2023 market recalibration process will ‘take a couple quarters to play out’: Strategist

BMO Wealth Management U.S. Chief Investment Strategist Yung-Yu Ma joins Yahoo Finance Live to discuss the recent relief rally in markets, potential overhangs, Fed rate hikes in 2023, and the upcoming earnings season.

Video Transcript

SEANA SMITH: It's great to see you again. So today's rally I guess a bit of good news here as we round out what has certainly been a very challenging year here for the markets. What does this signal to you in terms of what investors should expect as we look ahead to 2023?

YUNG-YU MA: Hi, Seana. Thanks for having me again. It is nice to have a bit of a relief rally toward the end of the year. It's been a tough year, obviously. I wouldn't read too much into today's action. There is a lot of pessimism out there. So I think that does set up the market for sort of a snap-back rally at any given time.

But we are in the heart of-- or approaching the heart of the time when we're going to get earnings warnings, and so that's going to cause an overhang in the markets until we get some more clarity and until the market can see some stabilization ahead.

JARED BLIKRE: Let me ask you about that because you noted something-- I'm reading your notes right here-- something that's happened in the past two quarters that centers around earnings season. I'm always interested in seasonality plays here.

YUNG-YU MA: Yeah, it's been interesting. Actually the past two quarters we've seen the market carve out a short-term bottom right about two weeks after the quarter end. So really right in the heart of those earnings warnings, the market had been declining and then stabilized as the market sort of sniffed out that the actual earnings might not be that bad.

So we think there's a high chance that this quarter could be a repeat of that same scenario where we struggle for a few more weeks, but as we get closer and closer to the actual earnings reporting, things actually don't seem so bad. So that's something-- a pattern to look forward to that's played out the last couple of quarters.

SEANA SMITH: So Yung-Yu, do you, I guess, look at that type of bounce-- potential bounce in the markets as a buying opportunity here for investors?

YUNG-YU MA: Well, we do think selloffs here are going to be buying opportunities, and that is based on our expectation of a soft landing in 2023. We do think the labor market will remain stable. We think that inflation is going to continue to come down. Consumers will see real wage gains, and corporations are not going to cut back all that much if spending is still pretty healthy in the economy.

We just think that recalibration process is going to take a couple of quarters to play out. So we do think that to the extent that we see some downturns in the equity markets over the next few months that those are probably going to be buying opportunities.

JARED BLIKRE: All right, you mentioned soft landing, so we've got to talk about the Fed. Big meeting end of January, early February, I believe. What are you expecting?

YUNG-YU MA: Well, the Fed has definitely signaled a difficult path ahead. We actually think the Fed is overly hawkish and overly negative in some of its projections in terms of higher inflation, slower growth, higher unemployment. We don't think that's actually going to come to pass in terms of unemployment shooting up as much as the Fed is expecting.

So in the coming meeting, we think the Fed will probably soften its tone a little bit if inflation continues to come down, as it has been-- the data has actually been reasonably good for inflation-- and if we see that the labor market, at least at the edges, is softening a bit, which we are seeing, a still healthy labor market but that's softening around the edges.

SEANA SMITH: So Yung-Yu, then how many more hikes do you think are likely on the table then before the Fed maybe pauses?

YUNG-YU MA: Maybe another 1/2%. We think that's probably par for the course. Perhaps 1/4% the next meeting, maybe 1/2%. But overall, we think the Fed is going to pause right around 5% in terms of the fed funds rate and hold it there for quite some time.

Could it be another 1/2%? Could it be another 3/4% on the upside if we get some negative inflation data? Both of those are possible, but right around 5% is where we see somewhat of a steady state for 2023.

JARED BLIKRE: And when we look inside the market, what are you looking at specifically in terms of sectors, styles? Any positions that you're interested or areas of the market you're interested in the new year?

YUNG-YU MA: Yeah, Jared, there definitely are. We actually think much of the plays that revolve around infrastructure have a lot of runway to them and a lot of legs. And that, of course, spans a few different sectors-- some areas of industrials, some areas of materials. But we have a lot of money that's going to flow into the economy from the Infrastructure Act, from the CHIPS Act, from the Inflation Reduction Act, and that's going to create-- you know, there are hundreds of billions of dollars of spending that are going to flow through the economy over the next few years, and we think that provides a nice runway for infrastructure.

We also think biotech is probably likely to have a good year. There have been a lot of major platform developments we think are going to continue to play out in the biotech sector. So we think that's actually an area of outperformance for 2023.

And I'd say a third area to pay attention to overall is just value. We think that value over growth has a long runway to it as well. So low P/E multiples, stable businesses returning cash flow or buying back shares, increasing their dividends, those areas of value that really look more stable we think have a nice trajectory to them as well.

SEANA SMITH: Yung-Yu, you mentioned earnings warnings. We certainly have seen the estimates lowered for 2023. When do you expect earnings to then stabilize potentially?

YUNG-YU MA: We do expect them to stabilize, and that's part of our soft-landing thesis. We think this recalibration probably has another quarter or two to go in terms of seeing pretty meaningful earnings cuts over this coming quarter and also the second quarter. But into the back half of the year, we think those earnings will stabilize, and we think the market will probably catch wind of that early in 2023. So we're expecting choppiness in the near term, but we expect-- our expectation of those stable earnings should filter through into a stable market in the coming months.