The Fed doesn’t ‘care about your 401(k),’ strategist says

Wells Fargo Securities Equity Strategist Anna Han and John McClain, Brandywine Global Portfolio Manager, join Yahoo Finance Live to talk about how markets closed on Wednesday, inflation, and what the Fed's next move will be.

Video Transcript

- And here is that song.

[MUSIC PLAYING]

- And that wraps up today's market action. All three of the major averages closing in the green like Jared was just saying. Dow closing at 436 points. S&P up nearly 2%. The NASDAQ, the outperformer of the three, up just over 2%, snapping that seven-day slide that we saw. Consumer discretionary utilities outperforming on a sector basis. Energy, the only sector closing in the red.

Let's talk about this with our markets guests. We want to bring on John McClain-- he is Brandywine Global Portfolio Manager-- and Anna Han, Wells Fargo Securities Equity Strategist. And let me start with you. Certainly, a rally today. At least Dow closing up just over 400 points. NASDAQ up around 2% snapping that seven-day slide. What's your big takeaway from some of the buying that we saw today?

JOHN MCCLAIN: I think the big story and driver here and has been for quite several months is yields. As you see, all yields kind of back off than equities can rise. And that's been the story and main driver. And a lot of the yield much higher has been driven by real yield and also some contagion from Europe. So I think that's been the main story and taking the headlines. But whether that remains the case, we'll see.

- All right, so, John, Jared just talked about this. The "Wall Street Journal" gets a little bit of a tip there. 75-point hike coming in a couple of weeks. Vice Chair Brainard says we're in this for as long as it takes to stop inflation. And yet, the markets rallied. Huh? What do you see?

JOHN MCCLAIN: Well, I think your last guest is exactly right here. It's yields going lower today, dollar weakness. That leads to equity markets moving higher. But the Fed has come out and said effectively-- look, they don't want the stock market to go higher. They don't actually care about your 401(k). And we need financial conditions to be tighter.

So good news is bad news, certainly, for the foreseeable future here. And I think they are laser focused on price stability here. And investors need to understand the cold hard truth, which is that global central banks since the GFC have come to the rescue of the markets. And now, they are substantial headwind to asset prices.

- John, but I'm curious--

- But I know the last time we--

- John, at seven day-- seven days, the NASDAQ was down. And then we get indication that the Fed is going to continue tightening. How does the NASDAQ-- how does the tech-heavy NASDAQ rally on higher rates?

JOHN MCCLAIN: Well, rates today are low, right? But in general, we don't look that much into intraday day-to-day types of movements. We think kind of longer term and how we're positioning our portfolios. And we think-- again, risk is skewed to the upside in terms of rates going higher. And so we would be fading any strength. So instead of buying dips, it's selling ribs at this point.

- And so, Anna, we know that last time when we were told that a 75-basis-point hike was essentially coming, markets were fine with it. But when they actually heard the hawkish tone from the Fed, a very different reaction. How do you expect that to be perhaps any different this time as we're already starting to have the Fed now talking about this 75 basis points but without some of the perhaps new ones that we're waiting on?

ANNA HAN: Yeah, and you bring up a great point. What's even more interesting is actually expectations for the next hike is a little shy of 75 basis points. There's still a camp that believes it could be 50. And I think something that's been encouraging that view has been the economic data we've been seeing lately. We are starting to see signs that some portions of inflation are coming off the boil. It helps as well when you're seeing equities are-- excuse me, the energy prices coming down from peak highs.

Now, again, that's not part of the core inflation measure. But it is something that impacts consumers' pockets. So when you put this picture together, it's really showing you that the market is worried about what we saying, that soft landing. When we have strong economic data, when we hear the not so bad story from corporate earnings, it gives us confidence that equities can weather through, even though the Fed wants to continue to hike.

And the Fed is not-- in my opinion, is not paying so much attention to equity levels and necessarily trying to stop equities from going higher but really toe the line between slowing inflation but not bringing the US economy into this deep recession. So finding that soft landing is really what equity investors are looking for signals for.

- John, what about the strong US dollar? Clearly a headwind here for a lot of these larger companies in the second half of the year-- of the year. How much of that risk has already been priced in?

JOHN MCCLAIN: Yeah, a decent amount of that risk is priced in. We do think that strength in the dollar will continue to overshoot a bit here. Because if you look across the globe between Europe, China, Japan, and the US, the US-- the Fed from the Central Bank perspective has the ability to inflict more pain on financial markets. And so we think that's going to lead to a bit of an overshoot on the strong dollar. But as Andrew was mentioning, look, you look at ISM, new export trending below 50 here. We're starting to see the pain translating through corporate earnings.

- And so, Anna, in terms of some of the international headwinds, obviously, the Fed can only do so much. Inflation can only come down so much on its own. What are some of the international headwinds that you think might be pressuring as we look ahead to earnings season?

ANNA HAN: I mean, the number one thing that we're watching is really the energy markets in Europe. The prices there is impacting, of course, domestic energy prices but more importantly is what happens with inflation in Europe. And when you see the chances of a recession for Europe to go into a deeper recession, that too is going to bleed over to US corporate earnings and US consumer spending. This all is connected. So that's the number one risk factor we're looking internationally.

But also sort of international related but more domestic focus is midterm elections. Some of the hot topics there is going to be what is the US's approach to China? And what is the outlook going to be for the next two years, if we get a change in controlling party in either the House or the Senate? Now, this too could put us in a gridlock. These are the kind of policy changes and the catalyst that we're looking at that can impact the US economics.

- Looking like a likelihood of divided government as the Democrats probably going to hang on to the Senate. John McClain and Anna Han, appreciate you both. Thanks so much.