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Investors need to decide whether the stock or bond market is 'their guardian angel': Strategist

EPFR Director of Research Cameron Brandt and GenTrust Head of Asset Allocation Matt Kishlansky join Yahoo Finance Live to discuss the latest Fed minutes and the latest in the bond and stock markets.

Video transcript

[BELL RINGING]

- That does it for today's trading action. Again, all three of the major averages closing to the downside. Dow off just about one half of a percentage point. The NASDAQ the worst performer of the major averages, off just over 1%. The Dow lower for the first time in the last six trading sessions. S&P off nearly 1%.

Taking a look at the sector action, like Jared was just mentioning, energy bucking the downward trend that we're seeing play out in the markets, getting a boost here as crude ended the day higher. Communication services, materials, consumer discretionary among the worst performers in today's market action.

All right, let's bring in our market panel. We have Matt Kishlansky, GenTrust head of asset allocation, and Cameron Brandt, EPFR director of research. Cameron, let's start with you. So we did get a brief bounce here today in the markets after the Fed did release their minutes from the July meeting, although we did quickly give up those gains. What's your big takeaway from the action we saw today?

CAMERON BRANDT: I think we're in a stage where for the most part, you should step back when you can from the day-to-day action. I think the bigger picture is that not necessarily for great reasons, a significant slice of the investing public thinks that the worst may be over. Certainly we look at things through the mutual fund ETF lens. What we've been seeing is definitely a shift back into the market, driven by the assumption there is going to be a mild recession, either at the end of this year or early next year, and that that recession will rapidly change the direction of monetary policy back towards easing.

- And Matt, to you and your big-picture takeaway from the day. And did you learn anything from those Fed minutes?

CAMERON BRANDT: Not really. They were pretty consistent, I thought, with the verbal signals we've been getting recently.

- And Matt, go ahead.

MATTHEW KISHLANSKY: Yeah, I agree. I don't think there was a ton of guidance. And I think investors kind of ended the day where they began the day. I think they feel like they're almost stuck in one of these old cartoon episodes, where they have a white angel on one shoulder and a red devil on the other.

And from one perspective, they're being told relax, everything's fine. Inflation is coming off faster than projected. We think the Fed's going to slow down its hiking cycle. Healthy corporations have had no problem marching through the year of this storm so far in 2022. And if anything, they will continue apace through whatever rain may come in the fall.

And then I think on the other side, they're being told, whoa, whoa, whoa, slow down. The terminal rate for Fed front-end hikes for the rest of the year is still up to close to 3.7%. And yet the US 10-year Treasury is yielding significantly more than 75 basis points below that. So the market from that corner is telling them expect full complement of hikes, a resulting recession, and then some easing after the fact. So I think investors have to decide which of those, between the stock market and the bond market, which are, in essence, on either one of their shoulders, which one of those is their guardian angel?

- Well, Matt, what do you think makes the most sense in this environment right now?

MATTHEW KISHLANSKY: Well, I think given that uncertainty and the challenge of trying to find an entry point into the market, we're less convinced that it makes sense to make big bets from an asset allocation perspective to be overweight or underweight. We prefer to make some sectoral bets within equities. We really like biotech. We think it's been significantly oversold throughout the beginning of this year. And we think the risk-return profile for it looks pretty attractive.

We think both clean energy and infrastructure are places where the government's spending priorities have been telegraphed and will create some tailwinds through the rest of the year. But we don't see that priced in to those sectors particularly. And then overseas, we think that Norway will be the only, maybe the only winner in the energy tug-of-war going on between Putin and the rest of Europe.

- And Cameron, given that dynamic of the angel and the devil on our two shoulders in this economy, how are you positioning ahead?

CAMERON BRANDT: Well, we don't actually manage any money. So I can simply tell you how people are positioning. We've definitely seen some step up and movement into sovereign debt. Even though yields have not gone up much, they're markedly higher than they have been. And I think we're seeing a number, a section of investing public trying to grab income while they can.

The banker are among the sector funds that we track is, indeed, infrastructure, in addition to the telegraphed public spending priorities. There's going to be a great deal of spending in the technology sector to continue rolling out new products. And, of course, the green energy networks need to be built up. And we're going to be spending a lot more on military infrastructure.

- All right, we've got to leave it there, gentlemen. Cameron Brandt and Matt Kishlansky, thank you both for being here. Appreciate it very much.