The S&P 500 closed out its worst first-half performance in decades as disappointing economic data continued to dampen market sentiment. Several profit warnings also pressured stocks. Steve Sosnick, the chief strategist at Interactive Brokers, breaks down what to expect in the markets for the remainder of the year amid record inflation. "I think right now is everybody's hunkering down and that means consumer staples, that means that means that the type of stuff that you need to go out and buy regardless," he siad. "For the most part, people still do have money. The employment numbers are good. Most people were able to build up their savings and curb a lot of their debt during the last couple of years, which is great. But people are deciding to be a bit more cautious with their dollars and cents, and so I think you want to stick to the stuff that has lasting demand."

Opening Bell

What to Expect for Markets Amid Inflation After Brutal First Half of the Year

more insight in early morning trading activity. I'm joined by steve Sosnick, chief strategist at interactive brokers Steve It's been a rough year for the market year today. I mean, the S&P 500 just in this last month, that fell by 8.4% in June and 20% year to date. What is your take on the first half of this year? Is there any concern, you know, the Feds demand destruction really could send us into an even further selloff in the markets? Um Good morning Alicia, that's not the most rosy way to start the start the week start, we'll start the new quarter. But yeah, that's that's basically sums it up in a nutshell, essentially this year was this year reiterated the idea of don't fight the Fed for most of 2020 and 2021. You followed the Fed as they were Lowering rates and being relentlessly accommodative and that was one of the best periods of risk assets that we've ever seen essentially since 2009. The Fed has been almost relentlessly accommodative because there really hasn't been much inflation. The few times they haven't been, we've seen some hiccups. Well, this time, the Fed really needed to reverse course they pumped a lot of money into the system, inflation was coming through the Ukraine situation was certainly, you know, one of these exogenous outliers, um that made things worse, we were already shaping up to be to be in a situation where the Fed was going to need to fight inflation. They do that by raising rates and withdrawing some of their liquidity from the market place. That's never a good time for markets and that's why we saw this general trend toward risk off, you know, there's a lot of nuances in there. But the basic one is the money, the monetary pump stopped flowing. The Feds obvious inflation target is 2%. I don't think there's a single person out there that things the Fed will will hit 2%. I mean right now it seems to be on pace to hit closer to like 6% by the end of the year. We obviously know there's gonna be rate hikes at each meeting. Do you think, you know, given that 6% is still way off from that 2% threshold that an inter meeting hike, you know in August is what's gonna be needed to tame inflation. And do you think the Fed actually does that because it would be in line with a more hawkish stance. Um I'm gonna say no to the inter meeting hike. The reason there would be the Fed really doesn't like surprising markets. I think they, I think they kind of, you know, I hate to say the word lucked out but but I'm talking from a Fed governors point of view, I think they wanted to raise rates 75 at the last meeting and then the market sort of beat them to the punch. So they were able to do it. Um You know, bear in mind the Fed doesn't, yes, inflation is a monetary phenomenon at many levels, but the Fed doesn't control a lot of the things that are creating the inflation. You know, we're seeing it in non core factors such as food and energy, which is sort of outside the Fed's bailey wick to a certain extent. So I actually think that they're not going to necessarily do the sharper interest rate hike if they're going to be a bit more tough on inflation, I would expect to see them ramp up the quantitative tightening that they've announced. It's another one of these things, they're dipping their toe in about reducing their balance sheet. What they've been doing was buying, They've been buying bonds, mortgages, and government bonds, you know, at $90 billion 47.5 billion a month. But that's kind of a glacial pace for something that's grown so fast. So I think if we're going to see a surprise, it would be a surprise to have more aggressive quantitative tightening. That's also not a pleasant thing, mind you, but it would be a different characteristic than an interest rate hike to your point a moment ago. The Fed has not wanted to surprise the market, but that is truly led to a Fed that hasn't been trusted by the market and it certainly has been delayed because it's it's it's seemingly fearsome are fearful of the market's kind of reaction. I mean even I go back to transitory when the bed was talking about that and the market blocked it for for you know, even having the idea that that that inflation will be transitory and for the idea for such a long time. And the Fed came back afterwards and said, oh never mind about transitory and each step along the way for the last two years, it has just been late to the game to the point now where many out there are saying, listen, the Fed is late to the game on these rate hikes and now, you know, trying to have these more aggressive rate hikes only makes it more risky for us to dip into a recession. And now we've got talked this week more than than ever before about the fact that we may already be in a recession. Do you see the Fed at some point decoupling its concern from the markets and just doing what is needed to be done regardless of how the market reacts, given that we've already pulled back so dramatically. Well, you made some great points in that question, Alicia. Um Yeah, they've been slow and that's the problem is I think a lot of people recognized you know, six months ago that they needed to be, you know, instead of talking about transitory instead of talking slowly that we needed to be getting into actual action and that's why I say with the quantitative tightening, you know what they're dipping their toe, They've been so afraid of markets and and and and with good reason because over the last 13 years, the times they've tried to withdraw with liquidity or the times they've surprised the markets in any way, in a negative sense, it's been relatively disastrous. Well, guess what? They have to do it now. We need to take our medicine. The times they were doing it before was sort of preemptory sort of to reload the ammunition in case it was needed again right now what we need here most is some real action on on the inflation front. The problem now is markets are sussing out recession partially because of the, just the drag that that they're taking, you know, the slow drip here. Um you know, the the we had a negative GDP in the first quarter of negative 1.6, we, the Atlanta Fed now forecast for the second quarter is negative one that came out yesterday. So yeah, the N. B. The N. B. N. B. E. R. Um The group that officially declares recessions is a bit more nuanced, but the general and the general mindset, it's two negative quarters, Well, we may be looking at two negative quarters in hindsight. The Fed certainly raised rates during a bear market and maybe and may have ended up raising rates during recession. You only know that in hindsight, but that's a really tough period of time and that's why we're, that's why, you know, we're in the funk that we're in. You said a moment ago that I made some really good points in that question. I will tell you this yesterday, I was in a cab and those points that I made, I brought them up because I was having that conversation with my cab driver and those are the points that my cab driver was making just to show how transparent it seems. Um that the Fed's reaction has been so tied to the market maybe to the detriment of kind of the overall action that the Fed should have taken. Um That being said, let's dig into kind of the market a little bit more in terms of, you know, where the struggles are and where the opportunities are, where do you, where are you watching in terms of, you know, areas of the market that are gonna have longer than expected declines and where are you watching for incremental gains or signs of rebounds? Well, I think, you know, a lot, a lot depends on the labor picture of some of the big tech companies. I think a lot of them over expanded. You were talking about meta before. Um, and so I think they've got some headwinds, they're going to probably get into some cost cutting when you see companies doing that. Yes. You know, it's, I guess good for their bottom line, but not good for the economy and not telling a great story about the company. Um I think right now is everybody's hunkering down and that means consumer staples, that means that means that the type of stuff that you need to go out and buy regardless. For the most part, people still do have money most, you know, the employment numbers are good, most people were able to build up their savings and curb a lot of their debt during, during the last couple of years, which is great. Um and so you know, but but people are, people are deciding to be a bit more cautious with their dollars and cents and so I think you want to stick to the stuff that that has, you know, that has lasting demand. I'm going to say like a Procter and Gamble or Clorox something of that nature. Um or you know, or, and or companies that have a decent dividend, which by the way include a lot of those companies because if you have a company that pays a dividend and very importantly has the cash flow and the earnings to support that dividend that they don't need to go out and borrow to pay the dividend, but if they have the money on hand and the steady earnings to support a dividend that provides you a lot of ballast in a downward market and you know, as you go up um you know that you're still gonna, you've locked in that yield, so to speak really quickly before I let you go here, I just want to touch on china with you, obviously china coming, coming back online so to speak here. Can you just briefly talk about, you know, what that means for the energy sector, but also what it potentially means for investors, given that we've seen so much of a pullback, you know, around chinese related companies in chinese stocks, their opportunity there. Um china coming online is good for the world economy. Um you know, having them offline has been tough. Yeah, that that means it puts pressure on natural resources um but we've seen for example copper um completely in the dumps, thanks to the, you know, more or less china stopping, you know, stopping its real estate sector um In general, I think, you know, you need china has bailed china bailed us out a couple of times in the last few years, being sort of the one place that was growing when the rest of the world had been stagnant during various parts of the business cycle. So if they can come back online, I think that's good. Um you know, in the sense of easing supply chain portion of inflation, that's good in terms of commodity, you know, in terms of impacting commodity prices in a negative sense. Yeah, that's that's the price to pay. Unfortunately, All right, steve such great insight, steve Stosic chief strategist at interactive brokers. Thank you.