U.S. stocks closed Wednesday's session higher after minutes released from the Federal Reserve's June meeting showed the central bank is likely to raise interest rates by 50 or 75 basis points at the July policy meeting. Sam Stovall, Chief Investment Strategist at CFRA Research, joined Cheddar News to discuss.

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U.S. Stocks Closed Higher After Release of Federal Reserve Meeting Minutes

joining us now is Sam Stovall, chief investment strategist at S at C F R. A research. And let me ask you, what is your reaction to how markets closed today, Do you think this is going to happen after those minutes were released? Well based on what the minutes said, I thought that we probably would not get much of a move. I was surprised by how strongly the markets advanced after the minutes were released. I think what they were reading in the notes was that while the Fed was unified in raising rates by 75 basis points at the last meeting, Maybe they were hedging to say that will raise by 75 or maybe 50 at the July meeting. And then, in a sense, they mentioned again, that should inflation be coming down more quickly than maybe the street is expecting that come the fall, that there's the prospect for a pause now, do you think for the July meeting, we'll see 50 or 75 given the current rate of inflation at this point, I think we'll see 75. 1st off, I think we're going to get a larger than expected rise in nonfarm payrolls on friday, we're looking for 310,000 versus the street estimate of 2 50. Of course, the 3 10 is within the range of of economists polled and our economists just feel that it's likely to be stronger than what the consensus is pointing at right now. And if you look to the the year on year percent change in headline CPI I we're looking for 8.7% which would be a high for this series. And so as a result, our belief is that the june reading of 86, which exceeded the 85 reading of March, it just continues to work its way higher. So maybe it'll be a peak. Um or maybe we have more carnage ahead now. Sam the Fed believes that it might be slim, but possible to have a soft landing when it comes to inflation. The two year, the two year and 10 year treasury yield curve remains inverted, which signals a recession is likely. And then there's some analysts say, open your eyes, look around, we're in a recession now. So what are your thoughts on the potential recession? And if we do have one, how bad could it get? Well, every time that we have had the year on year percent change in CPI I exceed the 6.5% level. Not only have we fallen into a bear market, but it's been accompanied by a recession. And these bears accompanied by recessions have been deeper and have lasted longer than bear markets not associated with recessions in particular, the average decline was 35% versus 27% and the duration was 15 months versus six months. Now, of course, these are averages and you have some that are longer, some that are shorter. Uh, So my my feeling is that, you know, if five out of five times, uh, this has happened in the past while it's not statistically significant, It, in a sense is a pattern you have to respect. So I would tend to say that because inflation is remaining stubbornly elevated. Um you know that we are likely to fall into recession and usually inverted yield curves precede recessions by an average of 14 months. So while we're not forecasting one for this year, Who knows what happens in 2023, how deep is this recession that we may see in 2023? I thought I was lucky just at least answering that we could have a recession with a bear market, let alone know how deep it's going to be that I really don't have a clue as to. But what you could say is there's a chance of a more shallow recession because first off, this is more of a service oriented economy than a manufacturing one. And second we still have people who are hungering for experiences rather than goods and so given the opportunity to travel should their flights not be canceled, etcetera. And with employment remaining fairly firm, I would tend to say that it would end up being a relatively shallow recession. Okay, now oil prices remain volatile as concerns about a recession around the world are over shadowing global supply concerns. So when do you expect oil prices to return to normal? Well, I guess it depends on what you regard as normal over the extended long term, You know, you're dealing at $40 a barrel. I think people would be very happy if it was below $100 a barrel. Our expectation is we could see oil trading in the mid nineties or a little bit lower fairly soon. You know, we've already been seeing W. T. I. Trading In the high 90s, so honestly no pun intended, but oil forecasts are pretty slippery and so as a result, the concern is that, you know, basically if we were to find that most of the oil price changes the result of a strengthening dollar, not necessarily supply disruptions or a dramatic reduction in demand, then we could end up seeing oil prices advanced once again. Alright, so mortgage rates dropped for a second week in a row, but demand for homes is still low as prices remain high and supply remains tight. And while the stock market is not directly related to mortgage rates, both are based on the basic movement of the economy, so which should investors and potential homeowners take away from this new data about mortgage rates? Well, I think the reason that people look at mortgages and home buying etcetera is because typically that is a family's largest investment um second would be their retirement fund etcetera. So people do tend to feel good with the wealth effect if their home is worth something. Those people who don't own a home who are trying to buy it for the first time are are feeling priced out. And so while the mortgage rates are high and the prices have also remained high. That makes it doubly difficult for them to actually purchase a home. Um, so you know, parents better fix up their basements because the kids are likely to be coming back. So are there any stocks or sectors you're focusing on specifically as his volatility continues? Well, what I like to do is look also at seasonals, momentum, its earnings forecasts, etcetera. And you know, as you know, we're in a midterm election year, which historically is the worst of the four, the third quarter of a midterm election year has by far the highest amount of volatility. So I would tend to say that even though the numbers have been green over the last couple of days that investors are gonna be gravitating still toward the defensive areas, consumer staples, healthcare, so areas like biotech and pharmaceutical as well as uh tobacco, uh, food packaged food products, etcetera. So pretty boring stuff for the third quarter. But should we end up getting that capitulation sell off as I think most technicians believe we are lacking to be able to call for a bear market bottom until we get that. Only then would I go for those groups that have been beaten up the most because they tend to bounce the highest. Now there's some analysts think the SP 500, this is the third session that it ended in pretty good shape. A lot of folks think that they could perhaps reach up to 4500 by the end of the year. What are your thoughts on that? Well, by the end of the year possibly, I mean, my feeling is that we would see the market bottom at least around 3500. That's being the S and P. 500 maybe even go down to 3200. But let's say it, it bottoms around the top level of 3500. History says that we are in a confirmed a new bull market on average, only three months later. So typically we see a 20% advance, so that would bring us to 4200 by the end of the year. Not too far from the number that you are suggesting. So the real question is, is this a bottom that we are trading off of or the bottom? And at this point, I'm simply saying it's a bottom, but probably the bottom is further out now, what are your expectations for the rest of the year, with the other major indexes? How long do you think the market's poor performance will continue? Well, I think the real question is, what's going to happen for second quarter earnings? And for forward guidance right now, the S and P 500 earnings are expected to be up about 5% versus the 6.3% anticipated as of March 31st we've been seeing a majority of sectors and two out of every three industries, uh see reduced earnings forecast for the second quarter. Um, So I would say, you know, be prepared for the numbers to come in lower than currently anticipated and at the same time, be prepared for company management to say, you know what, we're still having difficulties inflation, supply chains, strength of the dollar, etcetera, because Let's face it, almost 45% of the revenues from the S&P. Come from overseas operations. So if you have to translate those numbers into US dollars in a sense, every time the dollar goes up, you're earning that much less from overseas operations. Sam Stovall, chief investment strategist at C. F. R. A Research SAm your golden, thank you so much for coming on the show and sharing your expertise.