The co-owner and managing partner at Key Advisors Group Eddie Ghabour joined Cheddar News to break down the many factors impacting the market today, including the war in Ukraine, Fed rate hikes, inflation, and job numbers. Ghabour explained that he sees a bear market bounce currently leading to a downturn as the Federal Reserve is forced to be hawkish — even hinting at a recession. "I can't stress enough, you have a Fed that's telling us they're going to raise rates by 50 basis points in May during this type of environment," he said. "That's gonna be the knockout punch for this market and this economy in the short term and worst case for the consumer, unfortunately, in our opinion."

Opening Bell

Eddie Ghabour Sees Rate Hikes as 'Knockout Punch' for Market Going Forward

So for some early morning insight on early morning trading activity, I am joined by Eddie Gabor, co founder and managing partner of Key Advisor Group said you got to have you on this morning, always good to talk with you. Just want to get your thoughts in terms of what you make of this week's kind back and forth market activity. And what do you see as kind of the biggest near term risks for the market? So look, I think what we've seen here over the last 5-7 trading days is a typical bear market bounce. We got, we started getting very cautious with our clients and our market call back in November because of our concern for the setup for 2022 uh, in this war has made things worse from an inflationary perspective. So, uh, bear market bounces are violent. And I think for investors that two weeks ago were concerned about their positioning, they're getting a second chance to reassess and potentially take some risk off the table if they think that's what's best for them. Because I think the second quarter is gonna be very treacherous because I believe the economic data is gonna be slowing, earnings growth is going to be slowing, inflation is gonna stay hot and you gotta fed that's going to be very aggressive and very hawkish. So we are extremely defensive heading into the second quarter, I think we have a lot of headwinds that is not really priced into this market. And my biggest fear for everyday investors is we're starting to get this complacency again, where many are thinking that the bottom is in and they may be right. I am not in that camp. I think we're going to test the lows and possibly go even lower. I'm glad you say that because I'm looking at the optimism in the market and to your point we might be seeing a bit of a bear market bounce. And then you look at the vix, the vix is at what, 23.5 right now, When, what, the beginning of last week, certainly the end of two weeks ago, it was at 33 34. But nothing has really changed here. And in fact, we're starting to get some indicators of the market, potentially, you know, starting to slow down or some concerns that the consumer could be pulling back. What is it exactly? Is it a matter of fact that the investors just getting used to the volatility and trying to find opportunity? Well, I think what you, again, when you look at bear markets, typically the rallies that you'll get are more violent many times what you'll see in a bull market. So the fact that we've had this big of a move in a short period of time kind of supports the thesis in my opinion that this is truly a bear market and look just as fast as it went up over five trading days, two weeks from now, we could be right back down to the lows and looking at the vics into the thirties. I think the vix is going to be in the high thirties and possibly forties as we go into the summer months. Because again, the economy is slowing down in our opinion, much faster than the market is pricing in. Yeah. And the Fed is seeking to further slow it down obviously with interest rate hikes to try and get ahold on inflation. We'll get to that in a moment. But I kind of want to get your thoughts on the new data point out this morning. Jobless claims right? That said 187,000 kind of new initial claims last week. The lowest that I noted there since 1969 and certainly better than the expectation was. Does this kind of data point matter when the Feds seems to be steadfast towards this possible 50 basis point rise come this may I would think it kind of clears the way for the Fed to kind of make any any, you know, steps they want to take or get a little bit more hawkish. But how delicate is that situation again, as we both know that just a moment ago, it's starting to seem like the economy itself is just naturally slowing down the Fed to kind of pull back further. I would imagine that this is a really tight rope to walk. It really is and this is why we are so bearish. I don't think the Fed is going to be able to navigate a soft landing they made one of the biggest policy mistakes in history in my opinion, by not recognizing inflation last year and raising rates 1-2 times and now they're in a lose lose situation. The worst time to tighten monetary policy is when the economy is slowing down, but they have to and they're forced to because inflation is killing the consumer. So now you're going to have them be extra hawkish while the economy is slowing down at a fast pace. And this job data that came out today is actually more bearish from a market perspective because that means labor costs are going to continue to be very high and that's going to continue to suppress profit margins for companies because, you know, many times their biggest expenses, their payroll. So wage inflation is real, it's high, it's going to stay high and you gotta Fed, that's just going to drop the hammer on all of this. So when you look at this dynamic, I don't understand how you can tell someone that it is a risk free environment and just jump in with both feet. Uh, this is not a bull market environment in my opinion. I'll be happy when I pivot, but right now we are selling rips. Yeah, it's fascinating you say that because I think about the dialogue around the recession and how that has kind of that volume has certainly increased the concern around that over the last couple of days, certainly last a week, even after the Fed through that initial rate hike to that extent. How are you advising clients when it comes to de risking their portfolio Again, especially as we see an indicator like the five and the ten-year Treasury yield that rising above 2.3%, the yields overall kind of flattening and then this recession talk that that volume around that growing louder. So we've been extremely active with our client portfolios. Uh we have a tactical strategy that's a certain percentage of our clients net worth. That's one that we trade based on what we believe are short term thesis is we started getting reducing tech and small cap in the fourth quarter last year. And now as we look at our portfolio construction, we pretty much own the opposite of what we own last year because the environment seems to be completely different. So the only equities we've really been adding to our utilities, uh we've been buying some consumer staples sectors. Uh we're looking at both longer term bonds, Treasury bonds because I think when the economy starts to slow down, you'll see in our opinion, long term rates actually come down as you pointed to the yield curve is already starting to invert. Uh So bond proxies in our opinion is the best way for our clients to be positioned heading into the second quarter. And then if we get the sell off that we think we're really going to see, we're gonna have some amazing buying opportunities and some of these riskier asset classes, maybe late third quarter, early fourth quarter, but you have to have dry powder in our opinion in order to be opportunistic for what could potentially be coming down the road, where does cash come into play then? Are you holding cash on the sidelines or advising some people to hold some cash on the sidelines for that buying opportunity as opposed to leaving them in equities and obviously seeing a pullback with them. Absolutely. Look, there's a reason why the saying cash is king was said and a lot of times earning cash is not a sexy thing. However, when you are in an environment like we're in right now where you're seeing the substantial slowdown and a potential double digit drop on equities from where these levels are. Now, there is absolutely nothing wrong with holding cash and being patient for a few months. So yes, we do have a cash position as well too for our clients and we will probably increase that cash position over the next few weeks. That seems to be a growing trend. I've heard that from several kind of analysts, uh, and really experts over the last two or three weeks or so. I want to get your thoughts, but I have to let you go here in the situation with Ukraine. Obviously that's something that the markets have been eyeing closely and certainly has been affecting markets. Um, you know, we know that President biden is obviously over there with european leaders, but with NATO leaders kind of discussing the situation, even possibly implementing stronger sanctions on Russia and traders. Um, what are the markets eyeing with this meeting in brussels and what's the expected outcome, possible reactions? So look, all this is going to do is keep those geopolitical tensions intact. And that means oil prices are probably gonna stay high. And so the economic impact is really drastic to the consumer. You know, we had high oil prices before this war even happened. So we were already concerned with what consumers are going to have to pay from an inflationary perspective. And now the sea oil blow through 100. That means we're gonna have gas prices, oil prices for the next few months much higher than we all anticipated. Obviously, the best case scenario as we see some type of ceasefire or our government changed position on oil short term here domestically to try to bring prices down. But make no mistake if oil stays at this level for the next several weeks, this economy is going to fall much, much faster than even what we are anticipating because of how much that's hurting everyday americans At that point before I have to let you go here for real this time. Um, I want to get your, your inside and your thoughts on consumer spending. I was just talking earlier this hour with my co anchor Asia just about rents being up 17%. Obviously, the consumer is dealing with higher gas prices, food prices in some kind of spaces of 20%. The consumer really feels like they're getting hit at every angle how significant is going. That's going to be on the impact of consumer spending and given the reality that it is so much of our GDP and our economy being dependent on that. Well, that's exactly why we think so. If you think about it, we had a in the fourth quarter of 7% GDP print, we think we're going to probably be in the 2% or lower by the end of the second quarter because of that. I mean, you have food prices through the roof, you have gas, you have housing. Everything that everyday Americans need to spend on a day to day basis have gone up dramatically in the last 12 months. I don't see how it's mathematically possible for them to spend anywhere near what they did last year on discretionary items. So you're gonna have to, in our opinion, see that really come down in a big way. And again, I can't stress enough, you have a Fed that's telling us they're going to raise rates by 50 basis points in May during this type of environment. That's gonna be the knockout punch for this market and this economy in the short term and worst case for the consumer, unfortunately, in our opinion, Yeah, it makes me feel like the whole transitory kind of wording and dialogue the Fed was having, you know, last year. And and, you know, quickly after that, people started mocking in, we all realized transitory wasn't transitory. It kind of feels akin to what we're seeing now with everyone saying the consumer is pretty healthy, the consumer can withstand it. I don't know that that's going to really be the case given that again, the consumer is being hit at every angle here. Eddie always appreciate your inside. You always provide us with some great stuff. Eddie Gabor, co founder and managing partner of Key Advisor Groups.