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‘Markets are struggling’ to figure out where the Fed pivot ends: Strategist

John Bellows, Portfolio Manager at Western Asset, joins Yahoo Finance Live to discuss how uncertain and volatile the market is proving to be ahead of the Fed's policy meeting, finding value and diversity in portfolios, and gold and other commodities.

Video transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets, bring in John Bellows, portfolio manager at Western Asset. So John, I'm going to ask you about this whiplash that investors are getting over the past two days. A colossal comeback yesterday for the Dow, erasing a 1,000 point deficit. It was down about 600 today and was briefly in the green, it's down now about 90 points. What's at play here, and I'm just wondering how much of this is just technical selling and buying at this point?

JOHN BELLOWS: I think clearly we're in a period of heightened uncertainty and market volatility. You know, hard to comment on any one day of ups and downs but that is definitely true in the broader sense as we are in a period of heightened uncertainty. I think adding to that, or the driver of that has been a pretty spectacular pivot from the Federal Reserve. You know, they've made a very significant change in their outlook for what appropriate policy is in '22.

That change has been kind of ongoing over the last few months. And I think what the market's doing today is reflective of that. The market's trying to figure out where that pivot ends, what eventually anchors Fed policy going forward. And is still trying to calibrate correctly you know, the scale and magnitude of that Fed pivot. So very volatile markets, you know, any one day you can see up or down but I think the bigger picture is the Fed pivot has added to the uncertainty and markets are struggling to figure out where it ends and what is the anchor in the meantime.

ALEXIS CHRISTOFOROUS: So John, as a portfolio manager, I'm curious if you're using these big down days as an opportunity to scoop up some bargains? And if so what are you buying right now?

JOHN BELLOWS: Well, you know, Western Asset is very value-oriented in our process. And so we are focused on the price. And so when you see big changes in prices that will obviously be something we look at and factor into our decisions.

You know, I guess I'd kind of temper that with a few things. I think in addition to wanting to be active on the value front when we see this type of volatility, we think it's also important to have diversification in portfolios. You don't want to have portfolios that are swinging around wildly on any one given day. And so we put a lot of thought into both sides of the diversification. You want to have something that works in most environments.

I think the second thing I would say is we tend to be longer-term investors. And so when you see prices dip on one day you know, that could be an opportunity but it really needs to be wedded with the more bottoms-up research that goes into being a value investor. So the short answer is I do think there's opportunities and we certainly have been acting on some of those. But it's not a one or two-day trade, it's in the context of diversified portfolios and it's in conjunction with the bottoms-up work that really a value discipline requires.

ALEXIS CHRISTOFOROUS: What are you doing with commodities at the moment, John, because it looks like a lot of investors are piling into gold? You know, the SPDR Gold Shares ETF on Friday notched its largest single day of inflows on record. So is that where investors are going for safety and is it a good trade?

JOHN BELLOWS: Well, one thing that's kind of interesting about gold is we've seen a very, very strong move up in real interest rates. If you look at TIPS yields, for instance, are up 50 basis points in the last few weeks, it's a big move. You know, it tends to be the case that gold is inversely correlated with real interest rates. So higher real interest rates might actually be gold negative. It's just something to think about I think that maybe the gold strength on a day like yesterday, a little bit more flight to quality type characteristics but perhaps actually out of sync with the broader trend towards higher real interest rates.

I think your question on commodities more generally though is one where we're optimistic. I think that as long as the economy continues, the global economy continues to expand in 2022, that should be a support for commodities that are part of that economic growth story. So oil would be there, maybe even copper over a longer run, although China obviously has some more near-term concerns.

So you know, we're generally optimistic on growth over the medium term or even this year as the global expansion is ongoing. And I think that makes you positive, it makes us positive on commodities in general. Gold may be an exception due to that correlation with real rates. But I think commodities generally, especially those tied to economic growth constructive.

ALEXIS CHRISTOFOROUS: And, John, finally, what can Fed Chair Powell say tomorrow that would actually calm investor nerves if anything at all at this point?

JOHN BELLOWS: Well, again, I think part of what's going on is investors are trying to figure out where this Fed pivot ends. There is some uncertainty on exactly how much removal of accommodation the Fed has in mind. The Fed obviously doesn't know the final answer and they're not going to give it to you tomorrow.

But I think if Powell were to suggest that the market has priced a sufficient amount for now, I think that actually could be calming. You know, I don't think there's any reason for Powell to continue to push a further hawkish message. He's already sent the message, the market's already adjusted, and if tomorrow the market gets the sense that what's been priced, four hikes this year and some removal of the balance sheet, is sufficient given where we are in the outlook, I think that actually could be calming.

I think one thing that's kind of challenging there is it's going to be dependent on the economic data. So whether they end up hiking four or less or more, it will depend on inflation outcomes in the second half of the year. And obviously, Powell doesn't know with certainty there and neither does the market. So there will be some unresolved uncertainty on the final number of hikes but again, if Powell were to say you know, markets have understood the Fed pivot correctly, they're priced correctly now, he won't say it that way but that could be the suggestion, I think that will be calming because it will give the market some sense that you know, the uncertainty around the Fed pivot has been resolved.

ALEXIS CHRISTOFOROUS: We're all watching and waiting. We're going to bring you that Fed announcement tomorrow live at 2:00 PM Eastern. John Bellows, portfolio manager at Western Asset. Thanks so much.

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