Jay Hatfield, Chief Investment Officer at Infrastructure Capital Management, joined Closing Bell to break down the big factors leading to this latest market meltdown, as inflation and an upcoming Fed policy decision affect investor sentiment.

Closing Bell

S&P 500 Enters Bear Market Territory as Inflation, Rate Hikes Weigh on Stocks

Welcome back to cheddar news is closing bell. Everyone I'm kristen Schouler down here on the floor of the stock exchange. And we have a market selloff on our hands adding to the losses that we saw on friday. And the losses of last week as well. In fact last week, the worst week for the major indexes since late January and those losses continuing today as investors digest that hotter than expected inflation report on Friday showing that consumer prices rose 8.6% in May from the same time a year ago when the Dow down 2.3% off 724 points the S&P down 3.1% And the NASDAQ down 3.8%. So with us investors on edge amid signs of an economic slowdown, fears of continued inflation and higher borrowing costs are rattling stock markets around the world. The S&P 500 falling into a bear market today down 20% from its high and the NASDAQ continuing to slide deeper into its own bear market. So joining me now is jay Hatfield, chief investment Officer at Infrastructure Capital Management. J thanks so much for coming on the show, is inflation really the driving factor taking the markets lower today. Driving factor is definitely fears not so much inflation, but fears about the Fed's reaction to inflation and particularly what we focus on is really not the rate increases, but the shrinkage of the balance sheet or quantitative tightening And we've already had 800 billion of that so far this year. And you've seen what that's done to the markets, we're forecasting the Fed does another trillion of quantitative tightening. And so for that reason since the beginning of the year called this year, adult swim and a year where you want to be conservative and invest in defensive dividend stocks and not speculative asset classes like crypto or profitless tech Really taking it on the chin today continuing to slide. And I think many people had considered to some extent crypto hedge against inflation but certainly that not holding true today nor really at all this year. I mean crypto down 14% for Bitcoin just today at 23,000 a token. So obviously j we do know that higher interest rates historically do lead to downward pressure on the stock market. What do investors want to know from jay Powell and the rest of the Fed come Wednesday when we get a Fed decision and a press conference from the chair. Well what normally happens is that people fear the Fed meetings, we have these sell offs and then the meeting creates certainty and keep in mind that this is a quarterly meeting. So you get the so called dot plot so they get the forecast of rates. So we think it actually could calm the market down because then there'd be less speculation about 75 versus 50 basis points and create some certainty. We didn't think the inflation report. Was that surprising? We're not forecasting inflation to get better until the fall when energy prices might cool off. So we don't think there'll be a radical change in the Fed's outlook just based on one months of C. P. I. Data. Okay. So if your forecast is correct, J and I know many americans feel it prices are rising across the board, they're expected to stay elevated even if the pace of price gains start cool. But with your forecast that inflation doesn't start to really cool here on a year over year basis until the fall. What does that indicate the Fed will do when we see more rate hikes come september october and the rest of the meetings before your end? Well definitely they're going to raise rates Every meeting whether it's 50, or 75. We're not so concerned about the exact pattern of it. We do think that the quantitative tightening mentioned already is much more powerful in terms of cooling off the housing market and even energy which are the two key drivers because energy drives food as well. So we're less focused on The path versus where they stop. If they took the Fed funds rate all the way to 4% then that could easily create a recession if they pause like they should and assess what their policy impacts have been. Then we could have a soft landing or a very mild recession. Here's a question for you. This is a year to date chart. Obviously we do see the major indexes all down double digits, believe it or not. The down the SNP had actually started the record highs but then the selling pretty much ensued profit taking Russia's war in Ukraine, higher interest rates. Um And soaring inflation all at play here with the NASDAQ underperforming the most. So as you mentioned, j you don't see inflation peaking until the fall when energy prices might come down if we do dip into a recession. And and we could well do that just within the next month. Considering that the first three months of this year, I did actually contract, What does that mean for the investor for the stock market? Well, some of that obviously have been priced in given the 20% decline. If you do our model for fair value in the S. And P. S About 40-50 based on today's interest rates. That's a discounted value of earnings. So at some point this gets priced in maybe it's 3400 a mild recession. But I would point out we're not too concerned about a deep recession because we have a shortage of homes, about three million less than we need. Whereas during the financial crisis we had 4.5 million surplus homes and housing really is the most cyclical sector typically drives recessions. So that's why we're saying that if we did have a recession it would be quite mild because of this robust housing demand and shortage right now. Um All right, well, we'll be watching closely. J I appreciate you coming on the show that's Jay Hatfield, chief investment officer at Infrastructure Capital Management on yet another market meltdown in the S. S. And P. Officially re entering a bear market today.