Eddie Ghabour, KeyAdvisors Group Co-Founder and author of "Common Sense Bull," sits down with Yahoo Finance Live to talk about the bond market, the Fed, interest rate hikes, the 2022 market outlook, consumer staples, and earnings guidance.
ALEXIS CHRISTOPHOROUS: Yeah, definitely the action in the bond market. We don't say that too often, right? But it looks like investors continuing to sell those government bonds in anticipation of the Fed raising interest rates next month. And as we know, bond yields rise when prices fall. So here you have it-- the 10-year yield now closing in on 2%, folks. 1.96% right now. Some are even calling for a 3% yield by the end of this year. The yield on the 30-year at 2.26%.
Let's take a look now at the stock market. Because after struggling to find direction this morning, it seems investors have found it, and that direction is up. We've got the Dow now at its best level of the day, up about 343 points. The S&P adding more than 30 and the NASDAQ composite now up 139 points after being lower for most of the day. In addition to those earnings you mentioned, Karina, we're also going to hear from Disney this week and Uber, so lots of big names still to come.
Financials, materials, and tech leading the way higher. Just two sectors in the S&P 500 pulling back. That is energy and real estate. Just one more note on bonds. The 10-year yield on course for its highest closing level since 2019. So definitely, the action happening there in the bond market today, Karina.
- All right, Alexis. And let's keep it on the markets. Bring in our next guest, Eddie Ghabour, Key Advisors Group, author of "Common Sense Bull." Eddie, great to have you here. Just want to get your reaction first to the 10-year breaking out, touching 1.96. What is the bond market telling us?
EDDIE GHABOUR: Look, I think the bond market is letting you know that higher rates are here in regards to what direction the Fed is going to go into. We think it'll probably hit 2%, which probably isn't a crazy call at this point in time. But we are a little bit under consensus in regards to the direction of the 10-year. We think once it hits 2%-- or potentially hits 2%, that is-- that once the Fed starts raising rates, that the 10-year bond rate will actually go down.
I know that's not consensus, but that's because we believe that the rate of change on GDP is going to be slowing down at a pretty rapid pace. And the bond market is usually forward-looking in regards to that. So we think once the Fed starts going into that more tightening mode, that the 10-year bond will probably stop going up or have less upside in our opinion. And then the path of least resistance will be down.
- So when do you see it hitting 2%? Do you see that sometime in March?
EDDIE GHABOUR: Well, that's where we think the Fed is going to start raising rates. I think that's pretty much consensus. And I think that they're going to raise rates. So I would assume by March when you hit that 2% level, or maybe even by the end of this month-- because again, the bond is forward-looking. And then again, I think you're going to see the 10-year bond rate actually go down, which won't be good for financials. So financials are doing well right now because of the 10-year. I think that's going to be short lived.
- So now, I know when you in November, you said the Fed had to accelerate its tightening. But I want to ask you, how much room does the Fed actually have to hike rates? Because usually, that happens when you're going into a growth period. We're going into a period of deceleration. So is there a risk that the Fed is going to be too aggressive?
EDDIE GHABOUR: There's a huge risk to that. And that's why, in November when I was on your show, I was talking about that was our biggest fear for 2022. And now they put themselves in a lose-lose situation. I know there's a lot of people out there saying they're going to raise rates five times, six times. I've even heard some crazy calls of seven and eight. There is no way, in my opinion, this market can handle more than two rate hikes, let alone four or five.
If they do four rate hikes in 2022 when this economy is slowing down at the rate that it's going to slow down, then a 15% correction will look like recess. And we will wish that it's only 15%. Because if we get that, then I would look for the indexes to be at minimum 20% to 25% down.
- How healthy is the consumer right? Now because CPI comes out on Thursday expecting a consensus handle of 7.3%. So people are shelling out more to get the goods that they want, but real wages are actually lower. So how long does the consumer keep paying these prices before they have to put their hands up?
EDDIE GHABOUR: Well, that's our concern. This is why we feel like it's going to be very hard for this economy to do nothing but slow down at a rapid pace-- because again, the consumer's been holding on as long as they. Had a lot of extra cash last year. I mean, their balance sheets are healthy. But look, let's face it-- when you look at food costs, you look at housing costs, rents, everything, fuel-- this consumer is in a really tough spot. And again, when you're tightening during that slowdown, it's usually when you have a lot of problems. And that's what we're faced with here these first six months.
- So JPMorgan is saying for people who are investing, that right now, one should be tilting towards value and international stocks. What do you say to your clients?
EDDIE GHABOUR: So we've actually gone full defense. Starting in November when I was on your show, we started doing that rotation. We've been buying utilities, consumer staples. We put gold into portfolios for the first time a few weeks ago when it was under $1,800. We have a little bit of health care exposure. That's, in our opinion-- and cash-- that, in our opinion, is where investors need to be because those areas have a tendency to hold up better in a slowdown. So you want a boring portfolio right now, and that's why we're playing defense. I think gold could perform extremely well here in this environment.
- And what are you most looking for as far as earnings season? I know Peloton is reporting after the bell. A lot of people want to see what happens there. Do you think that the markets are shaken up by what comes out of Peloton today? And then just as far as earnings season more broadly, what are you looking most closely at? Is it the margins?
EDDIE GHABOUR: So there's a couple of things. The number one thing that we really want to take a look at is forward guidance. We know earnings should be pretty good because of the fourth quarter. Last year was one of the best quarters that we've had. So that should be strong. It's the guidance moving forward. And in regards to revenue growth, we think they're going to be decelerating. And moving forward, we think the outlook is not going to be very positive.
And so investors, in our opinion, need to play defense going into the second quarter because second-quarter comps are going to be even harder than first-quarter comps to beat from an earnings standpoint. So it's going to be a very challenging market for high-risk assets.
- OK. We will leave it there. Eddie Ghabour, Key Advisors Group and author of "The Common Sense Bull," thanks for your perspective today.