This week posed a tough one for Wall Street as the S&P fell 4.5% along with massive losses in other indices. Thomas Hayes, Chairman of Great Hill Capital, joined Cheddar News to explain what was behind the major sell-off this week.

This week posed a tough one for Wall Street as the S&amp;P fell 4.5% along with massive losses in other indices. Thomas Hayes, Chairman of Great Hill Capital, joined Cheddar News to explain what was behind the major sell-off this week. “I think the key is going to be the Feds' forward guidance [next week],” said Hayes, who also noted they'll keep an eye on the November election that could potentially spark a market rally

Stocks Close on a Low Note, Ending a Week of Losses on Wall Street

let's turn back to those major averages joining us now is thomas Hayes, chairman of Great Hill. Capital thomas, welcome to the show. What is your take on today's market action. Well, Hannah, thanks for having me. I think we just need to put everything in perspective. Uh ignore the short term volatility we saw with quadruple witching with Fedex. Fedex actually reminds me a lot of walmart when they pre announced in june which was shortly before the stock market bottom. Uh you know the good news this week is that the peak narrative is still in place as it relates to inflation june? Was the peak in consumer inflation? The P. P. I came in better than expected, which is the leading indicator to the C. P. I. The bad news though is the upside miss on C. P. I. Cement the 3rd 75 basis point hike most likely next week and the key will be moving forward. Is it 75 then 50 in november and 50 in december? Or is it 75? 50 25. And we're going to find out the real risk is that the Fed over titans and does not allow the lag to kick in. And as we did see from Fedex, they may have already achieved the demand destruction that they're looking for. And if they keep tightening into that demand destruction, it could be a lot more pain than their than their possibly positioned for. But I think when we look at history The last six times that inflation peaked above 6% and rolled over as we saw in June of this year. The bottom of the stock market was in. So we're still in the camp that the June Lows are going to hold for the stock market were over 200 points away on the S&P. And I think that sets up pretty nicely into year end. We've got new economic data almost every day. This week stocks had their worst day since June of 2020 on Tuesday after C. P. I. data showed inflation is here to stay. We are also set to get new economic data almost every day next week. So what should investors know about how markets could be impacted here? Well I think the key is going to be the feds forward guidance moving forward. They are focused more on inflation expectations because that affects current behavior than actual inflation. And if you look at the inflation breakevens five years out there at 2 57 down from 3 59 in March. So there's a lot of positive things moving forward. But what one thing I like to look at Hannah is how are people positioned? And one thing that got lost in the mix this week was the Bank of America Global Fund Manager survey surveys 200 managers with 600 billion under management and their position for the apocalypse they're more negative than they were during the great financial crisis. They're more negative than they were during the pandemic lows and I think the economic conditions don't warrant that. So the pain trade is actually up. They have the highest expectations for recession since april of 2020 and March of 2009. You should note the bottom for the stock market was already in, in both cases, lowest percent managers taking higher than normal risk growth expectations at historic lows, 70% expect weaker growth next year. So I think that the stage is set for upside surprises and as we move into the november elections right now, the odds are on that we're going to come out of the november elections in a gridlock situation that not one power will be in full 11 party will be in full power. And the stock market likes gridlock if there can be no new new major policy, no new major taxes. The market can rally off of that. So we'll keep an eye on the november election, will keep an eye on the Fed's forward guidance next week, which you know, so far if we actually just take a step back their whole procedure. Their method has been to talk hawkish and to act dovish and people say, well, they've done so much well, we're at, you know, 2 25 on the Fed funds rate to 25 to 50 with inflation that was, you know, as high as 9%. So they've done a lot more to talking. And that's been extremely effective in destroying demand as we saw from Fedex this week. So I think certainly they've got to go next week. But I wouldn't expect as much as most people are thinking about in terms of the terminal rate at 4.5. I think that's gonna be a little too aggressive and if they do move that far it could be tremendously detrimental. I don't think they will so far. It's been mostly talk, they have achieved a lot, bringing down inflation expectations through talk. And I think we're going to see more of that next week and the World Bank said the global economy is now in its deepest slowdown following a post recession recovery since 1970. Consumer confidence has already dropped more sharply than in the run up to previous global recessions. So, thomas, do you agree with their diagnosis that raising production is a better approach to bringing down inflation rather than raising rates? Well, I do think raising rates is detrimental at this point of view. I think what we've got globally is a serious amount of debt and what happened post World War two when debt to GDP was over 100 20%. They let inflation run a little bit above average over the next five years. Post World War two. So we borrowed a lot to fight a visible an enemy in the coronavirus pandemic. We borrowed a lot to fight and invisible enemy, but they let inflation run between 3 to 5% from 1948 to 1953. And it brought debt to GDP down from over 100 and 20% debt to GDP to 63% in just five years. It actually bottomed out years later at 33%. And I think that kind of playbook would work extremely well and so far intentionally or unintentionally. That's the playbook that's playing out. So they'll talk 2% all day long. But even in in the early fifties they didn't let that Fed funds rate actually get above 3%. They let inflation run at 3 to 5 and that was very successful. The fifties was a big boom time. Post World War Two. They were able to get the debt down largely by inflating their way out of it. And and I think that strategy is going to be okay moderate, but they've got to pin those long term expectations down to to so that behavior doesn't change. And we can have as a successful run in this decade as they did post World War Two in the 19 fifties. So I would say expect continued guidance to 2% and expect actual inflation to run slightly above trend, but not out of control. As you all know, americans confidence in the economy remains at a record low though it has improved with gas prices declining the University of michigan consumer sentiment index creeped up to score by 59 a half percent just below the expectation of 60. That score. However we should mention is down more than 18% from just a year ago. When you look at a long term chart dating back 50 years, you see how truly pessimistic americans are about the economy at least right now. Could we scare ourselves into a recession here? Well, historically, if you look at when consumer confidence got this low, it were they were right around times two generationally by equities. When people get this pessimistic, all the sellers are out of the stock and usually the economy turns around and that's what we've seen. Uh consumer sentiment and inflation are joined at the hip. And as we saw inflation peak in june consumer sentiment actually bottomed in june at fifth, the one up to now 58 59. And I think that trend is going to continue. Gas prices continue to come down commodities roll over and even the C. P. I. Number that that was backward looking. If you look home prices are coming down but owners equivalent rents, they work on a lagged basis. So the number was a little higher than expected because those numbers work on a lag basis. If you look at used cars came down, new cars were still strong that will work on a lack basis as well. So I think there's a lot of positive data coming forward. The Fed will continue to destroy demand with their forward guidance, but I don't think they're going to be overly aggressive more than they have to on choking off growth completely, in which case we could find ourselves in a perfect situation slightly above trend inflation, well above trend growth and debt to GDP comes down and people do do well in equity as we get through this, you know, seasonal weakness here, september october, people are expecting the volatility. But I think as we get closer to that election, earnings are holding up if you remember Hannah, uh you know, last quarter, all the analysts were coming on say earnings are coming down 20% 20% It's going to be terrible. They came down 2.5%. Uh and I think in the, in the face of all these different headwinds, the fact that earnings only came down 2.5 speaks a lot to the underlying strength of the economy. I also think we are at the inflection of some major instruments that could change things very quickly. The dollar has been too strong. However, if you look at the commitment of traders report from the cftc every friday commercial hedgers, which is the smart money are the most short that they've been since other peaks in the past in to 2020 2017 2015 2013 in 2009 and 2006, if we get some relief in the dollar, the dollar weakens a little bit. I think we're going to see very positive things in terms of flows into emerging markets is a tremendous opportunity that's been beaten down. We also see commercials are aggressively long 10 year treasuries, which means their position for rates to compress not to go up, Everyone's saying, well the feds gonna hike, but a lot of that's already priced in and you could see a reverse. If you see a bit in treasuries, that would be another positive sign. And guess what else? They're super long commercials are super long S and P. Futures. So while everyone's panicking out, the smart money is buying in and that usually precedes a reversal, whether that's in the next couple of days or the next few weeks more likely we've got to get through some seasonal weakness. I think as we look into year end, things are better than most people see right now thomas Hayes, chairman of Great Hill Capital, always appreciate your time thomas. Thank you so much