Michele Schneider, Partner and Director of Trading Research & Education at MarketGauge, talks about the challenges the Fed has in avoiding rising inflation and how the commodity shock is impacting long-term growth. 

Opening Bell

Markets Pull Back as Oil, Commodities Spike

So just for some early morning insight on kind of all the trading activity, let's bring in Michelle Schneider, partner and director of trading research and education for market gauge. Michelle glad to have you on this morning, despite this morning's activity where we're kind of lower across the board here, including the S and P lower by about 6/10 of a percent. Right now, The SNP is back above those kind of the 200 day moving average up over 3% since the Fed raised rates last week. What is your view on market sentiment right now? And what do you see as kind of the biggest near term market headwinds? Well, we've been talking about inflation obviously for such a long time and now there is a lot of discussion about whether or not the Fed is doing the right thing in controlling the inflation through a tightening cycle. Excuse me, Rather than actually just reducing their their ability to buy back and lower their balance sheets, do the lowest balance sheet and also decrease the money supply. Like the inflation that we saw after World War Two. Because what the tightening cycle could do really is lead to a recession. And so it what's interesting right now is that if you look and step back at the market, It went up about 50% from the high point in the S&P. To the low point in the S&P. That we saw basically in February and now at this point we're at this inflection point. So I think overall if you're looking at a buy and hold passive investing type of approach, you're probably making a mistake because it could be a long time until you see any real returns. If you're more of an active investor and you want to kind of buy the dips and know that you get out of things start to roll over, install based on the fact that the monetary policy looks like it's heading towards more tightening, then that's probably smart to do What's your overall take as we've kind of seen the head get a little more hawkish here, seemingly more hawkish. What's your overall take on the Fed's approach to rate hikes and any balance sheet reduction. Do you think that needs to happen sooner? Well, I think they're already well behind the eight ball, They should have been doing this really last year as we as the market was going up and things were improving post covid or what we thought was post covid at that time when infrastructure was bill was being passed and it looked like things were the labor market was improving. Now coming into it when you having consumer sentiment dropping when you have commodity prices, particularly energy prices continuing to skyrocket with no real end in sight. They are basically really running the risk now of creating this sort of recession. And one of the reasons by the way that the market has gone up is because the market is anticipating that this Hawkishness that will lead to a recession will actually create the Fed to come back in, save the day with a QE4. It's kind of a perverse way to think, but that's actually what a lot of the newer investors are thinking right now. That actually makes a lot of sense because my follow up question to you, you know, in terms of if you think the Feds should act sooner is in the fear is the recession. But then, you know, to your point, there are some who are seeing that as an upside and an opportunity here, I want to go to yields, right? The five and the 10 year Treasury yields, those have been rapidly kind of converging. Can you just give us insight in terms of, you know, your thoughts on whether there's any dissonance between the bond market and the stock stock market right now, completely. Actually, the fact that the yields have been going up while the stock market has been going up is really totally the opposite of what generally happens. And again, just like we just said, the only explanation for that is that people think that Powell can't really control inflation and instead will drive into recession, even though nobody's really talking about whether or not those commodity prices are going to come down. And so the yields aren't really doing much in either case at this point. So there is this almost disbelief that the Fed really knows what they're doing and I think that's why the market is taking advantage of some of these opportunities so that you know, you're seeing oil go up and the market go up. That's very atypical. So I would be careful. Let's put it that way if I was starting to invest, particularly now after we've gone up, from like I said, from peak to trough 50% right here, if you start investing your money at this particular point, it could take a long time before you actually see any real returns until this is all worked out. So with that context and what's your outlook for the equity markets this year? I think we're going to see a trading range people are getting either very bullish or very bearish and I'm kind of more in the neutral zone. This is very typical of what happened the last time we saw these type of record inflation numbers, which was really from the mid sixties until Volker came in and really boost up the rates in 1982 dropped into a recession. And then we started to see the equity market come back because he basically put the kibosh on the commodities market. The same thing could happen here. We could actually see obviously some moves up and moves down, but we could also basically flat line for a long time until all of this with inflation sorts itself out. You mentioned commodity. So let's talk about that. We're looking at commodities like grains and certainly even energy that's been on a tear since this invasion into Ukraine. President biden. We know now kind of meeting with NATO leaders in europe this week to discuss tighter, even tighter sanctions on Russia. Some analysts at this point are saying that oil could kind of Hover and then stay around $150 a barrel mark. What's your outlook on commodities overall and then specifically on oil and the gas industry is most notably in the near term. Well, let's, let's start with commodities in general, because there's a lot of focus on oil and gas as there should be. And obviously we've dipped recently down to about $95 a barrel and our back up over about $110 a barrel, maybe even higher this morning And people that are calling for 150-200, that could be true. A lot will obviously depend on what happened with Russia. Ukraine, which doesn't look like it's abating. But let's look at commodities in general, food commodities have been really to me the most troubling as far as what's really gone up over 30% rise in food commodities even before Ukraine, where wheat is a big export out of the Ukraine. So essentially if you look at equities versus commodities, even though that ratio has come in a little bit, it's still really near historical lows in terms of the commodities versus equities where equities got so overvalued and commodities got so undervalued. So now that's coming in so it's kind of a double edged sword because it hurts the consumer because you can't keep up with the rising prices of commodities at the same time. People's four oh ones and their ira accounts with equities are coming down. So I think that if you were going to invest, it's not too late to get involved in some of the commodities, maybe even some of the precious metals that are still really kind of looking around in a bullish phase but not really moving up higher like they did say in the late seventies. Well I wanna actually talk to medals with you. I've only got a minute left but I know that you kind of have some really good insight on medals. What's your outlook for gold illumined and even other medals? And do you see silver especially kind of spiking to 2011 levels? I think silver is probably one of the most undervalued medals right now. I mean obviously Nickel had a big to do with the London exchange and now it's up again and aluminum and all of the copper, steel, all the industrial metals will continue to go up but I like to focus on the precious metals. So I'm glad you asked right now gold has obviously over 1900 announced It tested quickly over 2000. I think it has more upside silver though really has my attention because in inflationary times, silver outperforms gold. And if you just look back in terms of valuation, silver is half of what it was in 1980, while the Dow is 34 times that. So I think that we could see a big move up in silver and maybe we'll get back up to $50 an ounce. I really appreciate your insight Michelle Schneider, partner and director of trading research and education for market gains.