Markets: ‘There is always a chance’ for a Santa Claus rally, strategist says

SEI Chief Investment Officer Jim Smigiel sits down with Yahoo Finance Live how November retail sales and the Fed's rate hike policy are reflected in the U.S. economy, the market outlook amid today's losses, and volatility heading into 2023.

Video Transcript

DAVE BRIGGS: Let's get you up to speed on the market moving retail sales report. Shoppers pulling back ahead of the holidays with the biggest dip in nearly a year. Retail spending declined 0.6% in November after an increase of 1.3% in October. That's according to the Commerce Department. Americans did spend less on cars, gas, clothes, sporting goods, electronics, while they continued to prioritize staples such as groceries and eating out. For more on this brutal Thursday in the markets, we're joined by SEI chief investment officer, Jim Smigiel. Jim, nice to see you, albeit on a brutal day. Nowhere to run, nowhere to hide. Is Jerome Powell driving this selloff?

JIM SMIGIEL: Good to see you as well, Dave. I think you're right. He certainly is, but the economic numbers are helping him out, as you just mentioned. The retail sales report this morning was, I think, had a little bit of extra oomph to it, given the surprisingly strong report from October. The narrative that the numbers are building is that the economy is clearly slowing. Inflation is clearly coming off.

And investors are trying to digest that with the rhetoric from Chair Powell yesterday, which is that we're nowhere near target. They're not giving any indication that they're interested in slowing down-- perhaps the pace, but no interest in taking the terminal rate of Fed funds any lower than, say, 5%.

SEANA SMITH: Jim, the extent, though, of today's selloff, any thought there that this might be overdone, and if not, any hope of a yearend rally? Is that pretty much out the window at this point?

JIM SMIGIEL: I don't think it's out the window. I mean, I think, again, this is the heightened volatility that we've seen. We're in this transition period. We have the lagged effect from the monetary policy that investors are trying to figure out how that's going to play itself out. The dual mandate and the confusion that the Fed is facing, I think the market is trying to digest as well weaker retail sales, higher Fed funds, and incredibly strong employment numbers even to today. Is there a chance for a Santa Claus rally? I think there always is, basic kind of animal spirits.

Is today overdone? Probably a little bit for a daily move. But the broader question is, what are we looking at into 2023? And we just have to talk earnings at that point, right? Are earnings estimates that are baked into the market at this stage, are they too optimistic? Do we have these wage pressures that are going to start to trickle their way through and start to eat at those margins a little bit? And that's what the market is trying to figure out.

DAVE BRIGGS: Do you expect further downward revisions in earnings, Jim?

JIM SMIGIEL: I have to say we do. Right now, they're about-- and they've been coming down. But right now, they're still around 5% to 6% fairly broadly. And we will take the under on that. The strength in the employment market is the key factor there. We think those wage gains are going to finally start coming out. We're at the end of the year. This is the time of year where a lot of those things in certain sectors are discussed, where a lot of those are implemented.

And I think we've seen decent earnings. We've seen some negative guidance. And it has kind of split along that angle that you mentioned earlier between goods, producers, and services. Airlines as an example doing fantastic. But broadly, 5% earnings growth in 2023, with everything that we see going on across the world, we find that a bit optimistic.

SEANA SMITH: So, Jim, what does all this mean, then, from an investment standpoint, just in terms of the uncertainty, the fact that you're saying it will likely remain volatile from here? Is it smart then to just stay on the sidelines?

JIM SMIGIEL: I don't know if it's smart to stay on the sidelines. These things are notoriously difficult to call on a short-term basis. It certainly means to stay diversified. That's something that I think investors just don't hear enough. Having a diversified exposure and true diversified exposure, making sure that you have your portfolio that's geared towards your objectives, and you have enough growth assets involved in the form of equities and perhaps credit, that you have some nominal exposure, that's going to give you some cushion in case there is a recession, and the Fed does have to pivot.

Inflationary sensitivity is something that we've been banging the table on for a few years now. We do think investors are still under allocated to it. The market is expecting a very, very big drop in inflation. We think that's going to come at a slower pace as well. And they would certainly benefit even today, if they haven't already, to get some inflation sensitivity into your portfolio.

DAVE BRIGGS: Yeah, full circle back to the Fed, as I'm searching for some good news, any good news, is it that the Fed appears to be winning this war, and we could be near the end of the tightening cycle?

JIM SMIGIEL: I think that's what to focus on. We are closer to the end, of course, than we are at the beginning. We're at 4.5% on top line. Most indications, even if you look at the very aggressive dot plots that came out yesterday, we're going to be getting over, say, just over 5% or so. The pace of slowing has already slowed. So we had four 75 basis point hikes in a row. We've downshifted to 50.

The one thing about Chair Powell's testimony yesterday at the press conference, he was definitely open to further downshifting. Could we move on now to 25? We think that's possible. We think that's possible as early as November. And that's a great way for the Fed to slow things down, take a step back, and let all of the hard work that they've already put in, recognizing that they were clearly behind the curve, but letting all of those rate hikes make their way through the economy, giving them time to adjust and be that kind of data dependent governing body that they claim to be.

SEANA SMITH: Jim Smigiel, always great to get your perspective. Thanks so much for joining us today.