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Market strategists detail how investors are digesting Fed movements

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Invesco Chief Global Market Strategist Kristina Hooper and Principal Global Asset Allocation Chief Investment Officer Todd Jablonski joins Yahoo Finance Live to recap the market for this week.

Video transcript

EMILY MCCORMICK: Welcome back. We're about a minute until the closing bell this Friday, January 21. And our market panel is here to break down today's trading action and tell us where the outlook may be headed here for markets. Kristina Hooper is Invesco Chief Global Market Strategist, and Todd Jablonski is Principal Global Asset Allocation Chief Investment Officer.

Let's get one final quick check of the markets heading into the closing bell. Stocks really accelerating into the close here. The NASDAQ off nearly 2.7%. The Dow Jones Industrial average off just over 1%. And the S&P 500 down 1.6%. And here's the closing bell.

[MUSIC PLAYING]

[BELL RINGS]

ADAM SHAPIRO: Well, always good to have a smile at the end of the week. There's the gavel. There's the closing bell. And here's where we are going to settle. It is a down week. Look at this. The Dow is going to be off about 1.3%. We lost 400 and almost 50 points at the end of the session. S&P 500 is off almost 2% We're going to settle down 85 points. For the week, the S&P 500 is down about 5%. And year to date, it's down almost 8%.

NASDAQ, it is down. We've been in correction territory. It's lost 385 points. It will be down roughly 2 and 3/4 percent.

Let's get back to the panel. And Kristina, I was listening to different kinds of analysts talk about what we're witnessing right now. And they mentioned that, look, every year, in any trading session or during trading sessions, you get a natural pullback, 5% to 10%. The question, I guess, for investors that a lot of us are asking, is this that usual in the course of a year where you get a bit of a pullback? Is it that? Or is there something else going on? What do you think?

KRISTINA HOOPER: Well, it's not the usual in the course of a year. It is because we're at the start of Fed tightening. In fact, the release of the FOMC minutes a few weeks ago was the unofficial start of the tightening season. And that really has exerted downward pressure on stocks, as it should.

As we've seen in past Fed tightening cycles, at the start, usually we see expectation of rates going up starting a reappraisal process of stocks that creates volatility and that can put stocks in downturns. So the Fed doesn't tighten every year, usually. And usually, we don't see selloffs like this. I do think that it's very normal and to be expected, given the kind of environment we're in.

EMILY MCCORMICK: Todd, we have the Federal Reserve's next monetary policy-setting meeting and, of course, the statement and press conference coming out next week. What do you think investors should really be keying into and focusing in on, since we may not be getting a change on policy after this meeting, but we may be setting up for something in March?

TODD JABLONSKI: I think investors certainly have begun to bake in their expectations into the market. And at the beginning of the year, consensus seemed to be fermenting around three moves in 2022, three tightenings. Of late, you've seen investors shift their expectations out to four.

And what I note, and I think what other investors should be aware of, is that the gap between market expectations and Fed actions is what really causes market dislocations, the eruptions of volatility, and from time to time, the kind of movement in rates such as we've seen over the last several days and an implied vol with the VIX moving a lot, ultimately, I think you see are markets that are absorbing and guessing it a lot of new information all at the same time. That's translating into speculation about the direction and the pace of Fed action.

ADAM SHAPIRO: But Todd, to follow up on this, at some point, I mean, presumably March, everything that we're now anticipating becomes a fact on the table and the reality. And hopefully markets don't continue going down, down, down. But when do you get that pivot? When does the correction that we're witnessing-- or I'm going to use the term alignment to the realities of where valuations should be. When do we start to recognize that that is now in play?

TODD JABLONSKI: I think it's when the investors find validation that their concerns around inflation and the steps to control inflation are being echoed at the Fed. And when those concerns are being echoed and those expectations are being validated, all of a sudden, I think you see a lot of the pressure on long-term rates begin to ease. I think, in fact, some of the discounting that's taking place in some of the big cap growth tech names driving down prices begins to moderate.

And I think you have to actually look at equities as an asset class. Go back to the beginning of the year, say, what's the fundamental case for this asset class. You should, in our view, we think, view favorably the expectations for equities in 2022, especially given what could be on the table for fixed income in total moving forward from this point.

EMILY MCCORMICK: Kristina, given the latest drop that we've seen across the major equity indices as well as individual stocks, do you see any opportunities emerging here? And if so, where would you suggest investors put some capital to work?

KRISTINA HOOPER: Absolutely see opportunities emerging. We may not have hit the bottom yet. But certainly, the selloff in technology has been quite significant. And it has created a pool of tech stocks that have more attractive valuations than they did just a few weeks ago.

I also believe that tech is an attractive area along with other secular growth parts of the stock market, just given that the US economy is entering the slowdown phase of the economic cycle. And historically, that's a time when tech and secular growth and defensives tend to outperform. So this might not happen overnight, but I do think there are some buying opportunities. Perhaps the best approach right now is to dollar cost average in on days of selloffs.

ADAM SHAPIRO: Kristina, my whole investing career has been dollar cost averaging through the 401Ks. I'm curious though, because tech for some of us, as kind of average investors, we might-- I'm going to use the word mistake-- assume that a work-from-home play is also a tech play. What warning would you give to somebody like me who's making that correlation?

KRISTINA HOOPER: Well, I think you have to look at the fundamentals. And this is going to be a year for discernment. And you have to recognize and understand where revenues are coming from and, of course, where future revenues are coming from and what your anticipation is. There are some stocks that have been characterized as work-from-home stocks that are still likely to benefit going forward because of structural changes that are not going to revert back to where we were pre-pandemic.

And I anticipate increased-- we've already seen some increase. But I anticipate even more corporate spending on technology to accommodate more of a hybrid workforce. Yes, people are going back to work. Some will remain remote. And there's likely to be a large number that wind up being hybrid. So that necessitates more spending on software, cloud computing, all kinds of areas, some of which have been characterized as the be at home, work from home, stay at home, but really are plays on the future as well.

EMILY MCCORMICK: Todd, given the rising interest rate environment that we're likely to be in this year, of course, we did have 10-year Treasury yields pulling back a bit today after reaching the highest level since January 2020 just earlier this month. Do you think now is the time for investors to be getting into bonds? And if so, where specifically should they be looking?

TODD JABLONSKI: Well, really, I think to look at the fixed income asset class and say, at these level of rates, that the bear flatter that's likely coming, does it in fact portend potentially additional losses, let's say, from rate exposure? But what I will say is, as we begin to look forward over 2022, is that you could potentially see some stabilization in rate expectations, given declining inflation expectations, perhaps a bit of a moderation too as you begin to see investors begin to expect that a bit less.

When expectations begin to agree in that way, you could, in fact, I think, see core fixed income become more attractive for stability, especially when complemented by high-yield, which I'd emphasize, non-investment grade US dollar high-yield, in our view, tactically looks pretty favorable, even as you wait for that core fixed income to find stability.

ADAM SHAPIRO: Kristina, when Todd says stability, when we get the statement next week from the FOMC, is it going to be-- I mean, we're all going to look for the language in there that may upset markets or may bring some calm to the markets. Do you have any sense of which might play out when we get that FOMC statement?

KRISTINA HOOPER: Well, I suspect if there's more of a sell off between now and then, the Fed will err on the side of calm. But let's face it. It has used its words in recent weeks as another tool. And it's been talking very tough, very hawkish. And I suspect that part of that is not just to keep markets informed and try to be transparent but to have words do some of the heavy lifting. Talk tough but act, perhaps, a bit more dovish.

So again, I think some of what we get next week will be dictated by what happens in markets this week and just how unstable or stable they behave. But I suspect that the Fed is still going to want markets to understand that it is going forward with a tightening process because it believes it's behind the curve relative to where it was the last time it started tightening.

Now, one caveat though. There are three tools now that the Fed is going to use this year. Now, some are scared. They think that means the Fed is more hawkish. But I would argue, the ability to use three different tools takes the pressure off one tool in particular, which is rate hikes. And so I would err on the side of fewer rate hikes because the Fed has the ability and is planning on also shrinking its balance sheet.

EMILY MCCORMICK: And Todd, we've been talking a lot about the Fed, about inflation, supply chain issues, and of course, omicron and the ongoing pandemic. Do you think there are any other concerns or, on the flip side, potential positive catalysts that investors should be watching out for this year?

TODD JABLONSKI: Well, I think globally, of course-- again we've been talking a lot about the Fed. But I think that the pace and the different nature by which you see central banks around the globe shift their monetary policy, either tighten in the face of inflation to arrest inflationary woes or, in fact, to be more stimulative in cases where that's, again, the objective.

And what I think, ultimately, that means is that investors should be looking at developed markets and emerging markets for signs of opportunity. We favor the US in our regional equity allocation and global asset allocation. And we do think that, at some point, investors will see the fundamental strength in that big cap tech begin to continue. But for now, I think investors should be looking outside the US for potential surprises and information which might cause a feedback loop into investor sentiment into the United States.

EMILY MCCORMICK: All right. Todd Jablonski is Principal Global Asset Allocation Chief Investment Officer, and Kristina Hooper is Invesco Chief Global Market Strategist. And we thank you both so much for your time and insight this afternoon.

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