U.S. stocks closed higher on Thursday, with the major indexes  jumped up and down throughout the session, finishing their second straight day in the green.  Jeffrey Small, President of Arbor Financial, joins Cheddar News' Closing Bell to discuss.

Closing Bell

U.S. Stocks Close Higher on Thursday After Powell Comments

And let's turn back to the major indexes because we did see nice gains stocks actually rising to near their session. Highs into the close joining me now is Jeffrey Small president of Arbor Financial. It's a financial investment management company, Jeffrey, thanks for coming on the show. So fractional gains, the dow the NASDAQ up 6/10 of a percent, the S and P up 7/10 of a percent. What's behind the strength that we've seen these past two days in the market? Well, a little bit more weakness in the dollar. And of course yields are falling and that seems to be the correlation driving market prices and this very excessive global inflationary environment that we're in. But you'll notice on the updates, we see the treasury, the 10 year note dropping and the dollar getting weaker and and the buyers coming back into the market. But on the other in the down days we see rates rising and so we're probably gonna retest 3.5% on the 10 year before the end of this month. Um That means there's more volatility on deck until we see what the Fed does next month in anticipation. But inflation have no doubt is a global issue. It's not it's not specific to the United States of America. Right, well let's talk about that because the european central bank raising rates for the first time in years today, even 2.5 years into this pandemic. And I do believe one of the latest reads on inflation out of the UK was that inflation was rising at its fastest clip on record. So these actions by the E. C. B couple of what we see from the Fed, what does that mean for risk assets in general? Uh Generally the risk is skewed to the upside in this type of an environment where the global central banks and concert are raising rates to combat inflation. But what everybody seems to forget is inflation can still run rampant regardless of what the central banks do because they can't control supply chains, they can't control energy and they can't control food costs. And those are the three dynamics as the eurozone just set a record for the eighth straight month, 9.1% inflation rate. Which is unbelievable considering like you said what they've done the rates um since 2014 they've been negative. Okay, so are you in the camp Jeffrey that the Fed, the central bank here in America will be raising rates by 75 basis points or three quarters of a percentage point at this next meeting And decision date come september 21st. Well there is some economic data that might give them a little bit of leeway where we could see 50 basis points instead of three quarters. But I think Powell is pretty steadfast in his decision to try and squash this inflation. I see them going another 75 basis points but I think for the most part that's priced into the market at this stage, the real problem becomes what's more important than the Fed today is what the next ep I report is gonna show and if that C. P. I. Reporter is moderating to the south side of the equation like it has been dropping that is that that will be a signal for the markets to maybe have a short term rally and maybe see a 50 basis point rise depending upon how far it drops. So if we see something under 6% that would be the best news we could hear. So what is your expectation? I do believe that inflation report is on deck for consumer prices next week, Jeffrey. How much do you think they're gonna rise by? Wow, that's a great question. Um I definitely know they're going to go below where they were in the prior report. I don't know how much, I think we keep trending down. I think the Fed has maybe two or three more rate increases left and then they're done without truly crushing the economy. As we see, you know, the housing market is now officially in a hard recession, that's going to get worse as mortgage rates continue to climb and there's less activity. That's 1/5 of the economy. The other 4/5 of the economy. Of course we're doing well. Uh participation participation rate is great and there's lots of reasons to be long in this market as we could potentially see a bottom to the market by december of this year. So you don't think we've actually hit a bottom? Is that right? You think we could actually fall beneath those mid june lows? I think there's a really good chance if we if we look at the historical averages despite this being a midterm election year, unless the Congress goes red in the fall and I'm being a political here, if they go red, I predict we will have a rally. Why is that? Well, I don't think we'll see any more policies were economically destabilizing to the economy and raising taxes in a recession area, the highest 15 year inflation environment, meaning absolutely no political sense as it stoked the fires of inflation. On top of that, this new inflation reduction act really was an inflation reduction act. That was code word or double speak for, let's get something passed and pretend it's going to do something for inflation. But all it really did want to aggravate the problem further and brought no relief to the average american who's suffering the greatest at the cost of this inflation and high energy prices, which fortunately have moderated down recently. It certainly was an interesting choice of words what to call that particular act and we've seen actually more inflationary pressures enter the market to of course massive student loan forgiveness, impacting more than 40 million americans, Jeffrey wiping away that debt, adding free money to the system as well, even though of course for many people it will be a positive for their financial picture. I'm just curious given the factors that we're discussing here, at what point do you think inflation can return to the Fed's 2% long term target? The inflationary component is not going to return to 2%, probably the earliest till mid-year next year, 2023. Once we see inventory start to rise and things like vehicles in real estate and intangibles that we buy at the stores, once we The pressure off. But that's gonna be really hard to press when everybody's got a job. Everyone's got a job right now. Labor force participation is going up, unemployment ticked up a little bit, earnings forecasts are going to be 2% less next year than they were this year. And so the economy is technically on fire. Um You could consider a goldilocks economy if interest rates were in line, but rates have to be of course increased to quell inflation, things are out of control. What do you think this means for the jobs market? And I asked because of course everyone needs and wants to support themselves and their families, but especially so heading into the holiday period. Right, what does this mean? Can the labor market holdup despite higher rates? I think the labor market is going to be fine. I don't think we're going to see plans for hiring like we've seen and most major corporations have decided to cut their hiring plans down significantly with a few announcing layoffs from upper management all the way down to the rank and file. And so for now though, it hasn't really impacted the numbers even though we saw a slight uptick and unemployment from the last employment report, Jeffrey, are there certain sectors of the stock market that you like that you would recommend that your clients or investors buy into right now and perhaps other sectors that you would stay away from? Well, I think the, the investment cohort that does the best in this type of environment. Our value stocks, stocks that have a really good dividend, uh, let's say between three and 5% that are under bought underweight to the price to earnings multiples of the market and they have brand names with good balance sheets and great management and the ability to grow That's a buffet is um, okay, we've all heard, But that cohort of investments is only down about 4% this year, year to date. So it's out before the market by 12 points. And so the other thing that we can look at besides value stocks are tech places have been beaten up. I don't think you get a chance to own Disney or meta or apple if these prices ever again after this year. Interesting. So for techniques in general, Jeffrey, I know you were mentioning a few there, but what about the tech sector as a whole? Do you think people can buy into the technology sector as a whole or would you caution against that? I would be very selective about what they pick in tech. I would highly recommend they avoid chips. Um, chips are under great duress right now with the chip market is kind of crazy in terms of the United States, uh, withholding chip productions being sent over to china um, and video recently take a big hit. I've heard a lot of comments on the major networks talking about buying video. I think video is, is stock is overvalued. Don't buy a video if you own it, you probably want to get out of it. They're gonna be more duress. We're gonna take a $400 million China. And all we did with the chip suspensions is emboldened Chinese competitors to fill the gap and I don't understand why we keep robbing Peter to pay Paul environments, but that's the current policies that we have. So chips, no technology in Google Apple Facebook Meta Disney, those kinds of things going on going forward. They've been too beaten up. All right, Jeffrey Small, president of Arbor Financial Jeffrey, thanks so much for coming on again in another day with a rally for the stock market