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Markets: ‘We’re not out of the woods’ yet amid Fed rate hikes, analyst says

eToro USA Investment Analyst Callie Cox breaks down the market outlook amid the Fed's shifting rate hike policies, in addition to corporate earnings stability fording through inflationary environments.

Video transcript

[AUDIO LOGO]

SEANA SMITH: Callie, it's great to have you on the program again. So we're looking at losses, at least for the Dow, coming off what was a very strong gain yesterday of over 700 points. How do you think this sets us up as we head into the final month of the year? Because, like you noted in your notes, S&P now back above the 200-day moving average.

CALLIE COX: Yeah. I mean, I think we're struggling a little bit today. But we have to look at that in the context of where we've come since mid-October. Being Dow stocks, the economically sensitive stocks have led the market higher. And we're basically realizing now that the Fed could maybe pull this off.

And, you know, we might be moving into the next step of policy as the Fed is willing to be flexible, even though-- or even as we see inflation give us recent progress and the economy soften a little bit, but avoid those recessionary-- that recessionary depth, if you will. So, you know, I think we're processing a lot right now. But I think it's a lot of good news. Investors are just trying to understand how good it is because rates are still high. And we're not quite out of it.

DAVE BRIGGS: And, Callie, we're still processing whatever happened yesterday, with the markets essentially putting on the earmuffs and skyrocketing after the Fed told us exactly what they've been signaling for months now. Have you processed that, and what do you make of it?

CALLIE COX: Oh, I've processed that because Powell basically said what he's been saying for a bit now. He did give us a timeline, though. He did say that rate hikes could start slowing in the next couple of weeks at their next meeting.

So I think the market really hinged on that. I think it saw, you know, a element of certainty in there. And then, you know, we saw some position switching, some short covering, and suddenly, we were up 3%. I don't think a lot of newer details came out of what Powell said. And I'm struggling to understand why markets are rallying so much if we're seeing more of a shift than a pivot from the Fed.

I mean, the Fed has been very clear that rate hikes aren't coming anytime soon. Unless something breaks, we don't want that to happen. So I think markets could struggle here. They're above the important 200-day moving average. But at the same time, we're not out of the woods here. And we're in for what could be an environment of high rates for months to come.

SEANA SMITH: Yeah, Callie, you're saying that markets could potentially struggle here. Goldman, Deutsche Bank both saying that US equities are in for a wild ride next year. What does this mean, then, for investors in terms of how they should be positioned?

CALLIE COX: Well, I think investors really need to be focused on quality here. It may make sense to sow the seeds for the next bull market. And we may even be in a young bull market right now. But at the same time, it may not be the chance to dive back into risk and speculation.

I mean, we've been telling our customers that cash management and quality financials are key when you're looking at risk right now. Take a look at quality risk with the emphasis on quality because as rates stabilize, as rates possibly come down in the latter half of the year, we could see more of those rate-sensitive sectors tick up and those cyclicals tick up. But at the same time, a high-rate environment is a tough operating environment to be in. So you may not see all stocks survive it.

DAVE BRIGGS: Yeah, when we woke, we were in bull market territory, at least in the Dow. I think the S&P was 17% up since its lows, and even the NASDAQ up 14% from its year lows. JPMorgan today trimmed their earnings forecast for the S&P by 9% and also said they think we could retest the lows of 3,491 in the first quarter of '23. Do you agree with that assessment?

CALLIE COX: You know, I don't have a crystal ball. I say that all the time. But I think for us to retest the lows, we're going to need to see some recessionary evidence from either earnings or the job market or both. It seems like markets are squarely in the "we're avoiding a recession" camp. And frankly, economic data is turning that way, too.

So I'm not sure if we're quite out of the woods yet here. And, you know, inflation is still quite high. The Fed has a little bit more work to do in terms of softening demand to get that down. But, you know, it looks like we'll avoid it. But at the same time, if we see earnings crumble, if we see the job market crumble, we could see that new low start to be priced in.

SEANA SMITH: Callie, speaking of the job market, we certainly are starting to see signs that job growth is cooling here in the US. But the levels are still clearly well above what we would likely need to see or what the Fed has indicated we would need to see in order to get inflation under control. What are you expecting to see tomorrow? And, I guess, how do you think that picture looks out or looks as we look out into 2023?

CALLIE COX: Yeah, so the job market is a weird one right now. The leaders that you typically see weaken before you see hiring and the unemployment rate weakening aren't budging. I think about initial jobless claims as the big one.

We're not really seeing a lot of claims for unemployment benefits or those claims tick up, which is great news. You don't want to see unemployment tick up in normal times. But in the context of the Fed fighting inflation, we may have to see a bit more softness in the job market to feel like we can get to a point where inflation is under control.

That being said, tomorrow, you know, everything still looks quite strong. I mean, job openings are still quite high. Company earnings are strong. You know, claims are low. I wouldn't be shocked to see another somewhat moderate pace of hiring in November in the data that we get tomorrow. You know, I think the details really matter there. But thinking about the headline number, I don't see much change there.

DAVE BRIGGS: What about the spread between the 10 and the two? We've seen a lot of movement there-- no shortage of emphasis on every word coming from Jerome Powell, not as much on the 10 and the two and the spread there. What do you make of it? What does it tell you is around the corner?

CALLIE COX: Yeah, so the yield curve has a lot of historical precedents for predicting recessions, but it flickers quite a bit. We get some false alarms from it. And the context might be a little bit different this time around, which I know is the most dangerous phrase in finance.

But I think it's worth considering what environment we're in at the moment. Ever since we saw 10-year yields peak, we've seen economically sensitive stocks rally 14% to 15% if you look at the Dow. So I look at the yield curve. I see those conflicting signals where the stock market is basically saying, we're avoiding a recession.

And I say the yield curve is maybe showing the Fed that it's time to lay off the rate hikes, maybe slow down the rate hikes, pause here, and see the collateral damage around them. You know, maybe I'm an optimist here but do think that this period is a little strange for the yield curve. And the bond market's processing a lot of mixed signals.

DAVE BRIGGS: It sure is a little strange, hard to read. Callie Cox, great to see you. Thanks so much.