Bond market volatility ‘was massive’ compared to stock markets: Strategist

WealthWise Financial CEO Lauren Gilbert, Schwab Asset Management CEO and Omar Aguilar sit with Yahoo Finance Live to examine optimism in markets amid the Fed’s rate hike cycle and recession fears.

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Dave Briggs: Chyna reported Airbnb there. Their CEO, Brian Chesky, will be here in a few minutes. Let’s check again the markets today. And it was definitely a positive driver of momentum today on this humply day, rising 415 points on the Dow, about 1.3%. The biggest gainer once again, the Nasdaq rose 2.6%, led by Microsoft, Apple, Alphabet and Amazon. The same names have pushed us since mid-June.

Well, let’s go to our plate now and check closely on the markets. Lauren Gilbert, CEO of Wealthwise Financial. Omar Aguilar, CEO of Schwab Asset Management and CIO. Good to see you both. Lauren, let’s start with you. The floor is yours. What is driving the markets for you? What is driving today?

Lauren Gilbert: Well, it’s all about profits. And we got into this — with the quarter coming in here now looking at the last quarter, thinking we’d probably see 4% earnings growth year over year. It was much stronger. Many companies were able to maintain their profit margins, despite the increased cost. So it’s all about profits. Then we keep getting good data. The ISM numbers came out today, and they were positive in that growth area. So still the data we’re getting, while we’re in a slowing economy, we’re still seeing positive data.

Sheena Smith: Omar What do you think of the positive action we saw today? The Dow closed just above 400 points. Is some of this optimism justified?

Omar Aguilar: Well, it might be– I think it’s related to the positive earnings news. You know, just to think about investor psychology as we head into 2022, we’ve had a year full of negative news across the board since the beginning of the year. I believe that any positive catalysts that will cause investors to find opportunities to enter the market, they will likely be rewarded.

And in this particular case, as just said, earnings relating to a period when everyone expected slowing earnings, slowing margins, and warnings about expectations are welcome. I also think there’s an element of, you know, investors trying to understand the fact that they’ve heard Jerome Powell and the very dovish Fed think that the majority of the price hikes are probably behind us. This may turn out to be a bit premature.

Dave Briggs: Let’s follow there, Lauren. Do you feel there is a peaceful Fed talk? Or have you focused on the past couple of days with Daly and a couple of others who are pretty tough looking and almost wanted to clarify what Jerome Powell had to say?

Lauren Gilbert: Well, I guess they’re on a tightrope. We know that, and they know it. So everyone is trying to be careful what they say because they don’t know yet what they are going to do next. I think we raised the interest rate by 75 basis points. I think we’ll still see another 50 and maybe two more 25 before we really see them stop. However, they leave themselves enough room if they need to stop sooner than that or if they need a change, they will. And so I think they’re doing the right thing by looking at how to push the economy as these spikes come into play, and then looking at what happens next and how they’re going to respond.

Sheena Smith: Omar, as today, the S&P is up about 13% from its June low. Despite this, we have seen some volatility in the markets over the past several weeks. Is that what investors should prepare for, at least here for the next couple of weeks?

Omar Aguilar: I think we need to continue to anticipate volatility in the future. The amount of information we will receive in the next few weeks and months will continue to drive market volatility. And I would say, it’s not just stock market volatility that’s probably more obvious to investors, it’s possible that bond volatility has been higher in the past several months than it is on the equity side.

Just going to the 10-year yield from 3.50% to where we are now at 2.70%, it’s just a huge move for this particular market, which basically shows a lot of confirmation of the fact that we’re in a slowing economy, there’s the potential for a recession, that central banks aren’t You are necessarily trying to rush in trying to push this slack. So this volatility is definitely something we will need to continue to adapt to.

Dave Briggs: This move in 10 years, Lauren, tells you what’s next?

Lauren Gilbert: Well, I think something investors should be looking for is to start looking — to continue to hold their bond allocations and even hold for longer at this point. But what the market is telling us is that the Fed will eventually reverse course, right? So while we’ve been in this high interest rate environment, the Fed can change that dramatically as they see the economy slow, and then they can pull back. And this is where the confusion now exists in the bond markets. But for investors, as they look at their allocations, surely the bonds are starting to behave like bonds again, and then they look to extend the term as those long-term returns rise.

Sheena Smith: So Omar, what does all this mean for wallet allocation? Where do you see the most attractive opportunities today?

Omar Aguilar: Yes, good question. Well, there is no doubt that risky assets, relative to bonds, are still more attractive. As you know, we are going to raise this interest rate. Inflation is still very high. And so, in an effort to get us to the right place, you know, expecting a pivot on the part of the Fed is probably premature. I think the neutral rate that the Fed has set compared to the levels of inflation that we clearly have gives us the sense that inflation expectations may come down a little bit, but may not necessarily be as fast as people expected while we still have a significant amount of supply chain disruptions.

When you think about it, when you think about the stock markets, we are in the final stage of the economic cycle. During that time period, being able to stay defensive and start planning for a change in trend in the market is likely to be a good strategy. So we suggest clients make an iron bar, where they remain defensive in low beta areas which will withstand the fluctuations that we will see in the future, but to start positioning themselves for what will happen, which tends to be more growth oriented, which tends to be more oriented towards Technology and EPS growth, to maintain high quality and remain in areas that will benefit from this environment.

Dave Briggs: Well, I have to leave it there. Great conversation. Omar Aguilar, Lauren Gilbert, Nice to see you two. Thanks.

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