Fed pivot has ‘given the market a lot indigestion,’ strategist says

Stephanie Roth, J.P. Morgan Private Bank senior markets economist, and Scott Crowe, CenterSquare Investment Management chief strategist, join Yahoo Finance Live to talk Fed policy, markets, and the state of the underlying U.S. economy.

Video transcript

ADAM SHAPIRO: All right. About a minute and a half to the closing bell. Helping us decipher what happened today will be Stephanie Roth, JP Morgan private bank senior markets economist, also Scott Crowe, CenterSquare Investment Management chief strategist. Emily McCormick is here too. But when we take a look at what's happening, let me start with you, Stephanie. We make a big deal about the Federal Reserve. But it's not like we weren't warned. We're going to have taper. We're going to possibly have roll off. And we're going to have liftoff.

So why the volatility?

STEPHANIE ROTH: It was all about the tone in the press conference yesterday. We knew they're setting up for the March kite hike. We knew they're doing balance sheet roll off. But what we learned yesterday is that the ceiling is not necessarily for hikes. There's the potential to go at a faster pace. They very much compared today to 2015. And the economy is much stronger.

Employment backdrop is tighter. And inflation is higher. So they're just telling us that four hikes is potentially the minimum. And the market's starting to price more. And that's what you're seeing in terms of rates markets rerating, yield curve flattening, and equities being a little bit volatile here.

ADAM SHAPIRO: All right. Scott, hold the breath. Because we're going to get to you right after the closing bell. But let's see where we're setting up right now. Because you can see Dow, well, we'll see. I mean, 30 seconds is still plenty of time to keep it in the green. The S&P 500 looks like it's going to settle down again today. And the NASDAQ hitting new lows is also down. Here's the closing bell.

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EMILY MCCORMICK: All right. And that is the closing bell this Thursday, January 27. As we take a look at where the major stock indexes settled, looking like another red day in markets. The S&P 500 down about 0.6 percentage points. The Dow Jones Industrial average just below the flatline. It had been a bit higher earlier on during today's session. And the NASDAQ composite the laggard during today's session, down about 1.4 percentage points. Well, let's head back now to our panel. And Scott, as promised, I want to get this next question over to you.

With the S&P 500 down about 9% for January to date, and many individual stocks therein actually down much more than that, where are you seeing opportunities emerge in the markets right now?

SCOTT CROWE: Well, look. As the markets digested this hawkish fed pivot that I think surprised people in terms of its magnitude. It wasn't so long ago that they were describing inflation as transitory. But now they have their sights firmly set on moderating inflation. And I think that's given the market a lot of indigestion as it starts to digest that pretty dramatic shift in context. And as you point out, what the market's actually been selling more of is richer valued, higher growth companies and stocks.

And I think that's where the opportunity lies. At CenterSquare, we focus on real estate and real estate investment trusts. What we've seen in our space is the sectors like data centers, industrial warehouse distribution, cell towers. All the high growth circularly driven investments are the ones that are down significantly more than the index. And we view that as an opportunity to actually fade back into those names. Because it's not like just because the fed's increasing interest rates, we're going to do any less online shopping and need any less industrial warehouse distribution assets and investment.

ADAM SHAPIRO: Stephanie, as an economist, market gyrations are one thing. But when the economy is firing on all pistons, and if it's not let us know, but the earnings outlook is good when we see guidance from companies. The data from the economy is good. Something just doesn't add up when we see a continued trend down in the market.

STEPHANIE ROTH: Exactly. We think it's a lot to do with valuations. Valuations had to re-rate a little bit lower on the back of the tighter fed, the expectations of rates rising a little bit faster than expected. But absolutely agree. The economy is very solid. GDP came in pretty solid for the fourth quarter, inventories were a big driver there. Consumers really solid. Yes, we're getting some softer data as a result of Omicron. But on balance, we think it's more about liquidity coming out of the market and valuations being a little bit stretched. So doesn't change our view at all for the outlook.

I think earnings are still solid. We'd be taking advantage of opportunities in quality, quality names, especially given where we are in the cycle.

EMILY MCCORMICK: So Scott, when we look ahead to the fed's March meeting of course, just coming in a couple of months now, do you expect the market to react with similar volatility, assuming we do actually get that lift off at that time? Or do you think it's been adequately priced in at this point and will continue to be priced in until we get to March?

SCOTT CROWE: Look, I think it's going to be a volatile first quarter until we get there. But I do think the market's pricing a lot of that in today. I mean, if anything, I think the market may have moved too far the other way with some forecasters coming out and saying four to five interest rate increases in 2022. I think that's very unlikely given the historical behavior of the Federal Reserve. So I think that Q1 is going to be volatile as the market digests this hawkish pivot. But I would be surprised if the fed did anything near what some of the more aggressive forecasts are out there.

And so I think we may get some of that body language softening in March as well.

ADAM SHAPIRO: We're also going to be getting, Stephanie, the latest employment numbers next week. We're going to find out what's been going on in January. And this labor shortage and concern about inflation that's contributed from wage inflation, there doesn't seem as if getting past the pandemic would end that given the birth rates in the country and our policies on immigration. Is this something that as economists is getting much discussion? Because companies recruiting people that don't exist is a formula that's just not going to win.

STEPHANIE ROTH: We have to keep in mind that we're still in the middle of the pandemic. There's, according to the Household Pulse Survey, eight million people were at work because they either had COVID or they were taking care of people with COVID. So we have to remember that we have to get through this pandemic in order to really assess what that pool of workers are that are out of the labor force. So there are a group of people who are getting paid more on unemployment benefits that have still yet to come back.

And there are people who might come back as a result of the pandemic. So we haven't really settled into this post-COVID economy. And there is a legitimate chance that people who have just some excess savings will run out of those savings and they'll start coming back. But we're not necessarily there yet. It might take some time for participation to improve.

EMILY MCCORMICK: Scott, we heard Fed Chair Jerome Powell saying yesterday that he was inclined to raise his core PCE inflation estimate for 2022 by a few tenths of a percentage point and thinks that inflation has gotten worse since December. When do you think we start to get some easing in these inflationary pressures?

SCOTT CROWE: Well I think it's probably not going to be till the end of the year. I mean, because don't forget that a large component of CPI and inflation measures are housing and housing related. And our focus at CenterSquare is on real estate. And we can see real time the pretty dramatic increase in home prices and rents across the country. So and it's going to take some time for the fed backing off from its mortgage backed securities purchases, raising interest rates so that that change in posture to actually filter through to the underlying housing market and real estate markets.

And so that means even as the fed begins to tighten, you are going to see inflation probably start to moderate but remain stubbornly high and sticky. And I think that's one of the challenges the fed faces this year is that that's going to put pressure on them to continue to increase interest rates. But we're not really going to see the impact of the increase in interest rates probably until the earliest, the end of this year and into next year. So inflation, we're probably going to see a backdrop of higher interest rates, flatter yield curve.

So higher interest rates on the short end, moderating growth, and stubborn inflation. And I think that's what the market's struggling with a little bit in aggregate right now and more in the first quarter.

ADAM SHAPIRO: All right, everybody. Don't go anywhere. We're going to switch it back to Jared Blikre. We have Robinhood earnings. And ouch is one adjective that we might use to describe it.

JARED BLIKRE: Adam, this is a disaster, missing almost every single key metric here. You can see the stock down 10% in after hours trading. Want to get straight to the numbers. Net revenue came in light. $362.7 million short of the Wall Street estimate of $370.9 million. Net interest revenue also came up light, $63.4 million versus $66.3 million expected. Loss per share was wider than expected, $0.49 on a gap basis versus $0.39 expected.

And their transaction based revenue was $263 million. And that was short of the Wall Street estimate of $269 million. Also monthly active users, only 17.3 million, more than 2 and 1/2 million short of the Wall Street estimate of 19.9 million. And then their guidance also falling short. They see first quarter revenue below $340 million. The estimate was for $447 million. That is a huge shortfall. And then when you look at their crypto revenue, that was a big source of strength for them early on. That only came in at $48 million. That was shy of the Wall Street estimate of $55 million.

So no matter how you slice and dice this report, not very good numbers here. And I just want to chart the price action on a year to date basis. This stock is down 34%. If you look at a max chart from its IPO last year, you can see it's been nothing but, except for the first day here, a slow, steady decline. And we were closing at, I believe, a record low today. And we're probably going to see record lows tomorrow as well. So just to sum it up here, missing on all of the key metrics that I just went through. Robinhood.

ADAM SHAPIRO: Let's talk about this, Scott. I don't want to get you in trouble with your compliance officer. So if you're not allowed to talk about a specific stock, don't. But the question I have with Robinhood, and it's about no fee trading platforms, is this going to go the way of the metric system conversion in the United States circa 1976? It's there, but nobody does it.

SCOTT CROWE: Yeah, I think what we've seen is if you look at this sell off, it's really being led by the high flyers, by the crypto, by the Robinhoods, by a lot of the tech companies that aren't making money. So eventually, you a company needs to turn a profit. And when the fed stops making money free, that's when people start paying attention. So I think there is going to continue to be pressure on companies that aren't profitable that investors see a path to a bottom line.

And so that's why I think that even though some of these stocks like Robinhood have sold off the most, they're probably not the best things to buy. You're better off buying companies that have circular growth backing them. But they've also sold off but have earnings, and have income, and are able to turn a profit. That's where I'd be focusing my attention, not on the Robinhoods that have really taken it on the chin. But I think it's going to be hard for them to come back.

ADAM SHAPIRO: Scott Crowe is CenterSquare Investment Management's chief strategist. And Stephanie Roth is JP Morgan Private Bank senior markets economist. Thank you both.