Market volatility due to 'no consensus' on the Fed's next moves: Strategist

Michael Lee Strategy Founder Michael Lee joins Yahoo Finance Live to discuss today's market sell-off and the outlook for stocks ahead of this week's Fed meeting

Video transcript

EMILY MCCORMICK: Let's talk much more about the latest market action and expectations for this week's Fed meeting with our next guest. Michael Lee from Michael Lee Strategy joins us now. And we thank you so much for your time this afternoon. Taking a look at the price action that we're seeing in stocks today, of course, this is just extending the volatility that we've seen over the past couple of weeks so far. Is this, in your opinion, all about the Fed and expectations for tighter financial conditions? Or what do you think is driving the selling that we're seeing?

MICHAEL LEE: Emily, I think you hit the nail on the head there. I think this has everything to do with the Fed and the fact that as of right now, there's simply no consensus as to what the Fed is going to do. Inflation numbers keep coming in hotter. Some economic numbers are coming in hotter. Some are coming in cooler. And as a result, you just have a wide range of opinions, a wide view of where interest rates are going and what the Fed is going to do.

I don't think anybody is sure what the Fed is going to do, including the Federal Reserve themselves. I think this year you could see very different thoughts on the dot plot, very different sentiments in the meeting minutes as we go from month to month, from meeting to meeting, because this is very much a fluid situation. And there's nothing that the market really hates more than that sort of uncertainty.

The entire risk asset class universe is priced in one way or another off the US Treasury curve. And so as that Treasury curve is in somewhat of a flux and there's such a wide range of viewpoints as to which way it's going to go, looking forward it becomes very difficult to price anything. And as a result, a lot of risk capital just walks away from the market.

EMILY MCCORMICK: So, Michael, you mentioned that there is no consensus in the market, and perhaps even in the Fed itself over the next move here. What information, economic data, market data, do you think would inform the Fed and market participants about what that next move might be?

MICHAEL LEE: Look, I think the Fed's between a huge rock and a hard place here. I think the accelerated bond buying, the size of QE doesn't necessarily help the economy, but it stabilizes capital markets. And the full force that came with it a little less than two years ago absolutely stabilized capital markets. And then the economy took off.

In my opinion, maybe a year ago or a little over a year ago, they should have slowly but surely reduced that level of bond buying to where it's at a manageable number. So you start with this taper and what has become an accelerated taper from the initial thought to now rate liftoff, instead of maybe coming in September, as some were predicting last fall, it's looking more likely it's going to come in March. And you have smart people out there saying that 50 basis points in March is a realistic, realistic number. So what I think will be--

ADAM SHAPIRO: Michael? Michael?

MICHAEL LEE: Oh, yep?

ADAM SHAPIRO: I've got to interrupt you on two things there, because you've pointed out that when you-- everyone take a step back and take a deep breath, because you've pointed out not a lot has changed in the last year when you look at this market versus where we were 52 weeks ago, still up 12% on the S&P 500. But when you talk about the Fed, we hit highs on the S&P 500. You had to have your head under a rock and underwater to not know interest rates were going to start going up in March. So what changed all of a sudden?

MICHAEL LEE: Yeah, Adam, exactly. So that's my sentiment, is that over the last three to four weeks specifically, we went from the consensus being, OK accelerated taper to three rate hikes to, well, you know what? Maybe it's not going to be three rate hikes. Maybe it's going to be six rate hikes. Maybe it's going to be five rate hikes.

And then you have these varying opinions out there. And then you have people like Larry Lindsey the other day saying maybe they'll raise twice, but then abandon ship. So you just have this wide disparaging viewpoints of where the Fed is going to go.

And what I think has happened is a heightened level of uncertainty as to which way the Fed is going to go. I don't think there's been any fundamental change in the economy over the last three or four weeks since we started this accelerated selloff. We've had some good news. We've had some bad news, but nothing to say, OK, well, the market should all of a sudden in the blink of an eye be worth 10% less.

So I think we're in a little bit of no man's land. I mean, to me this is reminiscent of what you saw a lot in 2018, albeit it's happened a little bit faster. You also saw some selloffs like this, again, not to this degree in 2016, 2015, 2014, 2013, 2011, and 2010, all based around what the Fed is going to do.

When there's this level of uncertainty, you get a heightened level of volatility, and somewhat directionless in stocks. And I'd say earlier this afternoon, we looked on our way back to much smaller losses. Then the news about 8,500 troops being authorized or being heightened alert for deployment kind of derailed that. And here we are fighting back.

I wouldn't be surprised-- maybe we don't get back to those all-time highs. If we recover a lot of these losses only to see selloffs like this a few more times before we come to some sort of consensus, I'd say these next few Fed meetings are going to be some of the most significant in the history of the United States Federal Reserve.

EMILY MCCORMICK: Michael, what areas of the market sectors or names specifically do you think are best positioned to rally back, as you mentioned, see some of this recovery after the selloff that we've had the past couple of weeks.

MICHAEL LEE: Yeah, so as Jennifer was mentioning, the health-care sector has really been unloved. Is the sentiment there too negative for it to rally back? I think I don't know. That's something I own, I'll continue to own. Energy, you've now, in my opinion, got an opportunity to step back into a sector that's red hot and doesn't look like it's going to get derailed any time soon. I like XLRE in utilities as well.

But, look, we'll see where the market's going. I don't know how you cannot own tech. It's a matter of are you dramatically underweight or are you equal weight in the XLK, as you have it up there?

We've seen some unique events happen over the last couple of weeks, Microsoft making not only its largest cash acquisition ever, the largest cash acquisition ever. If the board room at Microsoft thought their stock was overvalued or fair valued, why would they pay for this deal with Activision in cash? So in my mind, that's a pretty bullish sentiment. Acquiring a company, making that big of an acquisition that's that big of a major player in all the major indexes is going to weight in the market. Combine that with Netflix, and all of a sudden you have an avalanche.

And to understand these sorts of selloffs, you need to realize that you have momentum players that are going to push markets in both directions. However, when you go to the downside, it gets much, much more uglier, versus when you get momentum to the upside. Now, why is that? It's because people panic on the way down. And no one panics when they make more money.

So what I think you're seeing right now is a lot of confusion going on. And I think this confusion remains with some rallies and some ugly selloffs until we can get a fairly tight consensus of the Fed, whether it's four or five rate hikes or it's three or four rate hikes or something more narrow than people say we're going to get 50 basis points in just six weeks versus no rate hikes at all. I think the range of viewpoints is too wide. It's too hard for large players to commit large amounts of capital, if that makes sense.

EMILY MCCORMICK: All right, we'll leave it there for now. Michael Lee of Michael Lee Strategy, thank you so much for coming on this afternoon.

MICHAEL LEE: Thank you.