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Fed: There may be too much dovishness and 'hope in the market', strategist says

Chris Konstantinos, RiverFront Investment Group Chief Investment Strategist, and Geetu Sharma, AlphasFuture LLC Founder and Investment Manager, join Yahoo Finance Live to discuss Fed interest rate hikes, inflation, new economic data, and Russia's grain and energy markets.

Video transcript

[MUSIC PLAYING]

[BELL RINGING, APPLAUSE]

[GAVEL BANGING]

[APPLAUSE]

RACHELLE AKUFFO: And there you have it, your closing bell for this first trading day in August. Let's take a look at how the major indices fared. A choppy day, as Ines was mentioning there. We see the Dow losing about 45, 46 points there. We see the S&P also relatively flat, losing about a 1/3 of a percent. And the NASDAQ also relatively flat, losing about 21 points. But certainly, not the momentum that we saw to close out the month of July.

Well, let's break this down with our market panel. Let's bring in Chris Konstantinos, Chief Investment Strategist at RiverFront Investment Group, and Geetu Sharma, AlphasFuture Founder and Investment Manager. So, Geetu, I want to start with you. In this sort of climate, where markets are really digesting a lot of different data points and trying to manage their projections for a recession, how do you advise clients in this sort of environment?

GEETU SHARMA: I think-- thank you for having me-- the market is definitely very uncertain right now. We have interest rate risk, recession risk, and high inflation. And given what we've seen so far, it makes sense to be cautious in the portfolios and be very careful of what kind of risk we are taking. We definitely don't want to take a risk of high leverage, because if we do see interest rates going higher, it can have an impact on highly levered companies and make them-- impact their cash flows and ability to pay.

So we are advising our clients to focus on quality, quality defensives, quality growth, especially many of the stocks have-- are looking very attractive in the sell-off. And if the business model is still resilient and cash flows are strong, financial flexibility is high, that's the place we think investors should be.

DAVE BRIGGS: And, Chris, you are focused on the yield. And thankfully, you bring along an acronym. Who is PATTY, and why are we paying attention to her? What's she telling you?

CHRIS KONSTANTINOS: You know there's nothing that strategists like better than a silly acronym, right? Yeah, so PATTY stands for Pay Attention To The Yield. And just as [INAUDIBLE] said a second ago, there are so many things right now that are uncertain that are outside of investors' control.

But one of the things that you do have a certain amount of control over is how much of your portfolio return comes from the compounding of coupon payments of bonds and dividend payments of stocks. And so just like she said, I think you want to focus on companies that have good free cash flow generation ability and ones that are using that high free cash flow to grow dividends.

Same thing on the fixed income side. For the first time in probably my entire career, we're getting constructive on fixed income. And we're finding interesting value in long dated treasuries and short-dated high yield for the same reason because we're finding attractive yields. And so that's the piece of your portfolio that if you sharpen your pencil and you're careful about owning securities that can pay you back, that's the piece you can control, that yield piece. So PATTY, Pay Attention To The Yield.

SEANA SMITH: Chris, what do you think of the market's reaction so far to what we heard from Powell? Because we certainly did see a rally Wednesday afternoon, Thursday, and Friday. Today, though, there seems to be a little bit of a concern about maybe investors overdid it thinking that the Fed is going to pivot sooner than it is. What do you think?

CHRIS KONSTANTINOS: To be honest with you, I was pretty skeptical of the market's initial reaction to Powell's comments. They seem to anchor on this idea that he said, well, rates are neutral. But I think the market either misunderstood him or maybe Powell could have done a little bit better job of explaining himself because I think what he was saying is that when you get inflation under control, a neutral rate of about 2 and 1/2% on the 10-year, that might be the right rate.

But right now, inflation is clearly not in control, right? Whether you're looking at a headline number, you're looking at a core CPI number, you're looking at a PCE number, all of these numbers are well outside the bounds of what the Federal Reserve would consider normal.

So therefore, I think the market took his comments to be a little bit too dovish. I think the Fed is highly committed to trying to catch up. They're behind right now. They're trying to catch up on the curve. And I think that means a lot more interest rate hikes in the future.

RACHELLE AKUFFO: And, Geetu, what do you think the market is telling us about the Fed's ability to stick this landing? And if we do have-- if we do continue to have perhaps a stronger recession, how are you positioning yourself for it?

GEETU SHARMA: So it looks like the market is thinking that the Fed is going to pivot pretty soon, that the ongoing slowdown in economic data will force the Fed to slow down or stop its rate hikes, it will bring down inflation. And the market is expecting low rate environment to continue that we've been in for the last 12, 13 years. And like Chris has mentioned, I think maybe there is a little bit of too dovishness, too much hope in the market right now.

Yes, we are seeing some inflation dynamics look better right now, like food inflation maybe-- may potentially come down with this green deal that has happened in Russia, Ukraine, and the first ship that has sailed. But at the same time, you know, gas prices are still very high. And like you were mentioning earlier in your reporting that housing-- housing prices are still rising at 17%, and rental data is still going up at 9%, 10%. So many of the inflation segments are still pretty high. So maybe we might see some slowdown in inflation numbers. And I think the market is kind of cheering that.

Now, we-- economic data is still slowing. And definitely, there's a risk that we might be heading into a recession. For sure, the yield curve is telling you that. But the chances of a soft landing are indeed there.

And if we do see a normalization of inflation rate, maybe not at this 8%, 9%, but if we do get to 5%, 6%, the economy-- and the economy still continues to chug along, then that might be a good economic environment. It's a slowdown, but not necessarily a recession. And I think in that environment, we can expect rates also to stay kind of high and not go back to zero levels.

DAVE BRIGGS: Chris, on Geetu's comments there about inflation having peaked or not, we are seeing a pretty considerable pullback in crude, WTI down 5%, Brent down 4% today. Do you think inflation has peaked? Will we can continue to see inflation come down throughout the month, in particular in our energy sector?

CHRIS KONSTANTINOS: I do think in the second half of this year, I think there will be some downward pressure on inflation. I mean, one of the things that we track here is global shipping rates. And what I've noticed is that they've actually been moderating a fair amount over the last few months. However, they're moderating from a very, very high level. And I think therein lies the rub, right?

Even if you get inflation to moderate some, I'm not sure that it's going to moderate enough to really dramatically change Federal Reserve policy. And we all know that the Fed's policy and interest rates really drive in the near to intermediate term the prices of many securities that we all track on this show.

So I'm not sure that it'll be enough. I do think it's going to happen. I mean, I think you get a little bit of economic cooling that we're already starting to see. I think the Russia-Ukraine situation, I don't expect it to improve a whole lot, but maybe there's some decent news there in the near term on grains. But nonetheless, I still think if you take a step back, the overall backdrop for inflation, it's likely to be higher for longer.

SEANA SMITH: Geetu, when you take a look at the consumer, the consumer is so critical here, especially in the second half of the year with the economy slowing whether or not consumers are going to be willing to keep spending some of those higher prices. What's your read?

GEETU SHARMA: I think the consumer is still spending. They're just choosing what they want to spend on. They're definitely not buying as many goods as they did during the pandemic lockdown and when they were stuck at home. Now they are traveling more. They are doing more leisure activities. They're going out. They're eating out.

So given the strong labor market, wage growth, increasing participation rate, the consumer is still earning-- generating positive cash flow, and they're choosing what they want to spend on. Companies, if you look at companies reporting, many companies have reported positive top line growth and bottom line growth in terms of dollar value, even if they're facing a bit of margin decline from cost pressures. But they are not talking about overall consumer spend coming down. So I think it's looking good for now.

SEANA SMITH: Geetu Sharma, Chris Konstantinos, thanks so much for joining us.