Ross Mayfield, investment strategy analyst at Baird, provides insight into the stock market.

Wake Up With Cheddar

Market Check: February 27, 2023

I want to bring in Ross Mayfield, investment strategy analyst at Baird Ross. Welcome to the show. What's your reaction to how the markets open so far? Well, I think it's a nice kind of bounce here after a couple of weeks of pain. You know, as you mentioned, digesting that hotter than expected inflation and hotter than expected economy writ large and what that means for the fed, we've seen a really aggressive shift in short term rates and what the market is expecting for the fed funds rate by the end of the year. So I think the market today is kind of digesting a lot of that and maybe, you know, sustaining a little bit of a bounce, but you know, nothing meaningful has shifted. We still have kind of a bearish narrative out there that the market will have to work through. Absolutely Ross. And to your point there, you know, the 2023 early on rally does seem to be fading a little bit here, especially as investors are reading into the fed's latest meeting minutes. So what are you anticipating from the fed and from the markets moving forward here? Well, I think first, you, you start with the Fed and you have to at this point expect that they're gonna add probably one, at least 1 25 basis point rate hike, uh, to what the market was expecting just a few weeks ago. So right now, the peak fed funds rate or terminal fed funds rate is expected well, north of 5% now, the fed has been saying they want that the whole time, but it's taken the market all of these reports over the past month to kind of come in line with the Fed's expectation. So that would add probably 1 25 basis point rate hike. You know, the fed speakers who are out talking, you know, continue to keep a 50 basis point hike in the mix or at least in the narrative. I think they want the market to, to really believe them when they say that they're not done and they're gonna continue fighting inflation as for what it means for the market. You know, I, I think the economic momentum we're seeing, you know, helps put a floor under earnings, but it really all comes back to the Fed. And if the fed has to be meaningfully more hawkish than was expected at the beginning of the year or even at the beginning of February, it's probably, you know, a risk off risk off type of event. And speaking of that economic momentum here, do you think that that's actually kicking the recession can down the road to 2024. Are you anticipating a recession? And if so when, and what might that look like? Yeah, I think you have to expect a recession at some point. I mean, the Federal Reserve has raised interest rates extremely rapidly to a, to a point that we haven't seen in a long time and there's a very short history of them raising interest rates like this without any sort of downturn or, or slowdown. Now, I think the recession could be milder than past recessions. I think the, the really robust labor market, the late in consumer strength, some of that excess savings. I think there's a lot of things that are working in favor of a shallower and milder recession. Um And I do think that because of that strength, it's now maybe a late 2023 2024 story. Um But ultimately to the extent that the economic momentum keeps the fed hawkish, um It keeps the recession odds elevated. We just think it might be milder than history and maybe it's more 2024 story then, you know, for a while, people had expected right now to be when the economy would start to slow meaningfully. And that's clearly not the case so far. Absolutely. Ross. And I want to also discuss some economic data that we got out this morning, Durable Goods orders. We saw this fall in January as consumers did pull back on spending on big ticket items, although core did actually pick up ever. So what's your reaction to these numbers, particularly kind of on the back of retail sales and personal spending that we've seen out in the past few weeks. Yeah, as you mentioned that core number ticking up and, and looking pretty strong considering again what the fed has done. Um, you know, and business investment has been one of the, the pockets of strength outside the labor market. And there aren't many of those, you know, housing is weakened, manufacturing is weakened, but business investment has been pretty strong cap has been fairly healthy uh for what you would consider pretty late in the cycle. So it, it's good confirmation. It's good confirmation that, you know, business aren't, you know, just talking themselves into this recession scenario and not investing for the future. Um So, yeah, so on the back of a strong consumer, a strong labor market and still pockets of strength in other parts of the economy. Again, it paints a picture of an economy that is certainly not in recession, maybe not even weakening yet. And so that's why we think, you know, a recession or a slowdown is really down the road quite a bit and this data just confirms it. Ross Mayfield Investment strategy analyst at Baird. Thank you so much for your time this morning.