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How gas price sticker shock may affect consumer spending

Baird Market Strategist and Managing Director Michael Antonelli joins Yahoo Finance Live to discuss macro factors weighing on the markets, including how consumers and markets may respond to spiking gas prices.

Video transcript

JARED BLIKRE: Welcome back. Well, the markets might be getting off to a downbeat start, but we do have energy and crude oil prices soaring today, consumer discretionary taking a hit. Fortunately, we have Michael Antonelli, managing director and market strategist at Baird, to help us all break it down. Michael, always great to see you. Let's begin with the elephant in the room here, which is crude oil prices. Almost can't talk about that enough. $130-- what does this mean for investors? We know what it means at the pump, but what does this mean for investors right now?

MICHAEL ANTONELLI: Sure, you're right. It's one of these kind of things that is on top of mind. I thought your interview with Dan was really good. If anybody hasn't seen that, hit Twitter for the recap. I thought that was really good. Well, energy shocks, one of the six or seven things we're dealing with right now, we have obviously a macro environment and crosscurrents that are kind of as tricky as I've seen maybe since-- I don't know-- COVID or the GFC. So it's definitely a tricky environment.

How are we supposed to think about energy shocks? You try to think about the average consumer. How much will it impact the average consumer? And one of the good things about the last-- I don't know if there's any good things about the last few years is that consumer balance sheets were repaired between stimulus and kind of wage growth. So you have to ask yourself, is the consumer in better shape to deal with higher energy prices? And I would say yes.

But, but if you were to look into the history of the market, if you were to look, like, all the way back to the '70s, oil price shocks, energy shocks, can tend to lead a recession. There's a couple in the '70s, one in the '90s, and then one in '08. So you really, the question that you have to ask yourself and it's the question that I think that almost everybody wants to be talking about is, does it lead to a recession? Does the energy shock lead to a recession? If it doesn't, then you navigate tricky waters, and you try to get to the other side of it. If it does, then that's kind of a bigger issue for us to deal with.

AKIKO FUJITA: Mike, walk me through that question there again about whether, in fact, consumers are in a better position right now to handle these kind of prices. I'm in California where I realize gas prices are always much higher than the national average. But it is pretty-- I mean, there's sticker shock. That's probably an understatement when you drive past gas stations and look at where prices are right now.

MICHAEL ANTONELLI: Not only is it a shock, I alone was out this weekend, and I saw the gas price changes by the day. It was something, honestly, that I'm not used to. You're probably not used to it, or any of the viewers are used to. So yeah, ultimately, it boils down to, how are people going to navigate higher energy prices? Will they necessarily pull back on spending? Or will they borrow more to kind of deal with the higher prices?

And again, if a consumer balance sheet is in the best shape it's been in history-- and the data does show that-- what's the first thing they will do? I don't think that they will pull back on their spending. They're likely to tap some of their home equity or likely to tap some savings or tap something to continue spending. I think that's the first step to dealing with higher energy prices. I don't think it's pulling back on demand and kind of heading towards that kind of recessionary period.

So and this is a great conversation. You can go all over the place and read about this, thoughts of, will people either kind of borrow, will they kind of continue consuming, or will they pull back on consuming? I think for now, they will continue consuming. If this spirals, like your previous guest said, if you get this parabolic move in energy prices, then that's probably a much better indicator for demand kind of destruction.

JARED BLIKRE: And Michael, I want to pull up the YFi Interactive here for our viewers, where I have a chart of the S&P 500 since the beginning of the year. And you can see, we're just slightly breaking down from current levels. But big picture, I'm noticing that the bears are out. You look at the weekly sentiment numbers from the AAII surveys. It's kind of a contrarian indicator. I'm actually starting to hear strategists get kind of bullish on equities right here. And I'm just wondering what your views are.

MICHAEL ANTONELLI: I mean, look at that chart. Look-- so the S&P 500 fell a little under 10% in January. There was no invasion. The Russian-Ukraine situation and oil prices had nothing to do with that in January. So we're down about call-- yeah, call it 10.4% right now. So we're down a little less than half a percent, based on the Ukraine situation, which, again, you need to really understand what's signal and what's noise in the markets because noise can happen all the time.

What's signal in the market? I think the Fed, inflation, rate hikes, valuations. Those things are signal. Ukraine-Russia, while it absolutely just devastating situation for the world, it really hasn't impacted the stock market as much as January was, which was more Fed and, like I said, inflation related.

You're right, the good sentiment. If you looked at the II numbers, there's now more bears than bulls. It's at numbers you've seen in 2020 and late 2018 and 2016, all these moments where sentiment just got so bad that a near-term bottom got pulled in. I always just ask myself, am I bullish or bearish here? Well, all of that really depends on your time frame. I may be bullish for the medium to long term, but am I bullish over the next week or month? That kind of depends on what you're trying to accomplish on the stock market.

The sentiment numbers have gotten really bearish. If you go on Twitter, there's talk about nuclear war. There's talk about-- there's research out there about what could happen if nuclear war occurs. Those are pretty bearish sentiment numbers. Does that mean a bounce is going to happen immediately? No, but think back to COVID, back in March. When things get as bad as they've been, they're hard to get worse than that.

What you're looking for in the market is not, is there good news or bad news? Are things getting better or worse? You're looking for the news to get less worse. As weird as that sounds, that's what you're looking for. And this morning, we got a little bit of the outline of a ceasefire. It hasn't happened, obviously. But that is the news getting a little bit less worse at the margin.

AKIKO FUJITA: Well, and Mike, I think you put it perfectly. There's just a lot of noise, whether it is about data or whether it's about everybody trying to weigh in on what's playing out between Russia and Ukraine. To that point, we've got the FOMC meeting coming up next week as well. If you're an investor in the market right now, do you hold some cash because of all of that uncertainty that's out there? Or are you still better off invested in some space, instead of keeping things on the sideline?

MICHAEL ANTONELLI: I think history has shown that the best way to get through times like these, whether it's COVID or whether it's just kind of geopolitical, you know, roiling and energy, the best way to get through these is to have a supply of cash, is to have something that helps you sleep at night. That's kind of planning 101. You have some sort of, you know, just stockpile or war chest of cash that you can just help kind of get through these difficult times.

There are sectors. I used to be a big housing bull. I still think housing is a great sector to be interested in. Now there's defense, right? If the entire NATO countries need to rebuild their defense systems, maybe that's a good place to think about deploying some cash. But ultimately, the amount of cash you hold is really kind of about how you can sleep at night, right? How you can sleep at night.

But I will say that if you're going to buy low, sell high, you know, you do have to pick your spots along the way, right? There's-- you can't be a trader or an investor if you're not going to buy low every now and then. So but I do think having a cash pile makes a lot of sense at times like this because it helps you avoid making a mistake, right? Just selling out of the market because you're scared. A cash pile can help you get through these difficult times.

But I do want to remind your viewers, your listeners, everybody, that listen, there's no kind of calm period in the world. It's not like we're going to enter some phase when this is over where something else won't occur. You know, the '90s were thought of as this great period, but there were also difficult moments back then. So this is just how the world works. There's no calm, peaceful moment. Let's keep our heads on straight and get through this together.

AKIKO FUJITA: Yeah, some good context there, to your point, risk tolerance a big thing. But I have a feeling a lot of that's really gone down for a lot of investors, given what's played out over the last few weeks. Mike Antonelli, managing director, market strategist at Baird, good to talk to you today.