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Fed meeting signals ‘better days are indeed ahead for the markets’: Strategist

Hennion & Walsh CIO Kevin Mahn joins Yahoo Finance Live to talk about the Fed's forward outlook on interest rate hikes in 2023, inflationary concerns on U.S. consumers, and the weight of recession woes on the market.

Video transcript

SEANA SMITH: Let's take a look at the broader markets here. The Dow still in negative territory, S&P and NASDAQ, though, holding onto gains. Some of the gains being attributed to the fact that there is some speculation out there that the Fed may be nearing the end of its rate hikes, also the stronger than expected results from Meta last night helping to boost the NASDAQ today.

We want to bring in Kevin Mahn, Hennion and Walsh Chief Investment Officer. Kevin, it's great to see you here. So we have the Fed raising rates by 25 basis points, largely expected by the Street, some commentary from Fed Chair Jay Powell. He wasn't really committing to the fact of whether or not more increases, plural, would be necessary. What do you think?

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KEVIN MAHN: Seana, I woke up this morning talking about what the Fed did yesterday and what the Fed may or may not do in the future. It felt like Groundhog Day, but I digress. I think what we learned yesterday in all likelihood is that better days are, indeed, ahead for the markets.

Because we received confirmation from Chair Powell that, in all likelihood, we've certainly hit peak hawkishness and, by extension, we've hit peak inflation, as he mentioned the term disinflation 17 times during that press conference where he didn't mention that word once during their December press conference. So I believe from here, we're likely to see one 25 basis point hike after their March meeting and perhaps one more 25 basis point hike after their May meeting. And then they stop and assess the overall damage that they've done to the US economy, which I would believe will be relatively significant.

DAVE BRIGGS: The Groundhog saw his shadow, I think, today, but he's never right. Do you think Jerome Powell does have this right?

KEVIN MAHN: Oh, that's a great analogy. And certainly, he hasn't been right thus far. We remember back to early-2022, Dave, when Chair Powell suggested that, in all likelihood, they were going to only raise rates by 50 to 75 basis points last year. They raised rates by 425 basis points last year.

We remember last year when he suggested that inflation was transitory. That certainly did not turn out to be the case. And then in May of last year, he suggested they weren't even considering rate hikes above 50 basis points. Then, they hiked rates by 75 basis points three consecutive times.

So certainly, some credibility has been lost with market participants around the Federal Reserve. So that's why you really have to take all their verbiage with a grain of salt. But, certainly, inflation is beginning to moderate right now. And they have scaled back the pace and rate of their rate increments. And that's a positive for the markets, although I don't think better days are ahead for the economy, Dave.

SEANA SMITH: Kevin, how much worse do you think the economy could potentially get in terms of a recession? How severe could that be?

KEVIN MAHN: Well, fortunately, if, in fact, the Fed doesn't stay as aggressive as some had earlier thought, which it appears now as though they might not, this recession may not be too severe or too long. But we're starting to see signs of distress amongst the consumer. Remember, Seana, that the consumer accounts for 70% of our economic growth in our country.

We saw that retail purchases have now fallen in three of the last four months. We also saw that spending on services were relatively flat in December. That was its worst reading in over a year. And now, consumers are starting to dip more into their personal savings and put more on their credit cards. How much longer can that last?

And if the Fed is not able to get inflation back down to their 2% target, which I don't believe they will come close to this year, well, inflation is going to continue to take a bite into the consumer's wallet. So that's why I have concerns about the strength of the US economy in the first half. I believe we'll likely dip into recessionary waters.

But remember that markets and recessions don't always move in the same direction. And if you wait for the economy to improve, you may miss out on some of the best opportunities that the stock market has to offer.

DAVE BRIGGS: If someone in our audience doesn't come up with a Punxsutawney Powell meme, you failed me. I do want to move on-- Cathie Wood, ARK Invest CEO--

KEVIN MAHN: I love it.

DAVE BRIGGS: Joined the show earlier sharing her thoughts on Powell's press conference yesterday. Let's listen.

CATHIE WOOD: I think the most important thing he said was that he agreed with Lael Brainard, who's saying we are not in the middle of a wage price spiral. And that's code word, I think, for saying, we are not in a '70s-style inflation.

DAVE BRIGGS: Your reaction, Kevin.

KEVIN MAHN: Well, we've had, what is it now, 15 consecutive months of higher inflation-- inflation getting back down to a 2% target, I think the Fed is going to start to ease up on their target forecast for inflation as inflation remains stubbornly above 5%. And they can only have so much control over bringing down inflationary pressures. They're trying to cripple demand and they've actually succeeded, to a large extent, based upon some of those numbers I spoke about with respect to the consumer.

But for investors, Dave, there are opportunities now to position your portfolio for those better days that are ahead for the markets. Certainly, we got off to a great start thus far this year, perhaps too great. But areas that have been really beaten up in 2022, some of those technology areas, consumer discretionary-- we saw Amazon was down by over 50% last year, now it's made back about 25% this year-- perhaps too much and too fast.

But those are the types of names that could do better towards the second half of the year when the Fed does pause or stop their rate hike cycle. But don't abandon quality in your search to try and catch up to that rebound. Look for those companies with strong balance sheets, those that pay dividends, and are also in some of those more defensive sectors, and balance that with some of those beaten up technology and consumer discretionary names.

DAVE BRIGGS: Excellent tips there, sir. Great to see you as always. Kevin Mahn, appreciate it.