Markets opened lower to kick off Monday's trading session, as markets attempt to rebound from last week's sell-off. Rishabh Bhandari, Managing Director, Senior Portfolio Manager, Capstone Investment Advisors joined Cheddar's Opening Bell to discuss.

Opening Bell

Bhandari: U.S. Stock Market in Bear Market Territory

let's bring in Rashad Bhandari, Managing director at Senior Market, a senior portfolio manager at capstone Investment advisors, stock markets falling once again this morning. We want to get your take on, do you think we're going to see another major sell off this week, Especially like the one we saw last week. Good morning. Thanks so much for having me again. It's a, it's a pleasure to be here. Um It's uh, it's, it's a great question, right? And it's, I think it's the one that most folks are asking right now. Um it's, it's difficult to say, I think it's uh, it's clear that we're in a, in a bear market right now and not like the bear market we saw two years ago in the spring of 2020, but more like a classic, you know, I'd like to call it the garden variety, recessionary bear market. Whether or not we actually enter into the technical recession or not, is still a question, but we are in a bear market. Um And what typically happens in bear market is, can we see the kind of moves that we saw last week? Right? Uh we see moves lower, we see moves higher. Uh and we see them with, with a lot of, a lot of velocity as well. Um The one thing that a lot of folks have been talking about as far as the market is concerned, um clearly is the monetary policy driven by inflation. Um And what it relates to in terms of the Fed Put That a lot of investors have come to bank on and rely on over these last 10, 12 years. But the Fed put and we can talk about it a little bit more is just one of the books that I think is available to the broader investor base. Uh, The second one is, is to buy the dip mentality that has sort of supported the market for a long time these last four or five years. Uh, And the third point I'd argue is the bond equity diversification that has allowed investors to lean on their bond equity, the bond portfolios as a ballast, as a protection against their equity books. Now, what, what has happened so far this year that all three puts have failed? The Fed put isn't in play by the deport, is not in play or hasn't worked at least. Uh, and the bond equity diversification put, hasn't now very briefly, what I don't mean to suggest that this means the market has to go down, right. It depends on a lot of other factors. But what it does mean is that the volatility dampening effect of these boats, right? When, when the market goes down, they support the market, they dampen the realized volatility of the market. Uh, that's, that's reduced or even gone away. So I would argue that we are in a higher fall regime going forward or already in one. Uh, and so we should be getting more used to the kind of moves that we saw both higher and lower last week. I'm glad you broke that down pretty thoroughly because it was something I was gonna mention was that by the dip mentality it seems like that has waned a bit in a way that we didn't see last year right. It was literally an updated down day. There was a constant buy the dip and it worked for investors. It worked for at least traders and that is that is waning a bit. Now. In addition when you look at that activity it seemed like last week was a week where we were pricing in what some would say was a potential for more hawkish Fed even a 75 basis point increase despite the Fed the previous week. Really trying to cool down any idea of that. But given C. P. I. And P. P. I. It seems like the market was really trying to price that in. You mentioned the big R. Word though I want to go there for a second because recession that word has been thrown around quite a bit. Some really saying and you even alluding to this and that. And even if we see a recession a technical recession it is not going to be like one that we saw in 2008. Can you just outlined the picture in which you see a recession happening and be what that recession looks like? Yeah I'll do my best. And you you're alluded to. Um One of the things that I think I'll try and talk about because it's relevant for this week, which is retail sales as well. But before we go to that to retail data and, and, um, and and the related recession or not, um, it suddenly feels like that that growth is likely to slow down, right? We are um, in a, um, you know, I'll take a step back modern capital markets that the ones that we're all used to and, and we've lived through have strong central forces. We have fiscal and monetary policies that, that sort of dr boom and bust cycles, Right? And that's almost by design. Now goal is clearly to continue to create a sustainable boom and manage the bust to be mild and short. You're gonna get those cycles, but you just maintain and sustain the booms and create the bus to be very mild and short and create the so called soft landing. I'd argue the prolonged stimulus that we received from the government. Uh, you know, I remember the first act pretty much the first act that the Biden administration signed was a 1.8 trillion stimulus. Uh, and I think pretty much no one was asking for. Um, and then also the monetary policy, the Fed was still buying bonds still seven weeks ago, which is kind of extraordinary, has created an explosive boom, not a sustainable boom. Uh, and now it's, it's difficult to engineer that soft landing. So I think that's kind of what is, uh, is gonna likely trigger us into a into a maybe a bigger recession than one we should have. But if I pivot away from that for a moment and just talk about uh you know, comparison to 2000 and eight. Um It's the U. S. Consumers balance sheet and and related to the retail sales data. Uh The U. S. Consumer balance sheet remains much better than it was in 2000 and eight. If you look at cash and money market funds, um rate of savings, Credit card data spending etc, the strength of the US dollar, the us consumer spending all of that put together. Uh it's actually much more robust than it was in in 08. Uh and that's why we think the retail sales data is actually going to continue to be relatively strong. Uh This tomorrow I believe is the data and then in the in the coming future one last interesting dynamic. I'll point out sorry, I'm I'm gonna continue for for a moment but but it's related is um also it plays an interesting dynamic between Main Street and Wall Street, I believe because often folks complain about the pain is always felt by the main street by Wall Street or corporate earnings continue to soar, right, we've seen that in previous recessions. Clearly 2020 being a big example, it feels like this slowdown will be driven more by margin compression for Corporates. Uh And Wall street angst rather than Main street pain. Clearly inflation is a is a is a is an issue that Main street will have to deal with. But it will be a recession if there is one that will be more driven by Wall Street and corporate earnings rather than retail or the U. S. Consumer ah slowing down. Materially I have to kind of questions to follow up with you here one is going to be on retail sales but really quickly the first one really on the Fed you mentioned part of your thesis kind of stands on the idea of having a managed kind of bus situation and the Fed it seems like you're indicating your thoughts is that the Fed is not going to manage to get us through this with a soft landing. Is that correct? I um I mean listen we all hope they do but a soft landing is already uh you know uh it's soft dish landing doesn't sound like a very optimistic scenario already. But the our experience with this Fed over the last 12 months or even longer even going back to 2018 actually when they when they first started hiking in the previous cycle has been that they have been behind the curve. Um And and just because chair possible uh ruled out the 75 basis point hike in just last month or even earlier this month. It's unlike I wouldn't rule it out from june if the data as you have suggested in your opening bit continues to remain very very very tough. Whether it's C. P. I. P. P. I. Or retail sales etcetera. Um, this, the Fed being behind the curve again, that reminds we were still buying bonds only seven weeks ago. Uh, it makes, uh, is, it gives me reason to not have a lot of confidence in the ability of this thread to engineer that slowdown. Sorry, the soft landing. Yeah. Well, I mean to your point and to your credit, the other reality is the Fed historically hasn't managed to do well with soft landings more generally here. So if Fed Chair Powell is able to pull that off, it would be a pretty historic moment amid what is historic kind of challenges. We're going to leave it. There were running up against time. Really appreciate your insight though. Rashad Bhandari, managing director, senior portfolio manager at Capstone Investment Advisors.