Fed Chair Powell hinted at ‘room to hike rates’ without disrupting labor market: Strategist

Chris Konstantinos, RiverFront Investment Group Chief Investment Strategist, and Shawn Cruz, TD Ameritrade Senior Market Strategist, joins Yahoo Finance to discuss Fed policy, the labor market, inflation, and the outlook for long duration assets like tech stocks.

Video transcript

EMILY MCCORMICK: Let's bring in our market panel now to discuss more on the fed's latest monetary policy decision and the market reaction that we're seeing. With the NASDAQ composite now trading in slightly positive territory though, the S&P 500 and Dow are still in the red. And for that, we have Chris Konstantinos, RiverFront Investment Group chief investment strategist, and Shawn Cruz, TD Ameritrade senior market strategist. But before we turn it over to you both, do want to get one final check of the markets as we head into this closing bell.

Definitely getting quite a bit of a swing here as we had the Federal Reserve's monetary policy statement coming out at 2:00 PM Eastern. Just after that, we did see stocks trading in sharply positive territory. The S&P 500 had risen by more than 2% to reach session highs, but is now trading just slightly below the flatline. And the Dow Jones Industrial average likewise, also down by about 100 points, or about 0.3 percentage points. We're definitely seeing a bit of a reversal on that front as well. With all that in mind, here's the closing bell.

[MUSIC PLAYING]

ADAM SHAPIRO: Can you hear me? Great. The S&P 500 is going to be off about six points. And then the NASDAQ, the NASDAQ actually pulled up 2.82 points. There you go. Let's get to the panel. Let's talk about what we're witnessing here. And Andy Serwer, our editor in chief, pointed out that really the only perhaps new thing we got today was the increased speed with which roll off will take place. So let me start, Chris, from your viewpoint. What do we as investors do with that? Because we may speed it up. But they're not doing it yet.

CHRIS KONSTANTINOS: Yeah, I think it's a classic case of the fed being as transparent as they think they can be, which is, of course not maybe quite as transparent as we'd all like them to be. But they sort of have to walk the line between giving us the information we need without TMI I suppose. I think that when we sat down and wrote our 2022 outlook here at Riverfront back in November, early December, we did highlight that a more hawkish than expected fed is the number one risk to stock markets in '22.

Having said that, you mentioned earlier on the program about inflation. We're of the view that there's still a pretty good chance inflation moderates here in the first half of '22. And so even if the fed starts down a relatively hawkish path, which as per today, sounds like they're going to, there's no reason that they have to continue that path. And they don't have to be quite as aggressive as maybe they sounded today should inflation really back off. Because I think inflation has been the key reason that they've done this sort of body language about face in the last month and a half.

EMILY MCCORMICK: Shawn, this isn't necessarily something that Powell gave any clarity on. But do you think the fed is going to need to implement a 50 basis point rate hike at some point this year in order to get ahead of inflation.

SHAWN CRUZ: Yeah, it was interesting in his press conference. He was asked specifically about that. And his response was that they're going to discuss that when they approach that March meeting. So he didn't completely rule it out. Another thing he said that I think if you really are trying to fish for some sort of hawkish commentary hints he gave in the press conference was he mentioned that they really felt they had a lot of room to hike rates without disrupting the labor market.

And when you think about the fed's dual mandate, it's price stability and low levels of unemployment. So if they feel that they can achieve that price stability without raising unemployment, I think that gives them a lot of room to hike rates if they do really feel like that is the case.

ADAM SHAPIRO: And yet, Shawn, just to follow up with that, when the fed chair talked about expectations, because that's what they're afraid of, is that the expectation that we're all going to have to pay more tomorrow for the stuff that we're buying today, and therefore we pull those sales forward. Controlling that expectation even in a full employment environment, the people in the bottom two quintiles are not keeping up within inflation. And how does that play into this decision they're going to make?

SHAWN CRUZ: I think that's going to probably play out in the way I would view that is really just thinking about some of the wealth effects in the economy. And we usually talk about asset prices where we're thinking of that. But I also think looking at real wages, that is going to be a major concern. And if you look at what the market's done since the fed really came out earlier on this month before they went in there quiet period and gave some discussion, the market has really done a little bit of the tightening for them in some regards already.

So I'm going to be curious to see what the market has already priced in, and in the weeks to come, what we get that could price them a little bit more. But that certainly does create some issues for some of those companies. Think of a Dollar General, a company that really caters to that audience, that does create some risk for them just in terms of revenue if their customers do really start getting hit in terms of their real income.

EMILY MCCORMICK: Chris, over the past couple of weeks, we've seen this massive really repricing of stocks and especially highly valued growth stocks. And I'm wondering, did you hear anything in today's press conference or in today's statement that you think warrants a shift to the sort of repricing that we've seen on valuations?

CHRIS KONSTANTINOS: Well I was actually just having this conversation with a colleague a couple of minutes before I came on your program. And if anyone was looking for Jay Powell to sound like a white knight for long duration assets, that definitely didn't happen today. And I do want to take a step back, though. If you look at where the carnage has been really concentrated, it's in a bunch of stocks that when you look at it through a broader lens, the fundamentals really aren't all that strong relative to their valuation.

These are by and large been stocks that have been in somewhat like bubble territory here for let's call it three or four quarters plus. And so some of this is maybe just healthy in terms of it reorienting all of us around fundamentals a little bit more in the market. Now of course, there's been some probably babies thrown out with the bathwater. You mentioned earlier on the program some of the really good results from some of the mega cap tech names, which I think the fundamentals there are very strong.

And they don't really trade at a huge premium, some of those names, particularly in the software space. They don't really trade at a premium per se to the S&P 500 despite the fact they're growing dividends faster, they pay dividends, which a lot of high flying tech doesn't. So part of this, I think, is healthy and just a correct, if you will, repricing of some assets that probably got a couple years ahead of their skis in terms of pricing and really aggressive forward growth.

Having said that, I do think that long duration assets could continue to be under some pressure here in the near term. Because when you're selling tech, a lot of investors are selling tech indiscriminately. And they're just trying to trim equity risk, trimming equity beta. And some really good companies, I think, are getting thrown out in the bathwater. So if you're a long term investor, look for periods of volatility like what we're seeing today to maybe be more discerning. And that's what we're trying to do here at Riverfront. We're being more granular in our security selection.

A couple years ago, it was all about making sure you had enough, your stock to bond ratio was properly calibrated. Now I think going forward, it's going to be a lot more about individual company and sector fundamentals.

ADAM SHAPIRO: Chris I think some of us, and I want to follow up to what you just said, we use folk like you to help us make the decisions. And I would use Tesla as the example. You don't have to comment on a specific stock if you don't want to. But we're awaiting their earnings report. And you're looking as an investor for those kinds of issues you've just talked about. And yet, you look at the price of a Tesla and you think, where's my growth going to come from? Regardless of all these other issues going on, how do you calm your clients, those of us who are investors, into making the decision of yea or nay on a stock like that?

CHRIS KONSTANTINOS: Sure. So first of all, my compliance department gets very nervous when I talk about individual stocks. So I'll speak broadly. But there's growth rate imputed ways to value corporate equity. And if you back into the growth rate expected for some of these companies, you're realizing that their current market cap, even after the recent sell off, are baking in really, really aggressive, or really maybe unrealistic expectations about what the future state holds.

Those are not the kind of names that my firm tends to focus on because we just don't think we're smart enough to figure out growth that far in the future. We'd rather look for dividend streams and cash flows in the near term that we think have more certainty. But at just a more general level too, I think the best way to approach periods like this for investors writ large is make sure you have a risk management discipline. Understand that risk management is it's not a Holy Grail. You're going to get some things wrong. You're going to sell some stuff and then six months later, you're going to wish that you still owned it, you're going to feel silly.

But just having some sort of unemotional way to set stops in the market, we think is a really good strategy for an investor. But make sure you also have similar types of disciplines to stop you back into owning equities as well. Because what we see a lot with investors is that they're quick to get out of stock when things seem really weird. They're not so quick to get back in when the fundamentals have turned back around. And that's usually where we see the biggest mistakes being made in equities, not at the sell point, but rather having that discipline to get back in as well.

So just being honest with yourself, being unemotional about equities, you can sell them and buy them right back. Stocks won't hold it against you is what I always like to say. And that, generally speaking, has served us well as asset allocators.

EMILY MCCORMICK: And we want to pause this conversation really quickly and head over to Yahoo Finance's Pras Subramanian who's standing by with earnings results from Tesla. Pras, break this down for us.

PRAS SUBRAMANIAN: Yeah, Emily. Stock lower here. I'm going to go through some of these numbers here. A bead on both the top and bottom line. Revenue coming in at $17.7 billion, topping estimates $16.64 billion. That's a record right there. Q4 adjusted EPS, $2.54, topping estimates, $2.37. Highly watched gap net income, Emily, that you were talking about before, a record $2.3 billion. Third time it's past $1 billion in net income for the quarter.

So another big beat there. Automotive gross margin, above 30.6%, again beating estimates. And they have $17.6 billion cash on hand and cash equivalents. No change to deliveries. They also see capacity and volume staying at 50% compound annual growth rate. That's maybe [INAUDIBLE] for quite a few quarters now. We also don't see a change in annual capacity at the three plants. California, Fremont factory, $600,000. Shanghai at $450,000.

I want to note one thing in their product outlook. At the end of their shareholder deck, they mentioned-- this could be knocking the stock a little bit. The pace of production ramps in Austin and Berlin will be influenced by the successful introduction of many new products and manufactured technologies in new locations. Ongoing supply chain related challenges. Regional permitting. We are making progress on the industrialization of Cybertruck, which is currently planned for Austin production subsequent to Model Y.

So we don't know if that's going to be end of this year or even possibly the beginning of 2023. On the call, Elon Musk will return to the call after a few quarters off. He's going to talk about a product roadmap. So maybe we'll get the update on that in addition to any new news on that Cybertruck date. We're also going to hear about FSD and investigation with NHTSA, anything new on that front. And also lastly, many investors and also customers are asking about customer service improvements. Are they going to invest in those areas where Tesla has sold so many trucks and cars, SUVs, and cars over the past year. People are having problems servicing them.

So that's another issue that's a paramount concern on the call later today.

ADAM SHAPIRO: All right. Pras Subramanian, thank you very much. Got to get to-- we've got Jared standing by. He's got Intel earnings. What have they got?

JARED BLIKRE: That's right. It was a beat on the top line and a miss on the bottom line. You can see the stock's down 2% in after hours trading. It was down as much as 4%. Here are the numbers. We have revenue for the quarter coming in at 18. Actually, excuse me, this is a projection for their first quarter revenue. They expect it to be $18.3 billion. That's higher than the estimate for $17.67 billion. They're seeing first quarter adjusted EPS at $0.80. But that was lower than the estimate of $0.86.

Now for the reporting quarter, fourth quarter-- excuse me, fourth quarter revenue came in at $20.5 billion. The estimate was for lower $18.33 billion. And also their fourth quarter adjusted EPS, $1.09. The estimate was for lower at $0.90. So originally, I misspoke. It was their outlook where we had that bottom line number that was missing expectations.

So the board has also declared a quarterly dividend of 36 and 1/2 cents per share. That's a 5% boost to that quarterly cash dividend. They're also seeing their first quarter EPS at $0.80. That's that number once again. And also going down the line here, their mobile line revenue, this is a unit that they're considering offloading. They've already made that decision as part of Pat Gelsinger's turnaround strategy. That came in at $356 million. Estimate was for a $366.6 million.

But it's really their PC revenue. That came in at $10 billion 0.16. So a lot of attention on this. Here's a number that might catch investors' attention. The gross margin for the fourth quarter coming in at 53.6%. And their projection for the first quarter of revenue, that's the current quarter, 49%. And it used to be-- that used to be a number that was in the 60s, but not now during their turnaround strategy.

Also, investors are noting that on the call today, their guidance might be a little bit light because they are having an investor day about three weeks in the future, February 17. So might be a little bit light on the color as they execute their plan here, guys. So it was a beat on both the top and bottom lines. But the stock here under a little bit of pressure given the outlook.

EMILY MCCORMICK: Yahoo Finance's Jared Blikre. Thank you so much. Shawn, I want to turn this next question back over to you. And when we zoom out and think about corporate earnings so far, of course, Tesla and Intel are trading lower after their own results. But do you expect earnings and what we'll be seeing for the rest of fourth quarter season to help support stocks this year, even against a backdrop of the fed hiking rates and rolling off its balance sheet?

SHAWN CRUZ: Yeah, well I think it's going to turn to an environment where being a stock picker can be rewarded because there is going to be a little bit of a divergence here between companies that are executing well and able to navigate these waters and companies that just frankly can't. And if you are a company that has a little bit of a stretch valuation, particularly in that tech space, and you aren't delivering on either bringing more customers in, you're not delivering on your ability to maintain or grow margin, or you just have guidance that spooks investors a little bit, if you're a company that's a little bit stretched on the valuation and the investors don't get the sensor filing firing on all cylinders, I think those are companies that are going to get hit pretty hard.

But there will be some opportunity created with these broad market sell offs where you maybe can get entry into a company ahead of a decent earnings reports. And I use Microsoft as a good example of a company like that.

EMILY MCCORMICK: All right. Shawn Cruz is TD Ameritrade senior market strategist. And Chris Konstantinos is RiverFront Investment Group chief investment strategist as well.