BMO Wealth Management U.S. Chief Investment Strategist Yung-Yu Ma joins Yahoo Finance Live to discuss seasonality trends, inflation, and how the Fed is affecting the markets.

Video Transcript

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- As you said, a lot to focus on for investors. Let's keep the market conversation going with Yung-Yu Ma, BMO Wealth Management US chief investment strategist. Good to talk to you today. As Jared pointed out, if you look at the historical context, we tend to see a bit of a spike after the Thanksgiving holiday. Investors have the holiday week to kind of catch their breath. But what are you looking at as we look ahead to year end?

YUNG-YU MA: Well, that is a regular trend that plays out on average. But I think this year is anything but a regular year. So we're not putting a tremendous amount of expectations on those patterns recurring.

But we are expecting that or looking forward to the next Fed meeting and thinking about some of the hawkish comments that have come out of the Fed recently and thinking that that's probably going to stay consistent in the December meeting that the Fed has. And that's probably going to provide somewhat of a headwind to the markets as they really emphasize that there's still a lot of work to do with inflation, that the mismatch between labor supply and labor demand is still extremely acute. And we think that messaging along, with the market really starting to shift its focus to what's the impact on companies and consumers of higher interest rates and how much of a slowdown will there actually be, that shift as well providing some headwinds to the market. So we expect it to be choppy going forward.

- You mentioned some of the hawkish comments that we've gotten from Fed officials. That seems to be counter to where we have seen sentiment in the markets move on the back of more recent economic data around inflation, the expectation being that things are starting to cool off. Potentially that could mean a cooling off of the rate hikes from the Fed as well. Can you talk a bit about the mismatch and where you think the market expectations should move?

YUNG-YU MA: The market has priced in a lot of optimism around those Fed changes. And some of it's warranted. Certainly inflation is coming down in certain areas. But it also looks sticky in certain areas. And the Fed is also going to really emphasize the labor market.

So I do think the expectations for a 50-basis-point or 1/2% increase in interest rates at the next Fed meeting, I think that makes a lot of sense. But the messaging that the Fed is close to being done and might pivot toward the middle or third quarter of next year is probably a bit too optimistic. And probably the base case is sort of a higher-for-longer scenario and really the impact of these higher interest rates continuing to be felt in the economy for a few quarters to come.

- Yeah, let's talk specific sectors right now in terms of what you're looking at in your portfolio. Energy a big loser on the day. Certainly there's concerns coming out of China, again, with reported deaths, the first time COVID-related deaths that we've seen in six months. What does the demand picture look like going into year end when you're looking at the energy space right now? And is this a space that you would add more exposure to, given some of the uncertainties not just out of China, but also out of expected sanctions out of Europe?

YUNG-YU MA: Well, certainly the China developments point to this being still a very challenging market, where we're still subject to shocks and new stories that come out. So that's certainly an aspect of it. But we should also keep in mind that in oil markets in particular that supply is still pretty tight in most areas. So we do think it's still somewhat of a two-way market. We think the energy sector overall is pretty well positioned here and that China, even though there is this short-term disruption, we do think that China is going to try to ease some of those restrictions in 2023 even more.

But it points to this not being an easy path that China has to get out of the zero-COVID policy. So that's a big determinant. I mean, China is such a huge consumer of commodity resources, of oil that that does have an impact. But we do think the markets overall are tight once the global economy comes more back into balance.

- Finally, in terms of broad themes for the portfolio, you say it's no longer TINA-- we're talking about there is no alternative-- but it is about TARA, there is a real alternative. What are you telling clients about yields, especially in the fixed income sector and whether, in fact, they should be moving their money in that direction?

YUNG-YU MA: Yeah, absolutely. There is a real alternative now that yields are really approaching levels we haven't seen in many years. And you can get pretty attractive mid-single digits, even high-single-digit yields in the fixed income space if you go out a little bit more on the credit spectrum. We think that's pretty attractive.

And we have been recently positioning client portfolios a little bit more into fixed income. Certainly it's been such a long time where, more than a decade where it was almost impossible to get reasonable returns out of fixed income. Now there's definitely an alternative and a very real alternative that clients really should pay attention to, even though it's uncommon because it's been so long that equities have really been the only source for getting more reasonable returns. Now fixed income really provides an extra boost in the portfolio that it hasn't for some time.

- Yeah, TARA over TINA. We'll keep that headline going. Yung-Yu MA, BMO Wealth Management US chief investment strategist, appreciate your time today.