Insigneo CIO Ahmed Riesgo and Todd Sohn, Managing Director of Technical Strategy at Strategas, a Baird company, join Yahoo Finance Live to discuss the market outlook amid the Fed's interest rate hikes and recent employment data, and also talk about trading in volatile or recessionary periods.

Video Transcript

RACHELLE AKUFFO: Well, let's take a closer look at those border markets with our markets panel. Let's bring in Ahmed Riesgo, Insignia chief investment officer, and Todd Sohn, Strategas managing director of technical strategy. A big welcome to you both. So Ahmed, I first want to start with you, getting your reaction to where we are in terms of what we're seeing with this market rally. Obviously, this came off of the bad news that we got in the jobs market. So now we have another swing in the opposite direction.

AHMED RIESGO: Right, so really, I think the market's not going to be able to rally here in any sustainable way until we get a pivot from the Fed. And a pivot doesn't necessarily mean reduction in rate hikes. It also means a pause. And the jobs number today really did nothing to change that narrative or to push that timetable forward.

If anything, I think what we continue to see is continuing strength in that labor market. It's one of the reasons why the Fed has to continue to tighten. That labor market is still quite strong. Remember, there's still 1.6 workers for every job available out there. So there's a big moat around the US labor market.

SEANA SMITH: Todd, what do you think of that strong jobs number that we got out this morning, the fact that the unemployment rate continued to fall-- or fell once again, I should say. The reaction that we're seeing play out in the broader markets, does this big of a drop, do you think, makes sense?

TODD SOHN: I think what stands out most to me right now, for as much as we had strong participation in breadth earlier this week and some improving economic data, peaking inflation, perhaps, what hasn't changed is the very difficult macro backdrop, right? The dollar is starting to re-engage itself higher. The yen, after a monumental intervention by the Bank of Japan, hit fresh highs today, right? So the FX market continues to play the role of the villain here. You have the Fed that's intent on continuing to tighten.

And our risk parameters, such as discretionary versus staples-- I think this is the most important ratio right now for the market-- still is very inconclusive coming off the March 2020 lows. It was decisively in favor of risk-on for discretionary. It's a much different backdrop right now, as much as we're trying to hold on to the June lows. So that leaves us very skeptical, despite any sort of improving economic-- on the economic front, whether it's jobs or other data.

DAVE BRIGGS: Yeah, good news is bad news. Ahmed, how do you think the Fed reads today's jobs numbers?

AHMED RIESGO: Look, I think you see it in the Fed funds futures. They are basically now saying that there's a very high chance that the Fed hikes by 75 basis points at the next meeting, and then 50 and then 25 subsequently. So it's really kind of given back some of the reduction in Fed hiking expectations that kind of drove the market higher earlier this week. So really, I think it kind of leaves the Fed in the same position that it was at the last meeting, still data dependent.

Remember, we still have one more CPI print before the next meeting. I think that'll be the next big economic number to watch. And if we're going to see sort of any cracks, let's say, in the Fed's rhetoric so far, that could be potentially one spot where that could happen.

RACHELLE AKUFFO: And Todd, I want to ask you then, as you take a step back, where are you seeing, then, some of these funds flowing into? Some people have cash on the side. Others are wondering what to do. Where are you seeing investment flowing right now?

TODD SOHN: Yeah, I think the greatest asset for the market right now is sentiment. And right, when you look at third quarter sector ETF flows, it was decisively defensive. Utilities, staples, healthcare saw the most amount of inflows. Conversely, you had cyclical outflows from materials, industrials, and energy. And those defensive flows were also paired off with a surge into cash-like Treasury ETF.

Now part of that is because you're actually getting a yield on cash for the first time in what feels like ages, right? But you typically see these surge into cash-like flows during crisis moments, the China devaluation, COVID, the Fed tightening in 2018. And so I like that the sentiment backdrop is supportive, but it's hard to square that away with a very difficult macro backdrop.

Now, that being said, the outflows from energy are so amazing to me, despite the great performance, especially this week, for that sector. So if you're looking for someplace to hide where the flows are not aggressive, take a look at energy.

SEANA SMITH: Ahmed, a big story next week is going to be earnings season, in addition to that inflation print that we are waiting for, but big banks are set to kick it off this year. When we talk about the fact that we have seen a revision lower here and a number of estimates, have they been revised low enough? And I guess, what do you expect this round of earnings to tell us, just about the state of the economy right now?

AHMED RIESGO: I think more than anything right now, we're still working on the discount rate. We're still working on the multiple because the market hasn't really settled on that. You've seen a lot of volatility there. Earnings have come down quite a bit already. Now, I will tell you, we are projecting a mild recession in the United States over the next six months. And it seems to me that-- and this is something that your previous guest mentioned as well.

Sentiment and positioning are kind of pointing to limited losses from here in case of a mild recession. In that scenario, we would see the S&P trade anywhere from 3,400 to 3,600, which is just about where we are today, perhaps a little bit lower. But I think the market's downside is quite limited.

I think the only place or the only potential scenario where we see the market fall much further from here is in the case of a hard landing. And really, that would require, we think, a shock in top of what we already have right now, such as something emanating from the war in Ukraine, which we're obviously not positing right now as a base case.

DAVE BRIGGS: And Todd, your thoughts on trading sideways for the next couple of months and expectations for earnings, which get underway next week.

TODD SOHN: Yeah, I do think volatility is here to stay, right? You've seen that fixed vol. You've seen Treasury vol. I'm surprised that VIX is still roughly around 30. Perhaps there's some other hedging derivatives, whatnot, going on. But you typically need to see the VIX at least spike to 40 or 50 before it's all said and done.

I think, ultimately, you may need to see the S&P, especially if we're getting into recessionary territory, go back to somewhere around 3,300, right? Where the COVID-- pre-COVID highs were, right? A lot of stocks are already starting to test those levels, particularly in the real estate area, or even look at something like Meta is already below its COVID lows.

So you may ultimately need to see, from a structural perspective, the S&P test somewhere in the 3,300 area before it's all said and done. That's going to put us in rare territory and a greater than 30% decline. But it should prove to be a very strong buying opportunity, structurally speaking. It's rare air if you get down that low from a 52-week high.

RACHELLE AKUFFO: Well, certainly lots to keep an eye on for us and for the Fed as well. A big thank you to our market panel, Ahmed Riesgo and Todd Sohn. Thank you both.