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Debt markets are acting ‘smarter than the stock market’: Strategist

Jimmy Lee, CEO of Wealth Consulting Group, and Eddie Ghabour, owner of Key Advisors Group, join Yahoo Finance Live to discuss market volatility amid recessionary indicators and the Fed’s rate hike cycle.

Video transcript

RACHELLE AKUFFO: And there you have it, your closing bell for today, July 11th. The three main clues in the red, as you can see here. The DOW is down about 1/2 percent today, 162 points. The S&P 500 – down about 44 points, just over 1%.

And the biggest loss is on the tech-heavy NASDAQ, with tech stocks there dropping about 2 and 1/3 percent, losing 262 points. Now let’s break this market action down with our market panel.

Eddie Ghabour, owner of KeyAdvisors Group and author of “Common-Sense Bull”, and Jimmy Lee, CEO of Wealth Consulting Group. So Eddie, starting with you, in terms of sentiment in the market right now, as they prepare for more data to come out this week, what are the markets digesting right now?

EDDIE GHABOUR: So I think the most important thing the market is going to digest is its inflation data and how the Fed interprets it. We continue to be quite bearish here, as I personally think there is too much complacency in the market right now when looking at where the VIX is.

So I think when we start getting this second quarter earnings data in July and August, investors are going to realize, in our view, that growth is really slowing down significantly. And we, in our view, are heading into a recession. We could potentially be in one right now.

And we have a Fed that is going to have to deal with a very high inflation figure. And they’re going to have to choose between trying to save the economy or just continuing to raise rates in this downturn. So I think risky assets will go down another notch in the coming months.

And there will be potential buying opportunities at the end of the third or fourth quarter. But right now, we continue to sit on the sidelines.

Jimmy, the same– your position– and is there too much pessimism right now, or about the right level?

JIMMY LEE: You know, the more pessimism I hear — and it’s been like this for months — the more I feel like we have buying opportunities for long-term investors. So I agree with the other guest. I think the next 90 days are going to be very volatile.

Inflation data is not going to improve fast enough and the Fed is not going to signal that it is going to change course. And I really think that’s what you’re going to have to have – is that investors have to believe that the Fed is going to take a break and when and maybe even reverse the trend if we continue to get negative economic data , which we will probably get.

But as you saw with the strong jobs report last week, I think right now we’re just giving up a small portion of the profits from a strong week in the markets, especially in tech stocks . The NASDAQ was up more than 5%. And today with China and the new shutdowns, you know, I think that’s making short-term investors nervous again.

RACHELLE AKUFFO: And Eddie, with a lot of that nervousness still skimming the markets right now, do you see, maybe, what could be considered safe havens or defensive plays that really stand out for you?

EDDIE GHABOUR: We’ve been telling our clients as we head into this second quarter that cash will be king in this environment. Because I think there are very few places to hide when you look at what the dollar has done, what interest rates have done.

Now, with all that said, I believe, as I said, that we’re going to have some great buying opportunities in the third and fourth quarters of this year. But we have to get through this second quarter earnings data coming in. The second quarter numbers are going to be really tough.

The comps are going to be extremely difficult. And again, I think when you look at the consumer, you start to see debt levels start to rise. You start seeing late payments on credit cards.

Used car loans are starting to go downhill. So the credit markets are telling us to be very, very careful here. And I believe debt markets are smarter than the stock market. And in the short term, we’re going to follow those signals, and that’s just telling us to be very, very careful here and not try to be a hero.

Jimmy, what are your expectations as we begin to get a glimpse of earnings as well as an inflation print for the month of June?

JIMMY LEE: Yeah, I think inflation is probably still going to be pretty high, which isn’t great for people watching what the Fed is going to say in upcoming meetings. I think we’re guaranteed 50-75 beeps at the next meeting, then in September, probably at least another 50, probably – maybe not guaranteed for that one.

But at least two Fed rate hikes, I think, we’re there for sure. And then on the revenue side, you know, I don’t know if the adjustments happened fast enough. People were rushing – analysts were rushing to make adjustments. But I think we’re going to focus more on orientation.

And you know, consumers still have a lot of cash in store. And as you saw with the jobs report, people are still hiring. So the good news is what we can expect down the road, and I think it will be more in the fourth quarter – is that we haven’t had a synchronized global recovery from COVID yet, isn’t it not?

So I think we still have some good news to come, hopefully a resolution from Russia and Ukraine, hopefully better inflation data that will make the Fed look less hawkish, maybe – be reversing the trend. And I really think that’s what you’ll need for a sustained bullish rally, and I’m hopeful of that.

RACHELLE AKUFFO: And Eddie, in terms of how people should view their portfolios, BlackRock says the traditional 60-40 stock and bond portfolio allocation no longer works. What do you think about this? And is it something permanent, or just to get through this period?

EDDIE GHABOUR: I don’t think it’s a permanent thing, in my opinion. The reason the 60-40 didn’t work out was because the markets really fell dramatically and the 10-year bond blew up. Thus, fixed income securities also suffered, from a price point of view.

But I believe that when we start to hit those peaks of inflation, and ultimately the Fed goes from raising rates to hoping to stay where they are, you’ll see the 10-year bonds peak and begin to decline. We think the 10-year bond will start rolling once we hit that record number.

And that would be good for bond prices, because they work inversely to interest rates. So I don’t like to say the word, it never works, because that usually means we’re probably close to making it work. So I wouldn’t quit fixed income because you had a bad half, just like I wouldn’t quit stocks because you had a bad half.

All right, we have to leave it there. Gentlemen, Eddie Ghabour, Jimmy Lee, thank you very much. Enjoy this today.