David Spika, President & CIO of GuideStone Capital Management, talks about the Fed's approach to tacking inflation and discusses the ripple effect oil is having on the U.S. companies. 

Opening Bell

Markets Reverse Trend Following the Feds Move on Interest Rates

have some more insight in early morning trading. I am joined by David Speaker President and C. I. O. At Guide Stone Capital Management. David glad to have you on this morning despite the declines that we're seeing right now is a noted the S and P. On pace to finish the week up higher and kind of the major averages as well. What do you make of this week's kind of market performance? I think what you've seen this week is a buying of the dip stocks appeared to be short term oversold. There's some optimism around peace talks in Ukraine. However, I do think this is short lived because what you just referenced is Fed rate hikes and Fed rate hikes are gonna continue. The Fed is going to be very aggressive. They have to be aggressive given that inflation is running at almost 8% year over year and that's gonna create volatility and that's going to create more pe multiple compression. So this is a short term oversold bounce but which is normal during a downturn. However, we continue to expect more volatility as the Fed tightening cycle continues to be priced in, let's talk about the rate hike path, right? If the Fed implements his current rate hike path, um do you see equity markets being positive for the year given that uh we have kind of a nearly inverted curve when we're looking at the two in the tens. Do you think that balance balance sheet reduction needs to happen sooner. And I say that in context of course of ST louis Fed A bullard even making comments over the last 24 hours around The desire to see an even more hawkish approach, talking about 50 basis point hikes and not just one several of them. Yeah, we don't believe that the market will have a positive return this year. And as I said previously multiple compression, pE multiple compression is happening and will continue to occur if you go back and look at almost two years ago in the market bottom and the Fed came out and use the bazooka to throw liquidity at the markets. You saw the PE multiple spring higher and it has stayed relatively high because of that support from the Fed from monetary policy. Now that the Fed is reversing course and you mentioned quantitative tightening, which will start this year and let me know that we've never seen quantitative tightening and rate hikes at the same time. So we really don't know what to make of that. Those two things combined will create additional multiple compression and historically it's taken a few quarters for Fed rate hikes to have a real impact on the economy and that may be the case here. However, we do believe that that multiple compression as a result of Fed tightening will create a difficult year for stocks and will create a year where it's going to be very challenging to produce positive gains in the broad stock market. Let's talk oil obviously that has been a focus over the last couple of weeks, especially with the situation in Ukraine. Were seeing oil back to about $100 a barrel in the energy market though still up 7.7% a 7.7% in the last four weeks. What is your overall outlook on the oil industry? Let's say in the next six months or so, especially given the situation in Ukraine that furthering the commodity shock. But as you noted a moment ago, there is some optimism there. I look at something like the vix right now and that's at about 26 when we have seen it as high as what, 34 last week, I think there's still opportunity to make money and energy for the next six months, for sure. The key factor today is we just don't have the production necessary to meet demand. There's probably about a $20 per world premium price in today. So if the war ended, then that $20 probably comes out. But at the same time, you're seeing tremendous capital discipline from US producers for a variety of reasons, they're not inclined to throw money at the energy patch to increase production, you're seeing opec remain very disciplined to, they're not increasing production. Some believe they don't really have much more to produce anyway. So if you don't see that rising production to meet the needed demand, the demand, we're seeing today or prices will remain high. The other point of this is even if the war ends, is the rust gonna say, okay, okay with you, Russia were okay with you, pete and we're going to start trading with you again, I don't think we should expect that. I think there's gonna be some additional penance that the Russians are gonna have to pay for what they've done. And so I think you're gonna see a continued impact on oil prices from what's happening in Ukraine in addition to the capital discipline, we're seeing in here in the U. S. That will keep prices elevated for a period of time, which makes investments in the energy sector still a good bet. Yeah. And we're already to your point, they're seeing kind around the world, investments being made to the parts of europe, not be dependent or as dependent on Russia for oil. We did a whole segment just a moment ago around this inflation, you know, starting to seemingly take a toll on, you know, the consumer right spending in retail sales that grew on less than expected in february year. We're certainly, it's still grew, but at a slower kind of pace here, You've got food and gas prices rising. What is you forecast on consumer spending over the next quarter, especially in light of kind of the latest retail sales data, there's a theory out there that consumers are too wealthy for a recession to occur. Um I think that's a pretty specious theory because what we're starting to see is consumer confidence be hit rising inflation by what's happening in Ukraine by the impact of fed rate hikes. And even if consumers are wealthy, if their confidence levels start to fall, they're not going to spend as much. We're going to start to see that in the retail sales data, The US economy is 70% driven by consumer spending. So if consumers reduce their spending that's going to have an impact on economic growth and that impact on economic growth will be felt throughout the markets. So that's something to keep in mind. We fully expect consumer spending. There's been a huge increase in pent up demand and you've seen spending really take off. But at some point that confidence that that waning confidence that we're seeing from consumers will have a negative impact on spending and that will have a negative impact on economic growth. So we expect that to be something we see over the next 12 months or so. And as our last guest that pointed out, Marshal Cohen really kind of in May, you have a lot of students that are suddenly gonna have to start repaying their student loan debts that's going to be pulled from their wallets. And certainly you don't have the same tax kind of incentives and even um you know money they were getting from the government essentially over the better part of the last two years. So all of that being additional factors there want to pivot really quickly here on the NASDAQ, that is down over 1.4% over the last four weeks while still being kind of up this week. 13.6, 7% year to date. What names are kind of sectors within tech do you see? I'm kind of best managing this downward trend. One of the things we've seen is tech and growth in general has taken a beating so far this year because there's been this move into value because we thought the economy was going to continue to recover. We're going to see a steeper yield curve, All of that is behind us. The yield curve is flattening, they warned Ukraine has had a negative impact on the economic growth. The Fed is raising rates. We think growth and take in particular will come back into favor in the near term investors pay up for growth when growth becomes scarce, particularly high quality growth and you're going to find that in the software and semi components of the technology industry. These are companies that have very concerned and and visible growth profiles, we can look forward and see their earnings growth and we can estimate that and be very confident that that's going to occur. So as investors, we're gonna want to own those companies when broad economic growth is declining. So we believe that technology and other growth sectors like healthcare will benefit from the slowing growth, environment and growth will come back into favor. Alright. David really appreciate your insight. David, Speaker President, and c i o at Guide Stone Capital Management.