Fed tightening ‘is a very big deal’ for markets: Strategist

Stephen Wieting, Chief Investment Strategist at Citi Global Wealth, joins Yahoo Finance Live to discuss how the Federal Reserve's monetary policy is weighing on the stock market as the Nasdaq falls over 2% and tech shares continue to decline.

Video transcript

- Let's bring in Steven Wieting. He's Citi global wealth management-- or wealth chief investment strategist. And Steven, Emily just alluding to some of the jitters that are in the market, given the economic data we're expecting this week-- we're already seeing it materialized today, and I wonder how much of that you think is really about the rerating that's happening on these renewed expectations of the Fed being a little more aggressive. We had Goldman Sachs over the weekend coming out and saying they expect four rate hikes now, as opposed to three.

STEVEN WIETING: I think this is mostly about the Federal Reserve-- this is an effective tightening of monetary policy. We're seeing it in broad financial conditions. You mentioned yields moving up. Well, that's happening while stocks are going down. The yield curve is steepening a bit. We're seeing across the board a rerating of what the Federal Reserve will do.

The likelihood is very clear that the Fed will succeed in sinking inflation. That was going to happen one way or the other, and we're just trying to gather really how much-- how actively the Fed will be doing that. But I think it's a really strange time as well. There's a greater degree of monetary policy uncertainty. I'm not sure that they really wanted that, but going from a period in which they're actively easing right now-- quantitative easing is still happening, in terms of bond purchases, through the end of the first quarter.

And at the very same time, in their minutes, they're planning the exit and planning a quantitative tightening, which they always downplay as having an effect. But it's a very big deal already to go from a year behind us, in which the Federal Reserve was providing active support to credit markets, lending so that others didn't have to, and then just stopping that. That alone, combined with rate hikes, was going to give us a different market environment this year. But now they've added an additional layer of uncertainty with their second policy tool.

- Yeah. And Steven, in your note, you point out, in the end, it's the real economy that matters the most. And, you know, when we're looking at what the Fed's doing, I suppose it's being driven by a stronger than expected recovery. And maybe that should be one of the main takeaways that our viewers have. When you dig back into that and think about, as Emily highlighted, some of the data we're going to get this week, obviously inflation seems to be one that is more closely watched. And omicron aside, it seemed like there was a pretty strong end to the year. What are you expecting to see when you look at that and how the market might react this week?

STEVEN WIETING: Well, part of the issue-- you presented earlier that year-to-year consumer prices were up about 7%, but the monthly reading of 4/10 of a percent-- or we could be even a little bit less than that-- is really where we're headed, when we think about sequential gains and consumer spending, but in a highly distorted economy where retail purchases were concentrated and scarce goods. And we were in an economic environment where unless the Federal Reserve just allowed the economy to sink, there was no way that they were going to stabilize prices.

So these year-to-year inflation measures tell us as much about last year's reading as this year's. Going forward, we think it's coming down. Growth will come down because of the absence of new fiscal stimulus, the absence of a repeat of the monetary stimulus. And the Fed's going to go a little further than that. So we do think that the economy can grow through this.

We have some tailwinds. The manufacturing sector is catching up with demand globally, so that means industrial production in the US is really not as high as it will be. And that's good news for four year economic growth, but markets have to look a little bit further than that. And that's not an environment where we're expecting a new recession, but we're going to have to take some feedback effect from financial markets into account. The Federal Reserve will in calibrating policy, if they want to avoid a mistake like they did in 2018, where they really did threaten a premature recession.

- Steven, from a strategy perspective, certainly a lot of investors asking themselves right now-- where can they ride out this volatility? Where is it safe to hide? You look at, obviously, the equity space, what we're seeing today, but fixed income-- some would argue even cash is in a good position to take. In the end, is it really still about equities where investors are likely to see the biggest returns? And if that's the case, where do they go?

STEVEN WIETING: It depends on your short-term versus medium-term or longer focus. We think that equities are priced more cheaply than bonds generally, but not all equities. If you think about our largest positions in equity markets, our biggest sector overweight is health care. And you saw performance earlier dropping less. That's not always the case, but this is a time where we think that that kind of growth and stability is important for a portfolio.

When we think about dividend growers, the larger, healthier firms that are currently so profitable that they can raise their parent payouts to shareholders-- they may not be the most innovative companies in the world, but we have 10% of medium-risk portfolios just in these dividend growth strategies, domestically and internationally. And again, companies in the staples sector-- probably the largest single sector contributor to that dividend growth strategy.

So it's not to say we can't have investments or keep longer term investments in really innovative companies that are changing the economy, but you can't always expect great performance. They're more volatile, and that's the price you pay for longer term growth.

- Yeah. At the same time, though, we do have some people coming out and calling that the spread between the NASDAQ and the other industries right now is perhaps bottoming. I wonder how long you see some of this volatility continuing before you might give kind of an all clear here for investors, who may have started 2022 on the sidelines expecting some of this to happen. How long you think some of it could keep up?

STEVEN WIETING: Well, I would be fair to say that there's a lot of cash on the sidelines. There are many investors who are either a little too bullish, but a lot who aren't going to participate. And this can create an opportunity, a drawdown for them. I think the timing is a little bit unfortunate. We often get very superstitious about the timing of the year.

The Federal Reserve, though, again, had changed its view of the sources of inflation, what they should do about that in December, right after making up their mind in November. And that's a little bit unfortunate timing, when you think about absorbing this news. They're not in a position-- I guess Chairman Powell could be tomorrow to-- but he certainly, I don't think, would contradict the minutes of his board, the FOMC. I think, to explain again, that they can be very deliberate and careful, again, in the way they disengage from support for the economy, especially when you see a situation like omicron, is this is not a risk free situation for the US and world economy. So I think it's clarifying--

- That's gonna be interesting.

STEVEN WIETING: --and getting some comments from the Fed could help, but I don't think it happens quick enough for financial markets to just come to grips very short term.

- All right, Steven Wieting, appreciate you coming on here to chat with us-- Citi global wealth chief investment strategist there with us to kick us off-- appreciate--