Huw Roberts, Head of Analytics at Quant Insight, joined Closing Bell to break down recent market action, offer investment tips, and look ahead to where markets will go from here as investors await another interest rate decision next week.

Stocks Close Lower Monday as Recession Fears Mount

let's turn back to the major indexes joining me now is Hugh roberts, head of analytics at the financial research firm. Quant insight Hugh, thank you so much for coming on this show and what is your insight on this market and what we see is a down day across the board. Thanks for having me. Well, it kind of feels like it's the day that Goldilocks ran out of steam for the viewers who aren't familiar, there's a market phrase Goldilocks not too hot, not too cold, just everything's just right. And that's used a lot in financial markets and for equity markets in particular to describe a scenario where you've got enough growth but not too much. That's going to provoke the Fed into being more aggressive of rate hikes. And really since mid october you've had a little bit of that kind of scenario pan out. You've had data kind of come in better than expected On the whole, not everything has been that way, but on the whole the data is kind of held up and probably edged towards the soft rather than hard landing camp. But it's got to a stage now where that run of data is once again provoking fears that the Fed will have to just either keep going with rate hikes or the other thing that would disappoint markets is that when they get to the highest rate, whether it's at 5% to whether they choose to stop that they stay there for a long time because what equities really want to see is a proper dovish pivot where they start talking about rate cuts and this data is just pushing that further and further into the distance. Well Hugh, let's talk about rates because the Fed is set to meet here in mid december and markets by and large expecting a 50 basis point rate rise, that's the equivalent of half of a percentage point. I know the financial jargon can be a lot of times for everyone across the board. What is your expectation? And do you think that the Feds aggressive rate rises are effectively working and bringing down inflation even at a time when we see other parts of the economy holding up quite well? Yeah, that's the, that's the tricky bit that the Fed face really is that they've only got really a handful of tools, hiking interest rates as one selling the bonds on their balance sheet is another, but both are blunt instruments and really what they do is they just act by suppressing demand. So for the man in the street, it means no potential layoffs, it means less discretionary money to spend and that's the way that they hope to bring inflation down. Now, you can see that it's having an effect in the interest rate sensitive sectors of the economy. So, you know, all the news on the housing market remains pretty dire. You've started to see orders roll over at the firm level if you look at profitability and earnings and they're beginning to come lower if you look at analyst expectations for Q1 earnings next year, for example, But where it's yet to impact is in the labor market, which really was the catalyst, I guess um delayed catalyst for today's price action. The labor market remains tight. There are still more vacancies around than the, there aren't seeing the downside pressure in terms of job cuts across the board, away from some kind of high profile tech stuff. So that's what people are worrying about. The Fed will feel that the job is not done and they have to keep going. So are there any investment opportunities to you that you see in this market? Um we are off of our lows for the year. That's a positive, but I think there are still some concerns out there that we could head even lower from here if a recession does come in 2023. Yeah, I think that's absolutely, that's the critical question for 2023 this year has been all about the Fed jacking up rates to fight inflation. I think increasingly next year the focus will be on the real economy side and that debate about a softer versus a hard landing. Some of the data, we just talked about the employment stuff tends to be a lagging indicator. If you look at the more forward looking stuff, there's a survey called is um for example, Institute of Supply managers, um that has a good track record of calling recessions the bond market, if you look at yields where they're at. If you look at the shape of the yield curve, they're suggesting that there's more risk of a hard landing. So the message from the bond market and the forward looking data is pretty ominous at the moment and that's why I think equities have been managing to ignore that kind of news for the last couple of weeks. But what we do is we, we model stuff, there's no opinion in our work. It's all about mathematical relationships between the macro environment and asset classes. And on this occasion it looks like, you know, the equity market has just run out of a bit of a steam here. And the risk reward probably favors more downside interesting now because you do run a quant firm, you have a head of analytics of the financial research firm, quad insight hue, which investors do if the math does say that the odds are more to the downside versus the upside. Yeah, well be positioned defensively. Really? So you don't wanna be too far over your skis in terms of your outright exposure to us equities full stop. And then in terms of your allocations within equities, you probably want to be thinking about some of the more defensive areas. Now. Again, as you say, there's lots of jargon in the industry, but a defensive sector would include consumer staples rather than consumer discretionary as the stuff people have to buy as opposed to the stuff that they, the Bloomingdale's analogy from your last guest. Um, their utilities are often regarded as a defensive sector infrastructure, especially with the build back better plan from President biden. So these are the kind of areas that tend to be a kind of a safe haven during kind of rough economic times, and they're probably the areas that people will tend to focus on. All right, Hugh roberts, head of analytics, the financial research from Quant insight Hugh. Thank you.