Investment advice: Market trends when Fed is 'on pause'

Yahoo Finance Live discusses the latest market trends as it prepares for the next Fed decision pertaining to interest rates.

Video transcript

RACHELLE AKUFFO: Well, today's weakness notwithstanding, we've seen a surge in mega caps recently, with the rest of the market trying to play catch. Up over the last few weeks, investors have dialed down their expectations for an aggressively hawkish Fed, while pricing in a much softer landing. Whether or not that materializes is debatable. But what's the bottom line for investors? How do they navigate a market environment where the Fed is in a wait and see mode? Yahoo Finance's Jared Blikre is here to break all of that down for us. Hey, Jared.

JARED BLIKRE: Hey there, Rachelle. First, we can take a look at the Nasdaq 100 year-to-date performance. And we got some oohs and ahs here. NVIDIA, Meta have doubled. We know this. But you were just saying, we'd have to go back to the last Fed meeting.

Something really important happened at the beginning of the month. And at that time-- just before the meeting, investors were expecting a hard landing. They were pricing in a recession, four-and-a -half cuts by the end of this year. After the last meeting, that number rose to only two-and-a-half. So investors are thinking, all right, soft landing now. And we've seen growth stocks, and especially the mega caps just take off.

Now, this is a 10-year T-note yield. This is the beginning of May. That's when we had that Fed meeting. And we were right down, testing these lows right by about 3.2%, 3.3%. Since then, we have actually risen.

And let me just show you the implication this is having on the stock market. Now, this is the Nasdaq-100 versus the Nasdaq Composite going back about 30 or 40 years. This is the dot-com bubble mcrash. And we can see huge outperformance here. And that would be by the mega caps at the time. Guess who they were? Intel. You look at Oracle, Cisco, even Yahoo. So at the time, we did see a lot more outperformance than we are right now.

Here's what's happening this year. That little blip right there is the huge outperformance we're seeing this year with respect to the mega-cap. So just want to point out that we can see a lot of more outperformance potentially if we were to enter into some bubble mode. Is it AI? I don't know. That's just speculation.

But let me show you the investment implications, the last time we had a major-- and this is during the global financial crisis. The last time we had a major pause. That would be in, I believe, June of 2006. The Fed kicked off a pausing that would last until September. That's when they cut. And guess what? That was a really good time to be in the market, when the Fed was on pause and investors just waiting for that first cut.

Here's what happened over that roughly 14-month span. And these are all the markets I'm looking at. At the top here, this is emerging markets. You might say, well, why would emerging markets be the number one outperformer? Well, it has to do with relief. Because the Fed had been raising rates and it was attracting capital into the United States. And all those investors wanted to benefit from those high rates.

So when the Fed paused, guess what? Emerging markets, well, it's their day to shine. So we saw emerging markets up 52%. After that, energy was up about 34%. Really interesting because if you're tracking the price of crude oil, as we're doing through USO, you can see that USO was rather depressed. But in fact, not only energy, but all 11 sectors in the S&P 500 did very, very, very well.

Here's tech. Tech was up about 29% over that 14-month period. Here is gold. Gold up about 20%. SPY, that's the S&P 500, the benchmark, up just short of 20%. And then euro. I use the euro here as a proxy for the US dollar. That means because the euro was not up, we saw a little bit of weakness there. And I did want-- point out finally that yeah, global financial crisis, guess what? Financials were under a lot of pressure. Even those were up just slightly by the end. But a clear bifurcation of the returns.

And so if we dial it back to the present time, what's going on here is quite a bit different. And I would say the debt ceiling, just another kink to add to the rest of it. How is it going to play out in the end? We don't know.

But I just want to finish with. This the debt ceiling has actually added liquidity to the economy. And when the-- excuse me, when the debt ceiling is eventually resolved, which it will be, disorderly or not, guess what? We're going to see the treasury issue massive amounts of bills, again, to catch up. And that's going to drain money from the economy. So that liquidity is going to evaporate.

But the bottom line is, when the Fed pauses, and we don't know if it's pausing just yet. We don't have confirmation. It's actually a pretty good time to be in the market, Rachelle. So you just got to be in the right markets, of course.

RACHELLE AKUFFO: And there you go. Well, with that fantastic breakdown, though, people can't say that they didn't have an opportunity to learn. Great stuff. Jared Blikre there for us. Thank you so much.