on china with you,
obviously china coming, coming back online so to speak
here. Can you just briefly talk about, you
know, what that means for the energy sector,
but also what it potentially means for investors, given
that we've seen so much of a pullback, you
know, around chinese related companies in chinese stocks,
their opportunity there. Um china coming online is good
for the world economy. Um you know, having
them offline has been tough. Yeah, that that
means it puts pressure on natural resources um but we've
seen for example copper um completely in the dumps thanks
to the, you know, more or less china
stopping, you know, stopping its real estate sector
um In general, I think, you know,
you need china has bailed, china bailed us out
a couple of times in the last few years,
being sort of the one place that was growing when
the rest of the world had been stagnant during various
parts of the business cycle. So if they can
come back online, I think that's good. Um
you know, in the sense of easing supply chain
portion of inflation, that's good in terms of commodity
, you know, in terms of impacting commodity prices
in a negative sense. Yeah, that's that's the
price to pay. Unfortunately, All right, steve
such great insight, steve Stosic chief strategist at interactive
brokers. Thank you.