John Hancock Investment Management Co-Chief Investment Strategist Matt Miskin joins Yahoo Finance Live to discuss the last month in markets, Fed policy, and where investors should make allocations in their portfolios.
BRAD SMITH: Also here, let's talk about more of this data with John Hancock Investment Management's Co-Chief Investment Strategist Matt Miskin. He joins us now in studio. Great to see you live in living color, Matt.
MATT MISKIN: Yeah, thanks for having me.
BRAD SMITH: Absolutely. All right, so we've been diving into some of this economic data, particularly on the employment front and the employment situation, all morning. When you think about what could potentially show up once we get the jobs report reading, what would you be keeping a close eye on?
MATT MISKIN: Yeah, we still think we're gonna get a decent jobs report on Friday. This is coincident data. The leading data shows a slowdown ahead. We're not in a recession yet, though. And I think that's why the markets are holding up as well as they are.
And globally, it's been a risk-on month. I mean, November has been an incredible risk-on month. We're not in a recession yet. We do see that developing into next year. The jobs market has been the strongest point of this economy. Still doing the heavy lifting, as it relates to this data this morning.
BRIAN SOZZI: For this cycle have the lows been hit, in terms of, let's say, the S&P 500?
MATT MISKIN: We don't believe so. So the yield curve is inverted, the leading indicators are negative. Earnings estimates are only down 2% to 3% off the peak. We think earnings have downside in the next year. That's gonna bring down equity prices. Multiples are expanding here. It's all been a multiple expansion story, meaning price-to-earnings ratio has gone up a lot as of late. We think that's gotta come back down.
So we'd be patient here. We're not a recession yet. But if we do go into next year with one, we think prices are gonna hit lower lows.
JULIE HYMAN: We're, of course, going to hear from Jay Powell later today. Everybody's gonna be paying attention to what he has to say. Not just about the economic data but anything about the path of future rate hikes.
You bring up an interesting note in your note to us, which is that we talk all about how much are they gonna raise by. What about QT? We kind of forgot about QT. That's still going on, the shrinking of the balance sheet. So what effect is that still having and is the market appropriately pricing that in?
MATT MISKIN: We don't believe so. And that's probably the most underappreciated element of this market right now, in our view, is that November was the most tightening this economy has seen in decades because you had $95 billion come off the balance sheet and a 75 basis point rate hike.
Monetary policy works with a lag. So all this is happening real time and risk assets are rallying, this is all gonna be felt more next year. You were talking about housing, housing's already weak. That's already started taking it on the chin.
That's still gonna be filtering in into next year as mortgage rates are still elevated. And, you know, employment picture, while it's good now, what if that de-- what if you start hearing more and more of layoffs going into next year? That's gonna weaken housing. So we think that this has a lag. This is gonna show up more so in the next year with the QT.
JULIE HYMAN: Well, but that's why some economists, some strategists, Elon Musk, have been calling for the Fed to slow down, in part, because of this idea of the lag. But the Fed's not listening.
MATT MISKIN: No.
JULIE HYMAN: I mean, should they be? Are they-- are they making a big mistake here?
MATT MISKIN: They always do. And--
Like, I mean, that's the one predictable thing is that they always, you know, go overboard in times of tightening into the end of it. Inflation is a lagging indicator. It's the most lagging indicator. And they're targeting that.
That's gonna have-- it's gonna take time for that to show up in the next year. But they're gonna tighten right into it. And, you know, it's an unfortunate development but we think Powell is gonna stick to the strip-- script, be very hawkish today.
We are gonna see probably a 50 basis point rate hike at the end of the year. Maybe another one or two. But then we think they're gonna basically need to reverse course quickly into 2023 and be cutting pretty significantly.
BRIAN SOZZI: Matt, if the person, the average investor, they have been down on stocks all year. I mean, it's been a tough year for them. How should they be looking to build back their wealth next year?
MATT MISKIN: Yeah, so what we're looking at is bonds right now, stocks next year. So in terms of bonds, they're down, you know, 14%, 15% this year. That was one of the worst years of the bond market in history. Yields are now looking at 5%, 6% on investment grade bonds. And they're trading at $0.90 on the dollar, $0.85 on the dollar. So you've got price appreciation potential and income.
Stocks, we would wait. We think they're gonna get cheaper next year. And that's when we would actually allocate more into equities, dollar cost average into that. Build your wealth there.
But for now, just get income. Get paid to wait. And let this kind of, you know, the cycle move forward, move through the recession. And then re-allocate to risk assets and equities more specifically.
JULIE HYMAN: You know, you've been saying the bond thing all year. And now everybody else is also saying that.
MATT MISKIN: Oh, geez.
JULIE HYMAN: I mean, everyone we were talking to is now finally saying fixed income.
MATT MISKIN: Really?
JULIE HYMAN: You've been-- you-- at John Hancock, you guys have been talking about fixed income this year. It hasn't worked out so well. And so it's interesting that now you're talking about after when we get into 2023, you should start to pivot back to stocks.
MATT MISKIN: Right. Yeah, I mean, it's been a tough year. I mean, historic. It's a three standard deviation move in the bond market. So if you look back in history and you're like, all right, what's the worst-case scenario? This is the worst-case scenario. So it has been a tough year for bonds.
But again, the price to par, you know, if you go back to-- if these bonds don't default, you go back to par so you get price return. And then now we're getting 5% to 6% in income.
And you know, I mean, we were kind of neutral on stocks, bonds. Right now, we're tilting a little bit more towards bonds as we go into the end of the year. I didn't see this massive risk on rally on a re-opening rumor that really hasn't materialized in China. European equities are rallying so significantly here on, what I thought was gonna to be a tougher winter and just weaker growth out of Europe.
But when we look at this-- and again, it's all multiple expansion. So we would trim that, re-allocate into higher quality income-producing assets. And again, get paid to wait.
BRAD SMITH: You mentioned cuts a moment ago as the pivot versus a pause as the pivot from the Fed. So how far in advance would the markets really kind of latch on to that and price that in as well?
MATT MISKIN: Well, you could argue it already started. You know, I mean, the three-month tenure, or the three-month T-bill, or the Fed funds rate versus the 10-year, massively inverted. I mean, we're talking the most inversion since 1980.
And so in a way, the market is saying, yeah, we're pricing in some cuts. They are pricing in a cut in September and December of 2023 already. But they're just saying that two cuts of 25 basis points, that's all we need, we're out of a recession. And that's just never happened. The Fed has never done two cuts after going 75, 75, 75, and been done. So we think actually they're gonna have to do more cuts as a result of that. And that's not priced in.
BRAD SMITH: How does that hit on the credibility of the Fed then, too?
MATT MISKIN: Oh my God. The Fed-- the Fed credibility problem is wide-ranging right now. I mean, they're just going around in circles. I mean, you go back at the beginning of this year, what they thought was gonna happen, it's complete 180. But now, they're saying the complete opposite.
So it's just like a pendulum. One second, you know, they're saying inflation is transitory. Don't worry about it, we're gonna do one rate hike. Now, we're not gonna cut. We're not-- you know, inflation is gonna be around for a long time and we're not gonna cut. You just got to pivot-- you know, you've got to basically play the other side of that, push against some of that narrative. And we think that's opening up a greater opportunity in the bond market today.
BRIAN SOZZI: Great perspective as always. John Hancock Investment Management's Co-Chief Investment Strategist, always good to see you. We'll talk to you soon.
MATT MISKIN: Thanks for having--