Kevin Caron, Market Strategist, Stifel, joined Cheddar's Opening Bell to discuss the week's wild activity on Wall Street as inflation and recession fears weigh on investors.

Opening Bell

Recapping Wild Activity on Wall Street

for more inside early doing an activity and kind of to wrap up this week, Let's bring into kevin caron market strategist at steve kevin really. Thank you. Karen. Excuse me, really, thank you for being here this morning. We've seen as I was painting a moment ago, this turbulent picture for the week on Wall Street. What are some of the biggest factors that you think are really dragging down the markets at this time? Well, I think you've got a huge adjustment. So the bond market, for example, at the beginning of the year was essentially asleep to the fact that the Federal Reserve was serious about confronting this inflation problem. What's happened now is that the, is that between March and April the bond market woke up and re priced expectations all the way out for the next 10 years for interest rates. So what this means is that the earnings for companies way off in the future with higher interest rates are going to be worth less. It means that borrowers are going to have to pay more for things like a mortgage. And on top of this, when you look at all of the fiscal money that's been pumped into the economy just a year ago, you had, you had, you had the american Recovery Act push through providing lots of money over the last nine months, that's all going away. So you've had a lot, a lot of things that the market has had to adjust to higher inflation, higher interest rates and a pulling away of fiscal and monetary supports. I'm actually, I'm actually pleasantly surprised that the market has been this, uh, this well behaved as all of those factors have been priced in. If this is well behaved, I am a little worried about, you know what we have to look forward to. Um to that extent. I asked the question is this, um week a sign that we're not even close to the bottom based on the picture that you paint there. Yeah, Well, what I mean by well behaved if you look at markets they are clearing. So you've got, you've got prices that are changing and rightly so that if you think about what has moved stock prices down, it can either be because earnings have fallen off a cliff. It could be because opportunity cost of investing in things like Treasuries has gone on up or it could be that investors have just suddenly gotten very nervous. It's going to be one of those three things as we go through it, we can see, well, obviously Treasury rates have gone up. So the opportunity cost for investing in other things has increased. That's clear and investors may have gotten a little bit more nervous given a lot of the things that happened last couple months. But the one thing that's been positive is that the earnings forecast for the market have been strong. In fact, they're higher now than when the market peeked back in january. So there's a, there's a bunch of good things that are happening here and it's not all negative, it's just that the markets are properly reflecting a whole bunch of changes that are really important. And I think they're doing so appropriately. I mean, I think that's a fair point when you look at some of the fundamental pictures of some of these earnings reports and and there there is a an added point to make in terms of like, you can look at this market two ways. One that there's a lot of fear and concern around it, and the other is that there's a lot of excitement and there's a lot of quality potentially on sale here where some of the safer buying opportunities across the market. Yeah, I like, I like the I like the word to use because quality at Washington Crossing is, is going to be really key. And I'm the senior portfolio manager of Washington Crossing, not strategist that steeple, but the important thing to know is that, Let's say we have a 5050 chance of tipping into a recession here. You're right, you want to own quality companies, which to us means companies that are flexible and durable and predictable. So what you're going to be looking for regardless of industry, are are companies that have profitable assets, consistent businesses, low debt and where we're finding value, it's lots of places. So tech has gotten hit hard valuations, there are much better when you look at some financials, there's some high quality financials out there that are looking more attractive to us and even the consumer area, although there are some challenges with spending and maybe some inflation that causes some issues in the near term, a lot of those companies are very, very solid. So I would say staples and some finance, some of the financials and technology certainly are looking a lot better than they were a few months ago. I want to pivot to kind of Fed activity in terms of what the Fed is trying to do to kind of get inflation under control and the broader inflation picture. I mean, some analysts have said that inflation is likely to accelerate at a pace that potentially maybe keeps the Fed from raising interest rates further. What are your thoughts on that? And what should investors know about how this could be the market really could impact that that activity. Right, So Washington Crossing, at Washington Crossing, we have, We've laid out three basic paths Path. one is a soft landing. This means the Fed raises interest rates tightens up. Just enough inflation comes down, they can back away from aggressive rate increases the the economy moves on. That's fantastic. Let's let's say that that's one option. The other option is that the Fed. It doesn't get it right and they tighten too much. The economy falls into a recession. That would be option to the tricky one is option three, which is inflation as inflation pulls away from the Fed if the Fed is too slow to raise interest rates and to pull back monetary supports, they run the risk of of having essentially uh it's almost inflation become more like a forest fire that's not put out too quickly. And so the challenge for them is that they move fast enough so that the psychology of inflation doesn't become rooted in the economy and that the Fed loses loses control of inflation loses credibility because The one thing that the market has come to depend on over the last 40 years that in a pinch the Fed can bail them out. They this is the first time in my career where the Fed may not be in that position because they are staring in the inflation threat in the face Which limits their ability to take certain policy actions, I wonder will get like 30 seconds here. But I've got to ask you when you look at the idea of a recession right, because that our world has come up more often over the last couple of weeks, do you think that's gonna happen if if one does happen, how would it look and what's the timeline? Well, you know, let's say, let's say it's 5050 and the market is already, you know, the S&P is already down, you know substantially, the NASDAQ is down even more so to some extent of recession is being priced in as we speak. Although earnings have actually held up pretty well. So I would say that. Yeah. Yeah, okay. If we have a recession, it's not the end of the world, we've had them before, like it goes on the the third. The other possibility that if the Fed is does not get ahold of inflation, those can become more protracted problems. So that's something that I think at Washington Crossing, we worry about a little bit more than a recession. And the way that you play the recession is that you know, if you're worried about that, you just want to make sure you own very high quality companies, the like of which like that you were alluding to earlier. Yeah, definitely. Kind of quality right now. And if you think qualities that is at a sale, this is the time to kind of by really appreciate your time, kevin Caron market strategist at steve steve