Craig Fehr, Principal & Investment Strategist at Edward Jones, talks about the major risks to the markets and which industries are poised for growth in the near term. 

Opening Bell

S&P Looks to Snap 3-week Losing Streak as Corporate Earnings Lift Markets

for some more early morning trading inside and how the markets are reacting this morning. I'm joined by craig Fair principle and investment strategist at Edward jones craig. What do you focus most on this week? Is it around this Russia and Ukraine kind of situation, the geopolitical tension and how it's faring on major sectors and certainly energy being one of those and other commodities or something else as well. It's clear that the situation in Russia and Ukraine is gonna keep a tight grip on the wheel for a little while longer. So we have to focus on that. As investors, we have to pay attention to what's driving that. I think the important part is to put it in perspective, it can be pretty easy to get to get sucked into this vortex of volatility where we're seeing markets react minute by minute to incoming headlines. It's, it's easy to get uh to get sucked into that. And I think the important part is to take a step back and view a broader perspective of what this means in the bigger context. I think we'll probably see markets continue to be sensitive to this situation for a while longer, anytime you're talking about global powers and the potential for military conflict, that can't be dismissed. But if you look back over history, those types of issues, do you have political tensions tend to be rather fleeting in terms of the impact or influence on the markets. So we're paying attention more broadly to the earning story, obviously paying attention to monetary policy and the tightening cycle that we're about to bark on, embark on next month, those are gonna be the broader guides for the market. I still think that the fundamental backdrop suggest that markets have room to move higher. But as an investor, you're gonna have to be able to, to weather this volatility that we're gonna go through in the near term focusing on these geopolitical tensions. Do you think it was that, you know, yesterday, in the last couple of sessions, the sensitivity around Russia and Ukraine, and if so, nothing much has changed today, right. Is it just the market had a panic attack or a bit of a panic attack? And then now are starting to cool off and maybe this is a buy, the dip opportunity, we're seeing you what's, what's affecting kind of this bit of a rally we're seeing at the start of the session, there is a knee jerk reaction in the market at the moment. There is very much a self first ask questions later, which is why we see days like yesterday, where markets were under a lot of pressure. And then you get those followed up with days like today, where there's a little more level view and I think that's going to continue. We shouldn't expect the markets to behave rationally. And with a long term perspective every single day that being said as investors, that's exactly how we should, uh, guide our investment decisions. So I think that we're going to continue to see this focus the, if we look more broadly at the implications for the market Russia is a rather small component of the emerging market complex. Russia represents a very small, Rather immaterial impact on overall S&P. earnings and on the global, on the global economy now there are some implications for energy supplies to europe. Obviously that has an impact in terms of commodity prices domestically, but I think the bigger influence here is not about the potential for an impact on global GDP from what's happening with Russia. Instead, it's about the the exporting of inflation at a time where we don't need any more inflation because central banks are really focused on starting to withdraw some of the liquidity. So what do you think that Stokes higher inflation, like higher commodity prices and the impact that that has on input prices? I think it's going to stir the pot for the market creates some of that anxiety around what this means for the Fed moving forward. I lost you a little bit there craig, so I apologize if I missed some of that, but I want to kind of pivot a little bit and turn over to consumer spending. I want to get your read on the strength of consumer spending, could higher prices push shoppers away from those higher ticket products and services. What's your outlook on spending this quarter. I think the consumers in in in great shape in fact and it's hard to think about that and the fact that we're in this confluence of the pandemic that is not over. We have these global issues that we're wrestling with inflation is really high. Um and you're feeling that every single day right, we we often refer to it as inflation is very local and very personal, Which means that you experience it in unique ways depending on how you choose to spend. If we, if we look broadly, the labor market is quite healthy, we have very low unemployment 4%, I think it's going to trend down even further from here. We have wage growth that's running a decade highs which is a good thing for consumers but all that is feeding into this and this inflation cycle. I think we'll get some relief in the back half of the year, we're starting to see signs that supply bottlenecks are clearing semiconductor shipments, auto production tells us that the that the supply chain issues that are exacerbating inflation might start to moderate. So as we see inflation come down, come down, that's going to help real wages that will help consumer spending in the back half of the year. So I think that sets us up for a nice foundation for economic growth. The interesting part will be to see how consumers choose to shift their spending right in economics one oh one, that would be the substitution effect if you look at one good or service and you evaluated against the potential to shift consumption or spending to something different right now. I think we're seeing a lot of pent up demand in areas like travel and leisure, entertainment, all the things that for the last two years have been curbed or stunted quite quite dramatically. I think we'll continue to see a high degree of demand in those areas. We might see it shift away or pull away from good spending. So few less amazon boxes sitting on all of our front doorsteps. But I think more broadly consumer spending is going to continue to run At a pretty good clip and that's 70% of GDP in the us. So that's going to provide a nice foundation for growth moving forward. You know, one company around um Consumer discretionary is the company Hertz and Hertz in fact going to post earnings after the close today. We also got names like Moderna Discovery and Norwegian Cruise line also have to report this week. What are you gonna be watching with these companies in particular? So there's a, there's a top line story in the bottom line story meaning what what is the revenue growth of like which by the way has been quite strong so far this year. And for the last several quarters uh the the interplay between revenue growth, so how how much demand is feeding into overall sales and then how companies are able to manage expenses to drive overall profit growth. So as we sit here today, Q4 earnings are looking like they're going to come in at better than 30% growth year on year? That's an exceptional growth rate. It's probably going too slow to something like mid to upper single digits next year. That's our that's our view, still compelling still enough to support the markets. So as we look at you mentioned, uh you know, we don't, we don't cover hurts formally, but if you think about what comes from a company like that, you have the travel and leisure demand that comes from renting a car. So the entertainment and leisure component of that, you have the supply chain bottlenecks insofar as rental car companies are having a hard time sourcing cars to put on the lots for people to rent. So you've got that interplay between supply chain challenges, rising costs, still high demand for spending, I think broadly that's a microcosm of exactly what's playing out in corporate America. Now, we're going to see a pendulum swing between goods and services and again remember goods have been flowing freely for the last two years, It's been services that have really been been stunted by pandemic restrictions. So I think we'll see that pendulum swing back. That might help overall inflation trends a little bit as well. But I think we're going to continue to look at what is top line sales growth look like. That's a barometer for economic demand and health and then how can companies manage rising labor costs, rising expenses to be able to drive overall profit growth? Which is why we think profit growth will slow next year but continue to be positive, which is a good, is a good foundation for, for equity markets to continue to post good gains. You know, one sector that has certainly done well, um, you know, or has not done well this year has been tech, it's kind of had the struggles with the evaluation concerns amid an interest rate environment. NASDAQ as a result, is down with 1.8% over the last four weeks, 13, actually 14.5% year to date. What growth opportunities do you see within the tech space? Yeah, you're both of your statements by the way, were true. Tech has done well. Tech has done poorly. It's really a matter of how you want to slice the timeframe because you're right so far this year, in 2022 tech has led to the downside. So growth or technology has underperformed relative to value or areas that are a bit more cyclical in nature. Financials, industrials, energy, things like that. Uh, you don't have to go back that far though to look where tech was running laps around everything else. So we are seeing that pendulum swing. It's a, it's a case for diversification in our view as you look at technology in particular, it has been beaten down a little bit. This, this pullback, this correction in the equity markets by and large up until the last few days where it's been more broad based because of geopolitical concerns has been more concentrated in the high flyers. The out performers from the last couple of years. High valuation names that get penalized in an environment where rates are higher and that's technology in a nutshell that being said, we still think it's a compelling sector. We have the highest recommended weight of all sectors to technology given its importance in the overall economy. The growth profile that that that that sector has moving forward. You can look inside of that sector. However, for for more opportunities, it's not as if all technology companies are created the same. So if you look at areas that are a bit more levered to software to cloud computing, semiconductors, the things that are really going to be the infrastructure for a hybrid work model in the future for more data consumption. All of that suggests that there are some opportunities within the tech sector to be able to to further diversify by subsector what industries do you see with potential upside? Not just the hedge on kind of this downward market where we're seeing what the dow year to date down 7.5% the NASDAQ around 14.5% and the S and P 500 as we noted, closed yesterday essentially in correction territory, but year to date about 9.7%. What trees you see kind of with that upside and again, not just the hedge on this downturn market. Yeah, I think, you know, you think about the traditional defensive sectors within the equity markets, you've got utilities and consumer staples, health care to a degree sectors that have those reliable revenue bases that aren't as sensitive to the master nations within the, within the economy. Those I think will still continue to be attractive. Now if you look at something like utilities, that's a higher yielding sector often thought of sometimes as a bond proxy or bond substitute in the equity space. You have to be careful because rising rates make those types of equities perhaps a little less attractive. I don't think it's an all in or all out story. I think there's an opportunity here to look to ensure you have enough in those defensive sectors like staples, healthcare and utilities to make sure that you buffer a little bit in your portfolio when equity market volatility or Pullbacks occur, which are going to continue In my opinion. But we do think that they're going to be followed by rebounds. We do think that the broader outlook in 2022 is for equity markets to move higher. So you still want to make sure you have some exposure to those more cyclical areas. So we like every favor financials would still look pretty good as rates start to rise and there's a bigger spread in the yield curve that can help financial profitability. The energy sector, which has dramatically outperformed recently as energy prices have moved higher. There's still some opportunities there. That's a sector that has lagged for many, many years. Industrials will be sensitive to this second wind and the economy. If indeed, we see growth pick up in the back half of the year as we expect, it will. So those more cyclical areas offer you that that exposure to the rebound and economic growth. But we'd make sure you don't abandon the defensive sectors in the meantime, to make sure you have that balance. All right, thanks so much. Craig, Fair principle and investment strategist at Edward jones.