Scott Wren, senior global market strategist with Wells Fargo Investment Institute, joined Cheddar News to discuss Monday's market trading as earnings continue to trickle in and ahead of a Federal Reserve meeting next week.

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Analyst Discusses Mixed Market Trading With Earnings, Fed Meeting on Tap

Joining me now is Scott Ren Senior Global Market strategist at Wells Fargo Investment Institute, Scott. It's good to see you today a lot to cover in this market as we really kind of kick things into high gear with the earnings this week. What do you make of the market action? Well, Kristen, I tell you, I think really for us, we want to be a little careful here because we're at the top end of the range. Uh, we think there's a lot going on that is going to prevent the market from breaking through the top end of the range. So let's call it 4200 in the S and P 500. Uh, when you look at credit conditions, uh, we don't think the fed is going to ease at all. They're gonna hike a couple more times. May in June. Um, you know, earnings growth is, is, uh, our earnings are contracting. I think there's still a lot of high estimates out there on the street over the, for the next couple of quarters. So when we put all those pieces of the puzzle together, uh, we'd rather be defensive here and we'd certainly fade this uh this rally we've seen. Interesting. So I want to talk about the Fed. Uh So May 3rd is the next that will get Scott and markets do buy a large price in another quarter percentage point rate rise. But markets also expected at one point that we might see some cuts to rates later this year. Even though the fed chair at the last meeting said rate cuts are not the base case. What's going into your models to show you that we could see more rate rises beyond this May meeting. Well, I think that and we just expect one more Kristen in June. So another 25 basis point hike to that five and a quarter, 5 50 range. But, you know, for us, I mean, is inflation going to move down? Yes, it is. I mean, we think by the end of the uh this year, uh you'll get that December uh 12 month reading at let's call it 2.9% something like that. So definitely moving in the right direction. But of course, the last thing the Fed wants to do is start to cut rates too soon and then have to come back and hike them up again. So for us, uh it's gonna take a while for the labor market to, to soften enough. Um Inflation is going to be slow to come down from here. We saw that 5% C P I reading. But um you know, it's not just gonna drop like a rock from here, it's going to be a little bit slower. Uh So for us, we want, you know, we want to be defensive. The market still is looking for certainly individual company analysts, if you aggregate it up to the top, they're way too optimistic in terms of what earnings are going to be for full year, 2023 or even early 2024. So when you say defensives walk me through what that means. We have some notes here in terms of equities, fixed income. I see you allocating from equities into short term fixed income perhaps, um suggestion on your part. Yeah, Kristen, you know, really over the last year, we've been defensive. And what I mean by that is we want to take some of the cyclicality, the sensitivity to uh the ebb and flow of the economy. We think there's going to be a two quarter recession maybe three starting in the third quarter of this year. So for us, we've lightened up on equities. We've moved money into the short end of the yield curve. We also like, uh too, so we've kind of taken that Barbell approach where we like the short term fixed income. Uh we like longer term fixed income. We just don't think those rates are going to go a heck of a lot higher. So we're leaning much more towards fixed income than we were, uh, let's say, uh, uh you know, five quarters ago, something like that, we've kind of built into that position. You know, we're underweight, things like industrials, real estate, consumer, discretionary, we're underweight, small cap stocks, all these things that are very sensitive to the recovery, not that we don't think 2024 will be good because we do. Uh, but between now and then I think we're going to have some harsh reality in terms of what the economy is going to look like. Interesting. So what does that look like, Scott? I mean, what should consumers and investors prepare themselves for? And maybe it's two different preparation plans. Well, they should prep themselves for a higher unemployment rate still in the whole scheme of things, even if it's going to work its way. Uh, let's call it 4.5% 4.44 point five. Uh, by the end of the year, that's still by historical standards. Not, not bad, but nonetheless, uh, higher unemployment, there's gonna be less consumer spending growth. Um, and stocks are probably going to go down. I mean, are, are they going to touch, uh, the lows again? You know, probably not. Uh, but we do think they'll trade meaningfully lower from where they are right now, which is really just an opportunity. So for us, um, we're trying to play this range, we're going to lighten up here on equities at the top end of the range, we think there will be downside and we'll have the opportunity over the course of the next, let's call it 4 to 6 months to step back in toward the bottom of that range and then get more optimistic about what's going to happen in 24. Interesting. So, are we talking a 10% correction Scott, when you say significantly lower, what's sort of your base case? The bottom end of the range is a little bit more than 10% and I'd say 7 to 10% is something that would not surprise us at all. Ok. So probably, I guess, have we risen that much since the banking crisis? Well, we've certainly, you know, I tell you, the market wants to go up and part of this Kirsten is that, you know, I mean, we're people came into this year negative. Um, everybody is leaning the same way. I mean, just think of the guest that you have on my guess is that there's only a small percentage of them that are positive. And so usually when everybody's leaning the same way, you know, you get some testing against that and that's what's happening now. Uh, the market's thinking the fed is going to cut possibly that earnings aren't going to be hit that bad, that inflation, inflation is going to roll over pretty quick. And we think, you know, all those things are going to happen, but just the timing is different than what I think the market as a whole is thinking or at least what the market is pricing in right now. All right, Scott Ren, senior Global Market strategist at Wells Fargo Investment Institute. Scott. Thank you so much for your insight on a very busy week of earnings and a lot on tap.