The Fed signaled they’re leaning ‘towards fighting inflation’ than keeping jobs: Strategist

Sound Planning Group CEO David Stryzewski and Robert Cantwell, Upholdings Founder & Portfolio Manager, join Yahoo Finance Live to discuss the market outlook, forecast for retailers, and the Fed's interest rate hike cycle.

Video transcript

JARED BLIKRE: And here is your closing bell on Wall Street on this Monday.

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DAVE BRIGGS: Better Business Bureau closing out this Monday. All right, let's check out those markets. You talk about the action on the day. It was another wild ride. We open with that bad news out of China. Markets fell. We had bad news on the housing data. Markets fell. And here we go, we finished the day up with solid gains across the board, as we did all week last week. Dow, S&P, and NASDAQ all gained about 3% last week, as the S&P, four straight up weeks.

Now for more on the markets, let's turn to Sound Planning Group CEO, David Stryzewski, and Upholding's founder and portfolio manager, Robert Cantwell. Robert, good to see you. Let's start with you, sir. On what is rallying these markets, despite all the bad data that continues to pour in?

ROBERT CANTWELL: Well, we just kind of got to the end of earnings season here. And numbers were not nearly as bad as a lot of investors feared. And so that's why you saw-- you just had the chart up with a lot of the big names up 30% or 40% in just the past month. A lot of that has been a relief rally over better than expected numbers.

And as you get into the rest of this year, it's very likely that those numbers are going to keep looking better because, again, if you go back to the first half of 2021, we had a really strong period of growth. And companies struggled to show growth rates in 2022 over that period. However, the second half of 2021 slowed big time.

And so you're already seeing Adobe put out their e-commerce report in July. E-commerce revenue was up 20% over July of last year. So we're seeing some really positive signals that at least within internet and e-commerce, there's quite a bit of recovery underway.

SEANA SMITH: David, what do you think? Because there is debate out there about this rally. Morgan Stanley saying that this bear market rally is about to run out. JP Morgan, on the flipside, saying that it actually has some legs. What do you think?

DAVID STRYZEWSKI: Great question. I'm probably just going to take a slightly different answer to that in noting that I'm looking at the consumer right now, and I think the Walmart story tells it right. Between gas and groceries, there's a lot of discretionary spending going out the door. And we're just not buying a lot of the same things as we were previously. And so we're certainly seeing a softening in our market while we're seeing a bull rally in what I believe is a bear cycle. And we're in the beginning innings of what's probably going to be a longer ballgame as we continue to go forward in it.

But I'm just concerned about new regulation, new taxes. Those have historically not been great long-term effects. So I love the bull market. I'm riding it. We're doing wonderful. A lot of these names are names that we hold. But we just need to be cautiously optimistic as we're going forward here.

DAVE BRIGGS: Robert, David talks about the Walmart story, which we'll really get a read on tomorrow with the earnings. And without asking you to dive inside those-- we'll hear from Target, we'll hear from Walmart, Home Depot, Lowe's. Broadly speaking, what do you think the takeaway from the health of the consumer will be later this week?

ROBERT CANTWELL: I think David made a great point there, where there can be quite a lot of economic shift that happens underneath the surface. And so the goal as investors is you want to be positioned in the categories and products and businesses that are net beneficiaries going forward. And even within Walmart-- even in their last report, they talked about big shifts in consumer spend across various product categories that they have.

But what does it mean for consumers to spend less on Walmart than they are in other areas? So just a little bit earlier on this show, you had real estate and how real estate looks like it's softening a little bit. But the reality is that real estate has had an incredible 12-month run.

And for a little wind to come out of the sails of real estate is not really a huge problem for a lot of real estate investors because where a lot of the opportunities have shown up in the market lately, digital advertising, cloud computing, these enormous growth industries that maybe got a little bit overpriced last year, we're starting to see those prices look really, really good again. And the fundamentals are continuing to hold up. And that, to us, is spend shifting beneath the surface, as opposed to having to worry too much about how much is the economy growing month in, month out.

SEANA SMITH: David, we have seen inflation come back a bit, now at 8 and 1/2%, lots of questions about what this means for Fed policy going forward. If the Fed is actually going to get too aggressive, then what that could mean here for the markets. How do you see it, and what are your expectations for the Fed here over the next couple of months?

DAVID STRYZEWSKI: Well, the Fed certainly needs to be raising rates a little bit more. So we're about at 2 and 1/2%. Everyone's talking about it. I think that because we've seen such strong jobs reports, we've seen CPI kind of flatten out here at the 8 and 1/2%, I think the Fed knows that there's some work that needs to be done. And they've ultimately signaled to us that they're going to be more gearing towards fighting inflation, as opposed to trying to keep jobs.

So instead of that dual mandate that they started out with, I think that they're really looking to capitalize on this inflation story because they know that they're behind on it. First quarter here, we were not raising until March. And so we're late to the party on some of this. We've got more to go between now and July next year, as they're projecting.

So how do we finish the year out ultimately depends, but I do not see the Fed really getting dovish quite yet. Not until we see a contraction, until we see things really pull back. And then there's the turnaround. So I'm looking for another bottom here in the market as a result of just the time that it takes for the Fed's responses to get priced into the market, specifically with real estate and how businesses metabolize their debt.

DAVE BRIGGS: Robert, let's go there on the Fed. I mentioned this earlier in the program that former New York Fed President Bill Daly-- Bill Dudley said that markets are misunderstanding how the Fed is fighting inflation, pricing in cuts at the end of next year. Do you agree with that premise?

ROBERT CANTWELL: Well, I can't predict the future, but what I can tell you is that--

DAVE BRIGGS: But we're talking about the present. We're talking about the present, not the future. We're talking about, are the markets misunderstanding the Fed's mission?

ROBERT CANTWELL: Oh, the market. I am not going to be smarter than the trillions of dollars that are traded within the bond markets. But what I will say is that as interest rates go up and down, there are businesses that flourish, and there are those that get wiped out, and then there are those that just kind of keep quietly growing. So to give you, like, a nice tangible example of that, mortgage origination companies famously go in and out of business with interest rate cycles.

By comparison, FICO, a consumer credit reporting agency, has been in business for 40 years, has never been wiped out during an interest rate cycle. And so to us, when we're looking across the market and we're looking for where there are opportunities, what it's telling us about the health of the consumer and things like that, we look more at the businesses likely to survive market cycles because we think that's where you learn a lot more about the durability of what's happening.

And so this is why I shared with you a little bit earlier where some of the recent softening in real estate has been relatively mild in the history of real estate softening in this country. And if rates do go up another 2% or 3% and if folks are wrong that the softening is not going to happen in the second half of 2023, there's still so much buffer in the equity value of real estate prices right now that we think that the economy is perfectly well suited to handle it.

SEANA SMITH: All right, Robert, David, thanks so much for joining us this afternoon.