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Fed funds rate of 5% is 'quite restrictive', says strategist

Most investors expect the Fed to pause its rate hike campaign at its next meeting. Christian Ledoux, CAPTRUST Director of Investments, explains why a 5-percent Fed funds rate is restrictive enough for the Fed to accomplish its goals.

Video transcript

SEANA SMITH: Let's get into more of today's market action and also what we can expect going forward. For that, we want to bring in CAPTRUST Director of Investments Christian Ledoux. Christian, it's good to see you here.

So we've seen a bit of a pause in the rally that we certainly saw Friday and really since we've seen since the start of the year, certainly this melt-up type of action that it seems like we're looking at in the market with improving investor sentiment. What do you make of the gains that we've seen and whether or not this momentum that we had seen prior to today, if it can continue.

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CHRISTIAN LEDOUX: Good afternoon, Seana. And thanks for having me. So you know as well as I did, this has been a very tech focused rally. And in retrospect, it makes sense. Tech is where the earnings are most secure.

We still don't know just how bad a potential recession will be, if we even have one. And other sectors are much more cyclically tied to that. So I can understand why investors prefer tech. Valuations in the short run generally don't dictate when a run like this will end. And if we have a true end to the rate hike cycle-- which could happen here, if the Fed decides not to raise again in June-- that could be supportive of higher valuations still.

AKIKO FUJITA: I mean, when you talk about tech, though, so much of the conversation has been focused around AI. We were talking about NVIDIA last week getting that big boost. You look at a name like Apple today. AI certainly not sort of the big play for them.

I mean, how do you differentiate between some of these big-tech names? Because it sounds like, in your notes, you're saying these are really just incremental gains that we're seeing, but, in the broad context of things, AI isn't going to be the single driver, at least within the sector.

CHRISTIAN LEDOUX: Well, no. These are big companies with big businesses. And they're doing various things that investors like.

You talked about, in your last segment, the Apple event. That's going to be incremental to their business-- maybe not that much, but still growing the ecosystem. Apple's very good at that.

The Microsoft and Googles of the world, they're going to be participants in AI directly. And the impact to their businesses could be actually substantial. And then, of course, there's NVIDIA who's fueling all this and has to be counted among the big-cap tech now. And their impact is huge. And it's probably made your desk that NVIDIA's gotten a little cheaper after its big spike because the earnings growth was even faster than the stock price growth.

SEANA SMITH: Christian, I think the big debate out there is just in terms of the potential that we could see a slowing economy, not only here in the US but really what we're seeing globally, how big of a risk that poses for stocks. What do you think?

CHRISTIAN LEDOUX: Boy, you know, I just don't see the tie directly this time. A recession can take many different forms. And this is going to be very unique in terms of how this plays out, certainly with unemployment as low as it is. Even if we have a move up from here, it's not going to come anywhere close to prior recessions.

And if the Fed responds to it-- which it's likely going to do at some point with a rate cut sometime within the 12-month period I would guess-- then that'll soften the blow. Stocks like to foresee the end of a negative period. And if this recession, if we want to call it that, or slowdown, ends in six to nine months, then the stocks will react positively in anticipation of coming out of that.

AKIKO FUJITA: And, Christian, you mentioned the potential for a rate cut in the next 12 months. Is that what you're still looking at right now? It feels like expectations are really starting to shift.

CHRISTIAN LEDOUX: Yeah, that's-- I think it's shifted more into the first quarter of next year for a rate cut. I don't think there's too many that are going to hold that we're not going to get rate cuts at some point. I think that the rate of 5%-- or maybe a little bit higher than that-- on the Fed funds rate is actually quite restrictive, and I don't think our economy can handle that for too long.

So there's a likely market anticipation. You can see it in the yield curve with the pretty steep decline to the 10-year yield from the one-year yield. That's anticipating that we need to have lower rates at some point in the future.