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The Fed’s ‘tone does sound as if it’s shifting’: Strategist

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Yung-Yu Ma, BMO Wealth Management Chief Investment Strategist, joined Yahoo Finance Live to discuss today's market action and the latest news out of the Fed.

Video transcript

ADAM SHAPIRO: Let's talk about what's happening right now in real time and how you can use today's data to perhaps make decisions about the future. Yung-Yu Ma is BMO Wealth Management's Chief Investment Strategist. It's good to have you here. Thank you for joining us.

Just want to point out that when you talk about in your discussions with clients, the Omicron virus, there's still a lot of uncertainty. But what we're witnessing today with the second confirmed case in Minnesota, someone who was here in New York City, and it looks, obviously, as if there's going to be more cases of this-- the market seems to be saying, yep, we got it. So what do you think the market is signaling to us about the uncertainty with Omicron?

YUNG- YU MA: Well, really, if we look at the past several days, the back and forth is telling us what the market is signaling-- that it's really challenging to know what to make of it at this point, and how severe the cases are going to be, and how much vaccines are going to be effective against the variant. So I think this back and forth today, it's a big up day. Yesterday was a big down day. We've had a challenging week overall. So I think that's what the market's telling us. It's reflective of the uncertainty that this variant does present us with at this time.

JARED BLIKRE: And we have to think about the Fed here. We've heard the rhetoric ratcheting up pretty much pricing in and confirming to market participants a taper is going to be moved forward. But there's always asterisks and caveats, of course. But some of the rhetoric is pretty heated.

Now, I want to give you a couple of quotes from Randal Quarles, the Vice Chair of Supervision-- admittedly, outgoing. But here's what he had to say today-- he said he would wait to raise rates until seeing the whites of the eyes of inflation. We never said we'd let the army march over us. The army is now upon us. So we begin to fire.

I mean, these are some pretty heated words. And I'm just wondering-- has the Fed really changed its position on inflation that much, seemingly over the last few days or weeks?

YUNG- YU MA: The tone does sound as if it's shifting. And Chairman Powell was out the other day also making some hawkish comments. You had the Atlanta Fed President also making some comments on the hawkish side. It does look like the consensus within the Fed is shifting, and that we'll get an earlier finish to the taper, and probably an earlier start to the interest rate hikes as well.

So that's something the market's going to have to brace for. Typically-- the good news is typically those interest rates hikes don't actually start to severely restrain the equity markets until much later in the cycle. But that said, right now, there's also a lot going on. So it's also difficult to extrapolate that this is a typical cycle as well. So, yes, that's something that looks like it's baked in in terms of that increasing hawkishness.

ADAM SHAPIRO: We're going to have the FOMC meeting next week, but we've got tomorrow, the jobs number. And how should investors-- or what should investors look for in the job-- the unemployment report we get tomorrow and WHAT the Fed may-- what we may see as investors may be something different than the Fed sees, right?

YUNG- YU MA: That's right. The expectation is for a big number. Last month's number was big, over 500,000 jobs created. And this month, November, has a similar expectation. And really what's going to be interesting is the market's reaction.

That could be taken one of two ways. It could be taken as underlying strength in the economy if we get a good number that shows that there's momentum even in the face of what could be a challenging Omicron variant and spread within the US. But it could also be taken the other way, which is that the Fed is likely to tighten interest rates even more quickly than the market is anticipating. So really what's key here, as long as we get a number that's within reasonable bounds, the market reaction is going to be key and probably give us a sense of where some of the direction going forward might lie with respect to how concerned it is about Fed tightening.

JARED BLIKRE: And looking forward to the new year, 2022, just less than a month to go here. How are you advising clients or your own firm on what you see as some of the pitfalls in 2022, and how to avoid them, and how to navigate the current market environment?

YUNG- YU MA: We think some of the more difficult markets are the international markets-- the way they're shaping up now with some of the challenges in China, the property sector, the slowdown there that could ripple both through emerging markets and also affect Europe. Europe, as we know, has already had challenges with the Delta variant. So the Omicron variant could increase those challenges as well.

So we think the US is best positioned currently and even into 2022. The question is how much risk to take and where to place that risk. We do think the majority of risk should be placed within the US at this point.

ADAM SHAPIRO: When you talk about where to place that risk, I'm looking at sector action right now-- financials up 3%, you got energy up 3%, industrials up 3%-- any particular area that stands-- or how would you advise us on who will the winners be if Omicron becomes far more severe than, say, Delta? Who would the losers be?

YUNG- YU MA: Well, I think we would go back to the early playbook from when the pandemic first began. The big players, the very well-established players, the ones who we would rely on if there are restrictions on movement or people are less reluctant to go to stores-- probably that same playbook would be in effect. And probably bigger is better as well, because it tends to be when we have these labor shortages, when we have these supply chain problems, size does matter. So that's probably a big part of the playbook as well.

ADAM SHAPIRO: Yung-Yu Ma is BMO Wealth Management Chief Investment Strategist. Thank you for joining us.

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