Fed will take ‘measured approach’ to avoid spooking markets: Strategist

Invesco Global Market Strategist Brian Levitt joins Yahoo Finance Live to give an outlook for the market ahead of the Fed meeting this week.

Video transcript

- We'll go from crunching numbers to digesting the market action and bring in our next guest, Brian Levitt, Invesco Global Market Strategist. Brian, thanks so much for being here. So I guess the story for today is oversold doesn't mean over, right? So I want to get your perspective first on these wild swings that we saw yesterday in both directions.

And then the slide today, I want to ask you, how long overdue is this? And is this a question of equity markets suddenly sort of waking up and realizing what the Fed is about to do, poised to do, and sort of catching up with where bond markets were a few weeks ago.

BRIAN LEVITT: Yeah, I think that's right. I mean, investors have gotten pretty bearish. So if you look at surveys, bull-bear surveys, investors have gotten very bearish. So you're starting to see signs that there may be some of the worst of this is behind us. If you also look within indices, so not just at the broad level, there's a particular amount of carnage.

And so we're starting to get you somewhat oversold. I think the challenge here for investors is that we're so used to when we see this type of volatility, that the Federal Reserve is attentive to it and may even signal some hope in a statement tomorrow or maybe some caution to don't extrapolate all these rate hikes.

The challenge is we're dealing with very high inflation. And the Federal Reserve is going to continue to-- they're going to move. And they're going to try and bring inflation expectations under control. And to do that, they're going to drive real yields higher, and they're going to tighten financial conditions.

So that's not a great backdrop for equities. It doesn't mean we run for the woods. It doesn't mean that the business or market cycles are over. They're just investors should expect some volatility as we move through this period.

- Play devil's advocate with me. Is there any chance that the Fed turns a little bit more dovish based on all of this market volatility? And then on the flip side, do you see them potentially hiking by 50 basis points?

BRIAN LEVITT: I don't see them hiking by 50 basis points. And I do not see them turning more dovish. The Federal Reserve recognizes that they need to move. They are going to begin to tighten policy. I think the key thing for tomorrow is they're not going to suggest that they're scrambling or meaningfully behind the eight ball. It's going to be a very measured approach. And they're going to talk about gradual moves in interest rates.

And so they're not going to do anything tomorrow to further spook the financial markets. But they're going to set the path for what's going to be meaningful tightening. Now, the good news is for investors is that the markets are already expecting the Fed funds rate to be at 175 by the end of 2023, which would portend 7 interest rate hikes, and as of today, would be a very flat yield curve and may suggest that a recession would be in the offing 6, 12 months from then.

So we've already priced in a pretty tight environment, a disconcerting environment potentially for the economy in 2024. The hope is now that as we start to tighten conditions and as consumer demand starts to ease, moderate, that inflationary pressures will start to come down and the Fed won't ultimately have to go through with 7% interest rate hikes.

- So now, Brian, where do investors go amid all of this volatility? Where do you see any opportunities? Are there any opportunities? And how do you preserve the portfolio?

BRIAN LEVITT: Yeah, I mean, I think you still-- I mean, we're in a slowdown phase. We're in a slowdown phase driven by tightening. In a slowdown phase driven by tightening, you still want to be a bit more defensive. But the extent that you want equities, you want to be exposed to higher quality. I don't think that that's a bold statement. You want to be less exposed to more speculative or less highly visible earnings. You want to be exposed to higher quality companies.

I mean, the good news is for investors in all of this is while a lot of companies, a lot of stocks got hit very hard, some of them deserved to. Some of them just did not have the fundamentals to support the valuations. But what you've also seen in this is very good quality businesses, even within the tech sector, that have gotten hit pretty hard.

And some of them, you know, good long term historical growth businesses, structurally advantaged growth businesses, are now trading at market level valuations. So that, to me, creates opportunities for investors, unless you believe a recession is in the offing. If I watch credit spreads, I watch what the 10 year rate is doing, none of that suggests to me that a recession is in the offing and that the market cycle is coming to a untimely end.

- One thing we do know, inflation is red hot, particularly in the central part of the country. And the IMF has downgraded growth. OK, we will leave it there. Brian Levitt, Invesco Global Market Strategist, thank you so much. Alexis, a lot to digest there.