Deborah Cunningham, Federated Hermes CIO of Global Liquidity Markets, and Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Sr. Portfolio Manager, assess the market outlook amid Fed rate hikes, inflation, and losses in the stock market.

Video Transcript

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SEANA SMITH: And that wraps up today's trading action here. Taking a look at all three of the major averages ending to the downside, the NASDAQ off at just over 1%, S&P off 7/10 of a percent, DOW off 93 points. In terms of the sector action that Jared was just walking us through, energy, by far, the worst performer in today's trading, off just around 2%. We're also looking at losses from technology, real estate, and consumer discretionary.

Let's talk about the recent market action and what we could expect going forward. For that, we want to bring in Deborah Cunningham, Federated Hermes Chief Investment Officer of Global Liquidity Markets, and Andrew Slimmon, Morgan Stanley Investment Management Senior Portfolio Manager.

Andrew, let me start with you just in terms of the downside, I guess, risk playing out in the market today. Once again, we are looking at losses. We saw a bit of optimism going back to a week ago today and what we saw in trading action last Tuesday. How do you think things shake out from here between now and the end of the year?

ANDREW SLIMMON: Well, I think near term, you have a very tough competitive situation for equities, which is there's uncertainty about inflation. There's uncertainty about the Fed. And there's uncertainty about earning. And on the meantime, you can go out and buy a 2-year Treasury at 4.3%.

So it's tough for stocks to really do well when assuredness of short-term yield curve looks pretty good. Later this year, if we get better inflation prints, I think it's a better situation for equities. But I think it's tough near term. That continues to weigh on the market.

RACHELLE AKUFFO: And, Deborah, as you mentioned some of that Fed uncertainty, to what degree has the Fed contributed to a lot of the uncertainty about, really, the path ahead that investors are now concerned about?

DEBORAH CUNNINGHAM: Well, certainly I agree that inflation is ruling the roost from a standpoint of what the Fed's actions are. I think, to some degree, they were very late in the game in the context of sticking with their thought that this was transitory, you know, until, really, just a year ago, the fourth quarter of 2021. So what you now have is a Fed, I think, that's continuing to play catch up.

And people look at mortgage rates and they say, oh my goodness, they've doubled and how are people-- what is this going to do to the housing market? Or they look at short-term interest rates and say just what we just heard, 4.3% for very short-term government risk. Yet when you look at something other than the last 10 to 12 years since the financial crisis, I mean, that was sort of more the norm from an interest rate perspective with inflation much less than it is today. So we got used to something with a low inflationary rate and, to some degree, a zero premium over that low inflation rate that just is not continuing now. And we don't really see an end to it in the near term.

So, you know, I think the Fed is in unison, whether it's Chair Powell, whether it's the governors, whether it's the other voting members of the FOMC, they're in unison saying this is our chief concern, and we are going to continue to battle this by increasing rates and releasing bonds off the balance sheet, both ways trying to quantitatively tighten, as well as with monetary policy tightening from an interest rate standpoint. Don't really see an end to that at this red-hot moment.

DAVID BRIGGS: They're hoping for a good CPI print on Thursday. Andrew, Hurricane Jamie Dimon out with his latest that in six to nine months, the Fed will tip us into recession, that Europe's already there, but that the markets have another 20% to fall. Your thoughts?

ANDREW SLIMMON: Well, I mean, this has been the story all year as the economy has proven to be stronger than what people expected. But in the future, it's going to weaken. I mean, you could have played that six months ago, with all due respect.

So I think the real question is, will it come to fruition? If it does not, stocks will recover. I can't imagine that the tightening that the Fed's done and will continue to do will not affect the stock market at some point. But the key point, and maybe this is where stock picking acts as management can add a lot of alpha, is there are so many stocks down 40%, 50%, 60% that they're already reflecting a recession.

I understand the S&P isn't at the cap-weighted index, and that's because there's a few big stocks that are only down 20% or less. But there are a lot of stocks that already reflect a recession. So I don't see that as tremendous downside for most stocks, could be for the S&P cap-weighted.

SEANA SMITH: Deborah, what do you think-- I guess, how do you think this sets us up heading into earnings season? We're going to start hearing from the big banks later this week. And then, of course, we'll get a lot of those larger tech names over the next couple of weeks. When it comes to the surging dollar, the uncertainty when it comes to the Fed, I guess, how do you see that impacting this round of earnings?

DEBORAH CUNNINGHAM: You know, it's been-- we've been surprised quarter after quarter with earnings that we thought were going to soften, we thought were going to turn down. And, in fact, they have held out very nicely. So I think that goes to-- you know, from a banking perspective when you're talking about JP Morgan, Citibank, you know, they're large global entities with lots of diversification that is working in their favor during this challenging time from an economic perspective.

But that can only hold out for so long. So our expectations continues to be, heading into the fourth quarter, that we're going to see impact on earnings, which ultimately then has a broader effect in the context of the finances of the issuers themselves.

RACHELLE AKUFFO: And, Andrew, in this environment, you say we buy fear and sell greed. What does that mean in terms of the investment strategy right now?

ANDREW SLIMMON: Well, I mean, the only consistency to my business, right, is the emotional element that brought the equity prices. Things swing to extreme. And I think about, really, the last-- since COVID, there's been a few extreme opportunities. One was buying the travel and leisure stock right into the midst of the pandemic when they priced as if no one was ever going to leave their house.

And then energy futures went negative, and, boy, oh boy, now everyone loves energy. And then fast-forward today, I think the fear is consumer sentiment is at an all-time low. And those create buying opportunities to buy quality companies in those sectors that have been unduly hit. But I don't think it's going to be tomorrow, but consumer sentiment is going to improve. But as I said before, a lot of consumer discretionary stocks are already priced in a recession.

So if, in fact, we do see some improvement, those stocks could have a lot of upside. I think greed, the flip side, is, look, energy went from negative, no one liked it. Now it's close to $90 a barrel, and it seems to be the number one error.

I don't say this is the top. I just think that there's more upside in other areas as that area has garnered and attracted a lot of money. So selling fears all-- I'm sorry-- buying fears always provide upside with the right time frame more than trying to get involved with a group that's very crowded.