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Meme stocks: People are ‘getting excited about investing again,’ strategist says

Ben Emons, Managing Director of Global Macro Strategy at Medley Global, joins Yahoo Finance Live to discuss investor sentiment, Fed rate hikes, inflation, meme stocks, and market volatility.

Video transcript

- Again, we were just kind of talking about the overall economic backdrop. We know that we got consumer confidence numbers this morning from the University of Michigan showing a turning around perhaps, of how Americans are feeling. In combination with the other data we've gotten for July, how do you view the current economic environment despite those recessionary fears lingering?

BEN EMONS: Good morning, and yes, it is somewhat easing of recessionary fears. I think what was positive this morning was that the input price index showed a huge decline. So that does tell you that Fed policy, which has tentacles by the way globally, is working through the global system. And therefore, our imported inflation is going to start declining. And that's also showing up now in those consumer expectations.

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So as you recap the bond market, as you see the 10-year yield edging a little bit down on those long-term expectations stabilizing. Whereas the two-year yield is up because it still has to follow the Fed's policy, it is likely going to get a bit tighter from here. So if you take that all combined, it does show the market has gotten a little bit more benign about yes, there's not going to be an immediate recession. We have high unemployment, we have strong earnings, but there's still a lot of inflation out there. So more tightening of policy needed.

- Well, Ben, you talk about tighter policy from the Federal Reserve that is the indication that we've gotten from for example, San Francisco Fed President, Mary Daly, saying that, quote, "It really behooves us to stay data-dependent and not call it." Referring to a bottom, which maybe we've seen or a top rather in inflation. So when you think about just kind of Fed policy going forward, it is true, though, that volatility in bond markets is still very much present. We've seen some pretty big swings just so far this week. Do you have a projection on where you could see the 10 year going and what that tells us about the predictability of Fed policy?

BEN EMONS: I think it's an interesting dynamic at the moment in the Treasury markets that the 10-year seems to be sort of oscillating in this narrow range just above the Fed's low-run rate. I think it's trying to tell us that the low end of the yield curve does believe the Fed will be able to reach that 2% inflation target over time. Because at 2 and 1/2% neutral rate of Fed continues to be a 2% target.

And that's what I think Mary Daly is pointing to is to say, we just cannot call it right at this moment. And therefore, this two-year yields has to continue to move higher, probably towards where the Fed may end up at, just at 4% or about. So we can see a big inversion of the yield curve still ahead of us. But long-term rates are likely to be relatively stable if not slightly higher. And I think this is giving the equity markets a lift, and financial conditions become looser as a result. Despite, we still have a lot of inflation.

- So does that imply that you think that you won't see financial conditions tightening despite the fact that the Fed is not done yet raising rates? Because that's very much a part of the story here. If longer term rates have essentially peaked already, then maybe that doesn't take any more steam out of, let's say, for example, the mortgage market or anything else that's hinged to longer term rates.

BEN EMONS: And I think it's a fair point because look, financial conditions have really loosened since mid-June on lower rates, particularly lower real interest rates, as well as an improvement of equity sentiment and somewhat lower volatility. And at some point, if financial conditions get too loose and it entices again a lot of spending and investing and a lot of momentum in the economy, and it doesn't therefore cool off inflation, then that will be something that Fed will really pay attention to.

So there is something about real interest rates at this moment of moves above zero while financial conditions are looser. So I think the Fed will pay attention to that. That if they are feeling this getting too much in the direction that they want to, they will try to pull that somewhat back to their expectations. Nonetheless, I think the market is also trying to say that this is an environment where the economy isn't falling off a cliff, there's a rebound in the third quarter underway, the GDP now number shows that. And I think part of that's why markets are up.

So a bit of a tug of war here, financial condition real rates. But it's something to pay attention to because ultimately, it will lead to some sort of I think resistance in equity markets, some friction as real rates get higher from here.

- Now broadly speaking, how does that line up with the story that we've seen in the VIX, also known as the fear index? Because we know that that has fallen below 20 as of this week. That I imagine is a factor in perhaps some of the elements you're talking about here. Do you feel like that is a confirmation that from an equity standpoint, that we maybe did actually reach the bottom?

We could ask. I mean, the VIX being at 20 or below, it's complacency, if you will. And it comes along with just views about that we would hit a bottom at some point, a bottom. And a lot of skepticism how far this could reach now, but low VIX is low-implied volatility expectations that we're not going to see a lot of swings either direction. And therefore, it just is conducive to loose the financial conditions.

But I would caution, though, like you have a lot of technicals at work. There's something about positioning, there's a lot of shorts at the moment that are probably getting taken out a little bit in an illiquid August environment. And at the same time, people pay really attention this year to the actual technicals like moving averages and trend lines and things like that. So I think that is still the market we're in though. Very technically traded to certain resistance points. I would point to 200 day moving average, for example, on the NASDAQ, probably a big resistance point from here.

- And then lastly here, I want to ask about meme stocks because in your note you did say that there was a rally ahead of the CPI that could be a signal of something else. And it is indeed the case that Bed Bath and Beyond, for example, ripping higher. There has been a lot of retail activity over this week. Does that tell you anything about the macro picture?

BEN EMONS: You could think of it that way, you can of course, people getting excited about investing again. And on the other hand, it's about companies that are retail-oriented that although sitting on large inventories and having to discount those inventories, retail activity may indeed be again picking up as gas prices go down. And that's some sort of a macro backdrop there against the fact that there are discounts. So lower retail inflation spurring demand.

Now, will that be just about Bed Bath and Beyond? Who knows, right? But I think the sentiment idea about the meme stocks is something of risk-taking returning while the economy isn't at a recession point at this moment. And I think that's the key thing to watch.

- All right, Bed Bath and Beyond, perhaps into the macro as well. Ben Emons, global macro strategy managing director at Medley Global. Thanks so much, and have a great weekend.