Stocks closed higher Wednesday after the Federal Reserve raised interest rates by 0.75%, the largest rate hike since 1994. The central bank is still working to fight inflation as consumers see rising prices across the board for most goods and services. David Ellison, portfolio manager at Hennessy Large and Small Cap Financial Funds, joins Closing Bell to discuss today's close, what rising rates mean for markets and whether they could cause a recession, and more. 

Closing Bell

Stocks Close Higher After Fed Hikes Rates by 0.75%

All right, ken, well, let's turn back to the major indexes again, gains across the board actually gaining a little bit of Steam Post Fed decision after an aggressive rate rise of three quarters of a percentage point to combat story inflation. And joining me now is David Ellison, portfolio manager at Hennessey Large and Small Cat financial funds. David, thanks for coming on. So what's your reaction to the Fed's decision today? And investors somewhat upbeat mood? Well, I think the market's liking the fact that they're realizing there's a lot of inflation. Uh, you know, I think that's, they sort of telegraphed that. So I think anything that Puts, puts the quickens the pace of rate rises or ends them sooner than expected the market will like because the market's been living on low rates and Fed accommodation since really 2008. So I think the, you know, the market had a valuation problem now, we've lost, we've taken a lot of that out now. We've got an earnings issue and, uh, you know, earnings are missing for companies. And, you know, you mentioned netflix, you know, the fundamentals have turn negative for a lot of companies. And once we work through that, then we can we can, you know, I think we'll have a pretty healthy market, but I don't think the rising rates really matters. I don't think the Fed tightening matters. I think the, the two biggest risk to me is Bitcoin and the quantitative tightening and what that does to the economy and what that does to the structure of rates and the cost of money in the system. So, you know, we'll see what happens. But I don't really worry about rates that much or or Feds forward guidance on rates and I don't think it matters that much to the market. David, let's walk through each one of those who identify the biggest risk to the stock market as Cryptocurrency and quantitative easing. Of course, the Fed, aggressively scaling back its own balance sheet, Walk me through these risks and how they could potentially send the stock market lower. Well, I think the, you know, the the Bitcoin is the lesson, a lot lesser of the two. But again, Bitcoin was a $2 trillion dollar asset value. That's now a trillion dollars. And we don't really know where the leverage is. We don't really have any, any sort of regulatory control over it. And if it gets out of hand, it continues to fall. I think you're going to find where the leverage is and you're not, you're not necessarily gonna like what you find. Uh And so far, surprisingly, there's been a big, big decline in it relative to where it was obviously. And and we really haven't had any problems, but we'll see what happens there. But I think the quantitative tightening, That was a real problem back in 2018. And they really didn't talk about it that much today in the, you know, the Q. And a session. It wasn't really asked. But I think that's where you could disrupt the capital markets even more, You could widen out the credit spreads, take mortgage rates up even higher than where they are now, which would be more troublesome to the market. So you know, I think You know the market's dealt with rates going up and down for years. I've been doing this for 40 years and that doesn't really matter. But the balance sheet is something new and it's a big thing. Bitcoin is a new thing and those two things need to be resolved before we can get comfort back in the market and feel like we can buy without a lot of most people. David would say though that Inflation running at the fastest pace in 40 years is sending the stock market lower because the Fed is needing to act more aggressively. Whether that's via quantitative tightening or simply higher interest rates. I'm sure inflation obviously has something to do at the core of these concerns. Right. Well yeah, but I think what you're seeing in my view is companies are missing. Uh You know, the stocks that are down big are the ones where they're missing earnings and the expectations, they're not beating the estimates on Wall Street. They're underperforming. And we could go through, you know, hundreds of names where they've missed earnings and the stocks are down 40 50 60% And that's not, it doesn't have nothing to do with inflation or rates. Again rates are still, you know, Fed funds are still what under 2%. It shouldn't matter. Um And so I think the issue we have going forward is that earnings matter, they didn't matter for a couple of years because the Fed was going crazy with adding money to the system. Now they matter. So if you miss earnings, uh, you know, you're in trouble and if you make the earnings, you're probably going to be okay. So now it boils down to working through the earnings misses that we're going to have this earnings season coming up is going to be very interesting. The last one was interesting to the extent that, you know, a lot of stocks went down when they missed and you're gonna have the same thing happen again and eventually that will, that will come to an end. Companies will get their act together and then we'll be in good shape for a prolonged rally because earnings will stabilize and start to grow again. What's your expectation the rest of the summer? David? Obviously, the Fed noting that there are still upside risks to inflation. So, yes, quantitative tightening will be continuing here and full force. Do you think the stock market will continue to drift lower or are you optimistic that the turnaround might come sooner than later? It's hard to, you know, you know, my, You know, my sense is that we're gonna be all over the place we were today. I mean, the market was down at one point today and it was up. I don't know, 500 points at one time. So the markets all over the place, bond prices, especially at the short end are all over the place. And I think that's going to continue. Uh And I think if the companies can, you know, if you start hearing in a couple of weeks we're you know, we're mid june now. So in a couple weeks you're gonna start seeing companies talk about the quarter, maybe they'll prerelease if those numbers aren't good. You know, the stock market is probably gonna, you know, go down more. But again, I think we're through the bulk of the real issues here because we've taken so much valuation out of the market. And from the point of view of P. E. And price to book and price to sales. So I think we're in a good place now where you can start to say, look if this company is gonna be okay and they're gonna make their numbers and their balance sheets okay then you're probably okay. You may have, they may go lower. But I think you're you're in pretty good shape right now. I think that is a good point to make because certainly in the wake of Fed decisions that we've seen this year, the stock market has one reaction on Fed day and then a completely different reaction the next day. So clearly it does take time for Ambassadors to look at the data that's out there, look at the signals digest the news and then make a decision about their portfolios ahead. Are you concerned at all about economic growth? Because there are real concerns, David that we could see the economy dip into a recession? Well, I think there's I think there's there's way too much talk about recessions that somehow that's, you know, that's sort of the thing that has to happen or something. Um You know, I think that For people that are working for companies where the stock is down 50%. It's a recession for the people that are getting laid off at, you know, at these different companies that's a recession. So there's plenty of people that are in recession now. Um if that's and that's how I measure it. Um And there's plenty of people now that are worried about losing their jobs. So How many, so the unemployment rate is 3%. The real unemployment rate is probably 5% right now because you've got a lot of people that are thinking they're gonna lose their jobs and it seems to be happening every day. So you know, that's that that's to me the I think we're in a recession now, does it matter? No. What matters is that companies are making adjustments, they're getting real with earnings getting real with cash flow, they're getting back to the basics, it's not, you know, Yabba Dabba doo dah evaluations, so all that is good, all the things that have happened good. Uh, and you could argue, well, you know, you didn't tell me to sell, you know, you know, when the stock was at 16 and now it's up to you, you should have told me to sell at 16. But again, there were plenty of people that were, you know, telling people to sell at 16 and there were plenty of people to say bye at 16. So I think that the reality is that markets of, you know, trading vehicle. But again, from a sentiment point of view, a lot of companies are now, I mean, every company I tell every bank I talk to is, you know, worried about credit. They're worried about low growth. They're doing all the right things to work through it. Alright, well, we're following it closely here on cheddar. News is closing bell that David Ellison, portfolio manager at Hennessey Large and Small Cat financial funds. David, thank you