eToro USA Investment Analyst Callie Cox joins Yahoo Finance Live to discuss how markets are digesting expectations for Fed rate hikes.

Video Transcript

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- Well, what is ailing the markets now, perhaps a case of Fed indigestion. And to dig into that theory, I want to bring in Yahoo Finance's chart master Jared Blikre to get a bit technical here, standing by with a special guest. Jared.

JARED BLIKRE: That's right. We've got Callie Cox. And Callie, you have a brand-new position. You are an investment analyst at eToro USA. So congratulations on that. But we want to get to the market here. We've been teasing enough. What do you mean the market has a case of Fed indigestion?

CALLIE COX: Well, Jared, take a look at the market and you can kind of see what I mean. Markets are having a little bit of trouble processing this idea that the Fed might hike rates once or more than once this year. Could be four times, based on Fed members. And it makes a lot of sense. Investors can feel the ground kind of shifting underneath their feet, and rate hikes do change the risk/reward equation a little bit.

So again, it makes sense that investors are really taking time to process it. We look at the market, though, and we see a market that's really chewing through this. But whenever we see a market processing moves ahead of time, we think that that could open up the door for more relief rallies once the Fed gets to the point where they actually hike rates.

JARED BLIKRE: Well, you brought along a couple of charts here, and I'll let you kind of just navigate the show here. What do you want to prove, or what do you want to demonstrate with some of this material?

CALLIE COX: Yeah, definitely. Well, Jared, I see you brought up the TINA chart. And TINA is actually-- There Is No Alternative, by the way, is what I'm talking about. TINA is actually one of the big concepts we're really stressing on this year, especially to our customers, because right now, the environment feels incredibly uncomfortable. And like, and yes, we are processing a Fed that is likely going to make some policy changes this year. But at the same time, there's a lot of cash on the sidelines and not a lot of places for it to go.

As you can see in the chart right here, if you look at the 10-year yield and adjust it for inflation, adjust it for CPI year-over-year growth, you're losing about 5.5% on average. And obviously, that's very unattractive, especially if you're looking for more growth-focused measures. So that's going to be a defining theme in the stock market, we believe. And we're kind of seeing it these days, too. Like yes, the headlines are scary, yes, you know, markets are processing this, but at the same time, we're seeing money come in and buy the dips, these relatively shallow dips.

JARED BLIKRE: Yeah, they're not buying bonds. We've seen that huge surge in bond yields. And it really kind of drives home this point that anybody in bonds right now is kind of losing their shirt. I want to head on to your next chart. This has to do with the Fed rate hikes schedule. Let me clear this. And we can see this goes back to 1971. We got that huge spike up to 20% in-- that was the short-term rate in 1980, 1981. And now, we've been at near zero since basically 2009. So what are we to make of this?

CALLIE COX: Yeah, well, what we're telling customers, too, is to really step back when it comes to the Fed and think about what the story is. Rate hikes are inherently a good story for the economy. It shows that the Fed is confident in economic growth, enough to ease up on the gas a little bit. And that's a great story for growth ahead.

The fear here, and a fear that we understand and we hear a lot about is the Fed losing control. And if you look at this chart, that's ultimately what's led to downturns in the past. The first few rate hikes that the Fed embarks on, especially if they're gradual, typically don't upend the market. In fact, the market hasn't gone through a bear market during the first few rate hikes of a cycle since the 1970s. And to me, that shows that, you know, as long as the Fed is gradual-- and we all know Powell's middle name is gradual, right-- as long as the Fed is gradual, measured and transparent on its policy changes, and really takes this economic growth and real-time data into account, then it should be able to guide the market, this market into the next phase of policy changes.

Of course, there is a risk of the Fed making a mistake here. There's always a risk. But again, this Fed regime is very gradual, and that's kept us very encouraged on the market this year.

JARED BLIKRE: Yeah, and before we go, we've got time for one more. I just want to highlight those retail numbers, retail sales numbers we got this morning. Real disappointment on that front. We also have earnings season. So how are you putting all of this together? The big banks today, but eventually we'll get to those retail names, too.

CALLIE COX: Yeah, well, the data was ugly today, not making it easy for the Fed. Retail sales was an especially ugly number. But we look at it and we see, you know, one print in a sea of really, really good prints. And retail sales, not to explain it away, but they are contending with the fact that there was a lot of pull-forward spending toward the end of last year with the fear around supply chain issues. So that could have been a number that could have been hard to quantify for economists. Big bank earnings also very messy.

Not a great start to earnings season, but we feel pretty encouraged on financials as long as the growth outlook looks good, especially considering consumers and corporates are kind of burning down on cash, and eventually they'll need to tap credit. And likely, they'll tap credit at banks. But overall, you know, not a great start to the earnings season. We think Wall Street is still underestimating companies. So hopefully, that comes to fruition because that would be great news for the market.

JARED BLIKRE: Yeah, and we are just at the beginning here, so a lot more to come. Callie, always great to see you here. Callie Cox, eToro USA investment analyst.