Eddie Ghabour, founder of KeyAdvisors Group and author of "Common Sense Bull", joins Yahoo Finance Live to share his insight on the market's momentum, the increase in rates, and the Fed.
- We want to keep it on markets and bring in our next guest, Eddie Ghabour from KeyAdvisors Group and also the author of "Common Sense Bull." Eddie, thanks so much for being with us. Happy new year to you. I want to start by getting your reaction to what we're seeing in the markets today and ask you, what is the relationship that you see between the bond market and equities at this point, particularly given sort of higher yields? I want to know when do those nominal higher yields become a problem for equities and valuation. Is that what we're seeing a little bit of today?
EDDIE GHABOUR: So I think this spike in rates here actually is a head fake. I expect a 10-year yield to actually trend lower from here. Today, I think what you're seeing is why you're seeing the NASDAQ really sell off is because of these interest rates spiking the way they have. I mean, make no mistake. It's been a big move. The yield's spread has widened, that's why the financials are doing strong in the cyclicals are doing strong.
However, I think that's going to be very short-term because, for the first time in a while, my outlook for the market is not very rosy for those riskier asset classes. Because I think we're going to be heading into a slowdown economically here over the next couple of quarters. And you have a Fed that's going to be tightening into that slowdown. So because of that, I think you're going to start see rates kind of top out, maybe here, or a little bit higher, and start to trend downward again.
So this increase in rates doesn't concern me at all. I think it's going to be short-lived. The bigger concern I have right now is the fact that a lot of investors are still carrying a tremendous amount of risk heading into a year that's going to be unprecedented when the Fed is tightening during a slowdown. It usually is not a good recipe for high-risk assets.
- So Eddie, I mean, I'm going to challenge you a little bit on that interest rate talk because you've got interest rates going up at the short end. They're going down at the long end. Does that flattening of the yield curve signal a recession to you? And do you believe that the Federal Reserve is really the biggest risk to this market and to this red hot rally we've been experiencing for years now in 2022?
EDDIE GHABOUR: Look, I don't think-- I think it's a combination of two things. I don't think there's any question that the Fed is the biggest risk because they've put themselves in a lose-lose situation. They have to tighten. And they've said they're going to tighten because of the inflation that's not going to be going away. Wages aren't going down. Food prices, in my opinion, aren't going down. And shelter is not going down. So other things may come down, but those three components really impact everyday investors.
And if you tighten during a slowdown, historically speaking, that's one of the worst equations to risk assets, your higher beta plays, which is why we've been rotating into more defensive plays. So normally, if the yield curve starts to flatten, of course, that's not a good sign. But a lot of times, the Fed is what actually drives us into a recession because they have to do that in order to tame inflation.
So I don't see any way around them having to tighten. And I also don't see any way around the fact that GDP is going to slow down because there's less government spending, they didn't pass that bill in December, and the consumer is going to have less discretionary income in 2022 than they did in '21 just because of the fact that there's no stimulus checks and the cost of living has increased significantly.
- And so then what are you advising your clients? How do they now rebalance their portfolio to put them in a safe position? And do they start taking some of that risk off the table you mentioned going more into defensive?
EDDIE GHABOUR: So the sectors that we like, we actually bought more health care today on the down day. Real estate, that's tied to rents, is probably our favorite sector for 2022. Because of the appreciation of house values, it is priced a lot of people out of being able to afford houses. So you're going to see rents really accelerate on a rate of change perspective. So that's wonderful for certain types of REITs.
We like consumer staples. We're also going to be adding to utilities. And lastly, we haven't put this position on yet, it's probably going to be something we do in February or maybe late January. But we're going to start adding gold to the portfolios. I think the name of the game to win this year, at least the first six months, is to play defense. You can still do OK, but in my opinion, it's crazy to be way out there on the risk spectrum when you're heading into unprecedented territory where the Fed is having to unwind the balance sheet, the size that no one alive has ever seen.
- Of course, Eddie, hindsight's 2020, but do you believe the Fed waited too long and is now behind the curve when it comes to inflation? And since a recession is defined as two quarters of negative growth, GDP growth, when do you think that recession is going to hit?
EDDIE GHABOUR: So I do think, to answer the first part, I do think the Fed was a little bit late. Unfortunately, the right time to tighten is when things are accelerating and the market can take it. And they continue to kick the can down the road. And now, they're going to tighten when the markets potentially at its highest level. We've seen peak GDP. And so that's why I say they're going to put themselves in a tough spot where they're going to be tightening during a slowdown.
Now, I don't think we're going to have a recession this year. I think the soonest we'll see a recession will be sometime next year. But remember, the stock market is not the economy. And so you can still have an economy that's holding up fine, but a stock market that's not as healthy, just like last year. We were in a tough spot economically, and the market continued to be very resilient and go up.
I think we're going to see the opposite happen in 2022, where you see a decent economy. It's slowing down but not in a recession. But you're going to have a market that certain asset classes are going to be extremely challenged.
- Yeah, it is a challenging time ahead, for sure. OK. We will leave it there. Eddie Ghabour, KeyAdvisors Group, and also author of the "Common Sense Bull," thank you for stopping by today.