Stock market swayed by ‘back and forth’ with Fed: Strategist

BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri joins Yahoo Finance Live to discuss stock market swings, volatility, the Fed's stance on inflation, the state of the labor market, and the outlook for the economy.

Video transcript

- October already shaping up to be a volatile month after the S&P 500 posted its worst monthly return since March 2020 in September. Our next guest says any future rallies in the market will be muted, she says Tatum. Let's bring you BlackRock America's iShares Investment Strategy Head, Gargi Chaudhuri. Gargi, it's good to see you. Fade those rallies, you say. Why should folks be thinking that way?

GARGI CHAUDHURI: Good morning, Julie. Good to be here. So I think that a few times we've seen this deal already, that the market has pre-positioned for a Fed pivot. And what we've learned over and over again from the various Fed speakers that have spoken this week and previously is that they're not quite ready to do that yet. So to the extent that we're not getting a fully dovish pivot from the Fed, I think any time that the equity market rallies like it did the first two days of October with those two massive moves that we haven't seen since April 2020, every time we see moves like this, I think we're supposed to fade them.

Now, look, I'll say that you're still supposed to be invested in certain corners of the equity market, but broadly, I think that there will still be some more volatility and pain ahead, especially as we continue to see the data slow down, and perhaps even grapple with the recession.

- What do you believe prompted some of the early quarter rally that we'd seen?

GARGI CHAUDHURI: Yeah, I think that some of that was just positioning. I think a lot of people, as you guys know and talk about often, became really bearish. So there was that squeezy price action, I would say, and some of that was just positioning. So a rally based on just the short positioning out there. Some of it was like I had said earlier, that this expectation or this view that the Fed would pivot, think back to two months ago where we did see one soft CPI print, and we saw a huge amount of rally in the equity markets on the back of that.

Then, of course, last month, we saw very strong CPI print, and we gave back a lot of that rally. So I think this back and forth between the direction of rate and between the direction or the estimation of a pivot from the Fed is going to drive equity markets in the future, and I still believe that we are going to continue to see a little bit of slowing down. I mean, earnings growth will have to slow from here, and I think that's still going to play out in the equity market. So stay invested, be in minimum volatility, be in energy equities, be in health care, but broadly is this rally going to persist? I don't think so.

- And Gargi, we just are hearing from Neel Kashkari, who's participating in a Q&A. The headline that caught my eye sort of echoes what you've been talking about. He said the bar to shifting our stance on policy is very high. It sort of emphasizes, right? Don't get ahead of yourself, folks, and look for the pivot if their bar is very high to shifting their stance. What are you looking for them to go over that bar? What signals are you looking for from the economic data that actually would cause, maybe, let's not even say a pivot, even a pause, or a slowdown in their strategy?

GARGI CHAUDHURI: Sure thing, Julie. I think that's the most important question. And I think the Fed has tried to be transparent about it. So they will need to see, or their expectations of inflation will need to come down. They will need to see a few months of data where inflation is decelerating, not accelerating, and moving closer to that target of 2% on core PCE. We haven't seen that yet. And again, one number does not a trend pace, so it will have to be more of a three or four prints of decelerating inflation, certainly on the core inflation, so that's number one. Another way in which I think-- so that's the most important.

But secondly, I think that the Fed could pause, again, not pivot, maybe, just stave it, if you will. I think they would if they started to see a significant slowing in the labor market. And that's something that the Fed has made very clear, that they want to see the labor market slow down. Now, if we see a couple of months of maybe 100,000 prints on the payrolls, I think that's possible that we can hear the Fed talking about a slower path of policy or a pause in the months ahead. But again, it's not one month, it's a few months.

And then, finally, I think we did obviously learn a lot from the Bank of England. We are not in the same position as the UK at all, there are different dynamics in the market. But I will say that if there is any kind of market functioning, questions that arise in the US, and again, we're not there now, but if that does happen in 2023, I think that would be a way in which the Fed indicates to us that they will not be raising rates in a significant manner, or at least that the bar has come down.

- Gargi, come up against two interesting market-moving events. We have the Fed meeting November 2nd, and then a couple of days later, we have the midterm elections. So let's say this, let's say the Fed comes out here, reiterates their hawkish tone, we get that out of the way. Next day, after the elections, we learn we're going to have divided government. What happens to the stock market in your view into year-end?

GARGI CHAUDHURI: I think it's going to be very difficult for the stock market to have the rallies that we saw in the first two days of October in that situation. Now look, a lot of things will drive the stock market, I don't want to base it entirely upon the Fed and elections only. Obviously, we have a blockbuster earnings season, so that's something that will obviously be a big driver of the market. But all else equal, if you're just giving me a hawkish Fed and a divided government, I think it's just going to be really hard for the equity market to make new highs or to get back to levels that we had seen, perhaps in the second quarter of this year with that framework.

I think we really need to see a fundamental shift in the earnings picture where earnings growth is very healthy across all sectors. And I just don't see how that happens when we have an economy that is slowing down because the Fed wants it to.

- All right, thanks, Gargi. Good to catch up with you. BlackRock America's iShares Investment Strategy Head, Gargi Chaudhuri. Thanks so much.