China’s COVID reopening ‘could exacerbate the inflation story’: Strategist

Ryan Nauman, Market Strategist at Zephyr, and Global X ETFs Chief Investment Officer Jon Maier join Yahoo Finance Live to discuss the prospects of a market rebound amid the Fed's interest rate hike, tech stocks, and the continued shock to commodity prices from the Russia-Ukraine war.

Video transcript

INES FERRE: Here's the closing bell for today, Thursday, June 30, at the New York Stock Exchange.

[BELL]

[APPLAUSE]

DAVE BRIGGS: And there's your closing bell, sponsored by Tastyworks. How did the markets finish out this Thursday? A lot of red on the board, as the Dow down about 250 points, 0.8%. The S&P drops 32 points. The NASDAQ tech-heavy, 1.3%, a loss of 149 points. It has been a rough couple of days on the market, Seana.

SEANA SMITH: It certainly has been a rough couple of months. Let's talk about what we could expect in the second half of the year because I think a lot of investors are trying to figure out where we are headed next. We want to bring in Ryan Nauman, Zephyr market strategist, and Jon Maier, Global X ETFs chief investment officer.

Jon, first to you. Dave was just saying it's been an awful couple of days, couple of weeks, couple of months here for investors, as we try to figure out the impact of inflation, the possibility of a recession, what exactly the Fed's policy is going to look like. What do you anticipate we'll see over the next three to six months?

JON MAIER: Yeah, yeah, and the market certainly had a rough first half of the year, just about there over. And I think the markets really need to get an indication that inflation is moderating. So we did-- the main PCE numbers came in slightly better than expected, but still pretty high. It does take a while for inflation to come down, but I don't think the markets really can meaningfully move forward, higher meaning, until there's a sense that inflation has started to decline. So I think the market is digesting that and expecting another 75 basis point hike in a couple of weeks. And I think that's what the market is digesting right now.

DAVE BRIGGS: Yeah, it certainly seems as though that 75 point hike has been priced in. Ryan, to that same notion, what do you think the markets are waiting for? What could be the catalyst for some type of a rebound?

RYAN NAUMAN: Yeah, first, thank you so much for having me on. And I agree with Jon. Number one, it's inflation. Inflation right now is on the minds of everyone, whether it's a consumer, corporation, and policy makers. But after that, it's really earnings. So far, earnings estimates are forecasts haven't come down at all, moving forward.

And we're going to start-- I can't believe it's already coming up, but the second quarter earnings season is going to be kicking off here in a few weeks. So it could be earnings, once we start getting some earnings downgrades, which are expected. Right now, a recession isn't priced into a future earnings. And I think that's going to happen. We could see some pickup in volatility or some more sell-offs once we start getting into earnings season and to more downgrades.

RACHELLE AKUFFO: And Jon, what are your expectations for earnings season?

JON MAIER: Well, I think what I'm going to be looking for from earnings reports, really kind of the guidance from companies. We know that the consumer is in decent shape, but they're certainly decelerating their spending. And we'll have some indication from companies, different types of companies, whether the consumer is still spending, because that's going to be a key going forward. If the guidance is pretty negative, if we're seeing that the spending on both goods and services are going down, that's certainly not going to bode well for the economy.

But there are certain areas that still make a lot of sense, from my perspective-- energy, energy transition. Today, you've seen energy-- clean energy, wind, solar is up today, versus most other areas are down. So I think energy and commodities are still in an area that are going to be of focus over the next few months.

SEANA SMITH: Ryan, how about tech? NASDAQ 100 finishing the first half down 30%, the biggest drop that we've seen since 2002. Are some of those growth names-- is it best to avoid them right now? Or could this be a great buying opportunity?

JON MAIER: That is--

RYAN NAUMAN: I think that--

SEANA SMITH: Sorry, Ryan, you first.

RYAN NAUMAN: Oh.

JON MAIER: Sorry.

RYAN NAUMAN: I'm sorry. I think that's a fantastic question. And I really think it depends on the individual, on their unique goals and objectives. For some people, I think this is a great buying opportunity for some of these beaten up tech names, that their valuations have come down and they're much more attractive, based on their potential growth. And other names, for other people, you might want to wait a little bit and maybe do some dollar cost averaging or some type of strategy where you're buying it in increments to maybe lower your cost basis.

But it really depends on your individual circumstance. But for me, I do think there are some great buying opportunities. We saw last week, Meta and a couple of your traditional growth names, tech names are transferred into the Russell 1,000 Value Index. So they are a value play now. And I think some people will be taking advantage of it.

DAVE BRIGGS: Jon, I have a question for you, but it looked like you wanted in on that one. So go ahead.

JON MAIER: Yeah, just a little bit. We're focusing on companies with-- have strong balance sheets, dividends, and are able to withstand higher interest rates. And that-- you know, you look at some of the larger tech companies like Apple and Microsoft. I think they are well positioned to take advantage or fare well in this kind of environment, even if the stock prices go down. Apple essentially is a utility. Everybody has an iPhone. Whether they upgrade or not, it may take a little bit longer. But I still think those are companies that make a lot of sense. And getting them at cheaper valuations also is not a bad thing.

DAVE BRIGGS: And what I wanted to ask you about is China reopening. We've got Shanghai, China reopening today. And if this reopening sticks-- and that's a big if-- where will we see that?

JON MAIER: Well, there, obviously, has been a lockdown in Shanghai for quite some time. And potentially, with China reopening, this could exacerbate the inflation story, because you've had people sitting home for three months without consuming. And now there's that need to consume. We felt that here after the pandemic. So that could actually exacerbate the supply side, increasing demand from the Chinese consumer. So that's a potential risk right there, because I do believe that you could have some strong consumer demand there.

RACHELLE AKUFFO: And we know that with the Russia-Ukraine invasion, a lot of concern over commodity prices. What are you seeing there, Ryan? What are you keeping an eye on in terms of what's rolling over and where we are in the cycle with commodities?

RYAN NAUMAN: Great question. So with commodities, especially the farm commodities, the wheats and grains, they've started to roll over. And there's a couple of reasons. One is that investors are realizing that the shock to the Ukrainian-- or to production due to the Ukrainian war isn't as great as maybe they thought. There's some other great crops. You know, Brazil's picking up the pace. Other places are picking up the pace.

But it also signals to me that with the prices rolling over is that we're getting some economic weakness. And that is the signal that I'm watching for as commodities fall. We even had some oil prices have come down recently off of peaks. That's signaling an economic slowdown ahead. And that's what I'm focusing on.

SEANA SMITH: Jon, what do you make of the retail activity, or lack thereof, I guess you could make the case, or just in terms of the recent sell-off that we've had in the market, spooking many of those retail traders out there on a day-to-day basis. Is that something that you see changing? Or how big of a player do you see them being here over the next couple of months?

JON MAIER: Well, you know, I think there's still a lot of cash on the sidelines. And the markets-- the NASDAQ's down 30%. And the S&P's down 20 plus percents. I think there are people on the sidelines, retail investors, looking to get into this market. But there needs to be some sort of reason. And there are inflationary concerns, recessionary concerns right now. So are we at a complete bottom? Probably not. We're probably not too far off from here. And then you will see some of the retail buying going on. But overall, there is still a good amount of selling right now, so.

DAVE BRIGGS: All right, Ryan Nauman, Jon Maier, thanks so much. Appreciate you both.