Stock, bond market correlations have investors ‘looking at bigger inflation picture’: Strategist

Qontigo Managing Director of Applied Research Melissa Brown and Ryan Payne, Payne Capital Management President and ‘Payne Points of Wealth’ Podcast Host, sit down with Yahoo Finance Live to talk about stock and bond market trajectories, Fed rate hikes, and inflation.

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SEANA SMITH: All right, well, that wraps up the trading day. It looks like the Dow is going to eke out gains just around the flatline.

DAVE BRIGGS: Oh, wow.

SEANA SMITH: Less than a point. I guess you can call it a win--

DAVE BRIGGS: We'll take it.

SEANA SMITH: --after the last couple of days. S&P closing down about 2/10 of a percent. NASDAQ, once again, the underperformer, off just about a half of a percent. We want to bring in Melissa Brown, Qontigo managing director of applied research. We also have Ryan Payne, Payne Capital Management president and "Payne Points of Wealth" podcast host.

Great to have you both here joining the show. Ryan, help us break down what we saw today, lack thereof action maybe, more broadly speaking, if you take a look at the overall numbers. But the selling that we've seen recently, how that sets us up. What's your big takeaway?

RYAN PAYNE: Yeah, I think first off, we had a huge move in the market the last two months. So I think bottom line is-- and the Dow is up, like, 20% in two months. I'll take that for a year return. So we saw a huge rebound from the bottom there, and I think you're getting a little bit of profit taking here. All of a sudden, every bank has gonve very negative on the market at the same time investor sentiment has gone kind of dire as well.

So I would actually argue that's probably setting up for a pretty positive end of the year when sentiment gets that low, and the fact that all year so far, the economic data has been pretty good.

DAVE BRIGGS: It has been very negative, Melissa, in particular, as Ryan said, those bank CEOs, one after the other, forecasting some sort of recession early next year. Does this set us up for a positive end of the year?

MELISSA BROWN: Well, I hope so, although I'm not quite as confident as Ryan. I think we've seen very low trading volume. And so I think any news, we're going to see a bigger than expected reaction. So if the news continues to be good, yeah, then we could have a nice end of year rally. But if we start to get a little more negative news, maybe the next bank coming out with negative viewpoint, on that low trading volume, we could see a much bigger downturn than we might otherwise see if volume had been higher.

SEANA SMITH: Ryan, the recent economic data points, it seems like, at least is trending in the right direction. All points all-- I guess signals point to inflation cooling just a bit. Jobs market, though, still remains relatively resilient. How do you square all this up in terms of what this likely means for Fed policy at the next couple of meetings?

RYAN PAYNE: Well, I think bottom line is the Fed has to be data dependent, which is an overused phrase, but I mean, if you look at it, like, oil prices, I mean, man, we're down to close to $70 a barrel now on oil, which is just a huge decline, which is-- that feeds into everything in the economy, right?

So that's very disinflationary. Lumber costs down 60% now. Housing market at this point is starting to plummet. So I think the Fed has already pretty much set the stage to start to not only taper what they were doing before, but also stop raising rates here soon.

DAVE BRIGGS: Melissa, what is ahead from the Fed, and what could be the catalyst to get things moving in the other direction as that CPI data next week?

MELISSA BROWN: Well, the CPI data will certainly be important. But we've been looking at a year of higher prints. It's going to take a long time for that year over year inflation number to actually come down, even if we see flat inflation on a month over month basis. And so I think it's something that the market-- that investors are still going to be watching very closely to make sure we don't-- I think they might overreact to even a slight uptick if the number comes out a little higher than expected. But as Ryan was noting, with that decline in oil prices, that's probably-- there's probably a lower chance of that happening.

SEANA SMITH: Ryan, how does that set us up, then, for-- just in terms of investment opportunity, where you're thinking about buying right now, as we do head into the new year? Domestic versus international, what makes the most sense?

RYAN PAYNE: Well, I think international has already bottomed. If you look at like China, they've had a huge bottom already. You're starting to see the dollar weaken, which, as a US investor, that's great when you're buying overseas. Valuations are cheap overseas. We've already factored in that we have an energy crisis. And if you look at, actually, hard to believe, but the FTSE 100, your UK stock market is actually positive for the year. Who would guess that?

So I think global markets are recovering. I have money overseas as well here. And I probably wouldn't overweight tech. The winners of the last 10 years probably won't be the winners of the next 10 years.

DAVE BRIGGS: Melissa, just want to follow up on you mentioning that downward move in oil. Given the price caps, given the EU sanctions, will it continue? And to follow up, you also say stocks are moving less on their own characteristics. What are they moving on? And what does that tell you?

MELISSA BROWN: Well, yeah. So when I say that, I mean that stocks have become more and more correlated with each other. So they tend to be moving in the same direction. And by the way, stocks and bonds have become more correlated as well, as have stock markets and the dollar. So, you know, I think that suggests that investors are looking at the bigger inflation picture. Oil is going to impact many, many different types of stocks. And they're looking at that more than saying, stock A looks better than stock B in terms of earnings.

But they've lowered their expectations for fourth quarter earnings. We still have a while before we have to start worrying about that. But that is something, also, I think that over the next month, we'll start seeing whether earnings are, in fact, coming in lower.

SEANA SMITH: Ryan, taking a look at small caps, like you said, maybe the outperformance will come from what we haven't seen over the last 10 years. Small caps outperforming, what-- 30% cheaper, I should say, than large caps right now, the biggest discount that we've seen since the dot com bubble. When you're drilling down, trying to identify some of those names, what are you looking for?

RYAN PAYNE: I'm a kid in a candy store. I mean, if you look at valuations outside of tech out of disruptive technology, everything right now trades relatively cheap, based on history. And I think if you look at the macro picture, look, I mean, we know inflation is coming down. We know the job market's going to remain hot. Wages are going up.

So I think the US economy should be strong. I think small caps are a great way to play that. And I think overall, you don't have to be that smart here. I mean, interest rates have gone up, so the bond market looks good as well. And I talked about this on my podcast, "Payne Points of Wealth," one of the best financial podcasts in the country.

So I think right now, it's just like, you've got to be in. Embrace the fact we've got uncertainty here. And I think everything's lining up right now for a pretty good rally across the board. Again, but just, like, spread out your risk, because the market is giving a lot of gifts here in terms of buying.

DAVE BRIGGS: And Melissa, what is the move in the yield telling you, in particular, the 10 and the 2, and also the move in the dollar most recently.

MELISSA BROWN: Well, the 10 and the 2 inversion is the biggest it's been since 1981. Now the good news in that is that starting in 1982, when the Fed started to lower rates-- and I was around then, I hate to say it-- we did see a multi, multi, multi-year rally. So it could be a little pain in the short term. But hopefully, eventually, if we do end up with some kind of soft landing, that could be good news. But for right now, I think we do need to keep our eyes out for that soft landing because that is a very big inversion.

And as Ryan also mentioned, the dollar is down well. I think that kind of volatility makes it difficult to negotiate. Where do you want to invest? Things keep changing so much. You might have positioned yourself for a higher dollar a month ago, and now you have to start selling. We haven't seen that yet, as I mentioned, in the volume numbers. But we could start to see that as well. People need to reposition for a different economic environment than they had been positioned for.

SEANA SMITH: All right, Melissa Brown, Ryan Payne, thanks so much for joining us here this afternoon.