Chris Vecchio, senior analyst at DailyFX, joins Cheddar News to discuss what investors should watch as the three major indexes see wild swings all week.

Between Bells

Stocks Rebound Friday as Volatile Week Continues

Welcome back to between bells, everyone stocks trading higher today as investors took in earnings results from Big Tech companies. The Dow fell nearly 300 points as Wall Street struggled its way toward the end of a volatile week. The S&P 500 index dropped About 5/10 of a percent shortly after the trading day began. Meanwhile, the tech heavy NASDAQ also down the same about 0.5%. This all comes after Wednesday's Federal Reserve meeting and hawkish signals on monetary policy. Something we've been watching closely and joining us now to discuss chris vecchio, senior analyst at Daily FX. Welcome to the show. Like we mentioned in Green Territory now, but what's your outlook for the market so far? We know it's been a volatile month. What do you think investors should make of this? Good to see you asia. So we are looking at the potential for a little bit more downside inequities in the near term. There seems to be a growing discrepancy between what the markets currently pressing in and what strategists and analysts at major banks and other institutions are expecting in terms of the Fed this year. We've already heard over the course of the day that several major banks, including Bank of America are expecting the Fed to hike rates, potentially seven times this comes on the back of Jpmorgan Ceo Jamie dimond suggesting we could get seven hikes this year. And so as that gap closes as market expectations are pulled forward. Currently rates, markets are looking at four hikes for 2022. That could mean a little bit more turbulence here for equity markets at least into that mark meeting when the Fed initially begins its rate hike cycle. Yeah. What do you think the current atmosphere says about stocks in terms of their valuation? Do you think that they're overvalued? Um as we saw in 2020 and 2021 and this is just kind of a correction that was to be expected. I do think coming into this year, seeing a little bit of a correction isn't a surprise. You know, long duration assets tend to take a little bit of a hit whenever interest rates rise and that's exactly the environment we're in right now. We also see that the yield curve is measured by the other 2, 10 or 5 30 spread is starting to narrow. And that speaks to an environment with lower growth and lower inflation moving forward. Um So when we think about what could happen with stocks, you know, could there be more P. E compression. Absolutely. Those pe ratios looking at valuations have actually come down quite a little bit over the past year. The dow jones for example, trading just below 20. You look at the S and P 500 about a forward P. E ratio of 22. Getting closer back to those historical long term averages which ultimately could provide some stability in the market in the months ahead. Well, once we see that convergence. Yeah, a lot of factors at play here, of course, the start of the earnings season, but also monetary policy and that's kind of what's weighing on investors during this time. Um Worth noting we only have two more trading days in this month. So how are you expecting the markets to end the month and what do you think it implies? I do think a little bit more turbulence here should be anticipated insofar as we haven't necessarily seen anything to suggest that the Fed is going to back away from what appears to be a more hawkish twist in its policy stance. Fed Chair Powell this past Wednesday himself was indicating that he would have bumped up his own inflation expectations relative to where he was back in december. We just had the pc report come out today showing the highest rate of inflation in 40 years here in the United States. And even though that's been buttressed by some stronger GDP readings over the course of the week, the fourth quarter GDP reading came in close to 7%. It was undergirded by a very large inventory build and consumption as measured by durable goods is starting to fall. So Q one GDP doesn't look like it's going to be in a good place and as a result, Even with some of these earnings misses that are coming across the table, it could mean that we have a little bit more downside here before. Ultimately the bottom is found in, say, the NASDAQ or the S&P 500. Yeah. So we know that this earnings season has been a little bit different focus on valuation and fundamentals. We've seen kind of the shedding of some of those growth stocks specifically intact. Do you think that's overdone or are we going to continue to see this trend moving forward? No, I don't think it's overdone. When you take a look at some of the chip manufacturers like TSMC or A. M. D. Even Apple was complaining even though they're now producing a lot of their M one chips for their Macbooks, no longer using intel, they still aren't talking about supply chain issues. Even Tesla mentioned supply chain issues as it comes to semiconductors while they weather the storm better than most other companies. And so I do think this is an environment that will continue to be challenging in the very near term, somewhat paradoxically because of the decline in Cryptocurrency markets, the incentive to start new mining operations has been somewhat diminished. And as a result that could relieve demand for some of these chips. And as a result, that could actually help some of the supply chain issues in the near term. But I do think we still have a little bit more time to go before. We can say that they are in the rear view mirror. And ultimately that's why I'm looking for March really being the point at which we can perhaps see a bottom reached in equity markets. Yeah. And chris obviously you don't have a crystal ball, you don't know what's gonna happen with the Covid situation. But do you think that the pandemic is still a key priority for a lot of investors out there and have they priced in? What could potentially happen with Covid? I don't think so at all. And I think you just need to look to crude oil prices for that because crude oil has a very strong correlation with global GDP on a quarterly basis. In fact, if you go back over 30 years, the correlation between quarterly oil demand and global GDP is a robust 0.97. So the fact that we have crude oil prices trading at their yearly highs here today, at the highest levels that we've seen going back about seven years suggest that investors are not concerned about omicron. And listen, the data suggests that this trade off of higher transmissibility for lower lethality means we're moving towards a more endemic phase of the pandemic where eventually it becomes something that fades into the background. NIH CDC looking at estimates to say that Covid could peak here in the United States By mid February and ultimately that could mean with widespread herd immunity plus vaccination rates that are well north of 70% for adults here, single shots in the United States. Ultimately we have a commerce spring where this is not really the type of concern that it was over the past few months. Yeah, here's hoping for sure. That's chris vecchio, senior analyst at Daily Effects, really appreciate that insight.