Earnings season will bring ‘a dash of reality’ to markets: Analyst

OANDA Market Analyst Craig Erlam appears on Yahoo Finance Live to talk about what investors should look out for in crypto, tech stocks, and markets more broadly after the Fed minutes were released.

Video transcript

- All right. Let's stay on the markets here and bring in Craig Earlham, a Oanda senior market analyst. Craig, nice to talk with you this morning here. We were just looking at the ongoing route in tech stocks, really, across the board. Software names, biotech, you name it. Do you think this is the start of a broader stock market correction?

CRAIG ERLAM: I'm not necessarily convinced. I think one thing that's always clear around this time of year is that we can't always read too heavily into it. I've worked in the markets for many years now. And it always seems that every January is doom and gloom and every December is Santa rally euphoria. And it feels like we're very much in similar territory now. Of course, the late December rally we saw in the stock markets was driven by the fact that we were seeing signs that omicron wasn't quite as dangerous as feared. So I think a lot of that late on in the month was potentially welcomed.

But I think what we're seeing right now-- we've not had any new data. What the Fed said in the minutes wasn't entirely surprising. Talk of balance sheet reduction. Fine. That caught people a little bit off guard. But does it warrant the kind of route that we're seeing currently? Probably not. This is probably a little bit of early year positioning, post-December recovery, and I'm struggling to read too heavily into it. That doesn't mean that tech is going to have another year like 2020 or 2021. But I don't think we're in for a massive stock market correction either.

- Craig, so you're buying tech stocks here?

CRAIG ERLAM: Not necessarily right now. I think as long as we are seeing this kind of move currently, then it doesn't mean the next day, week, whatever can't still be negative. Like, say, January I find as a whole to be a pretty obscure month. So I'm not necessarily saying jump straight back in now. But I think over the course of this year things will start to look a lot better. And I think reading too much into the first month of the year is always a dangerous thing.

- Hey, Craig. It's Julie here. So all of that said, what are you going to be watching this month to let you know what the more sustainable movement is going to be? I mean, obviously we have jobs tomorrow. Beyond that-- not necessarily data wise, but also what movements in the market will you be looking for to see if the route is going to continue, for example?

CRAIG ERLAM: Yeah. So I think the first thing is always just time. I think markets sometimes need time to settle. So like, say, two or three weeks I think is always just gives the markets a little bit of time to settle. And I also think a lot of rationality tends to come back around earnings season. And we've got earnings season starting in a couple of weeks time. And I think that's when people will start to get a better grasp, or at least start to maybe look at these markets through a more rational lens. And we could start to see a bit of normality return for the markets, welcome normality.

The next couple of weeks may just be a little bit volatile and unstable in the interim. Like, say, we seem to have gone from doom and gloom of omicron to euphoria and back to remembering what we were talking about before. Prior to omicron, it was all about inflation and interest rates. And it's almost like that's crept up on us once more.

It's not crept up on anyone. It's just come straight back into the fore. It's a problem that hadn't gone away. It had just been moved into the background. It is going to remain a problem in the opening parts of this year. But once you start to see the inflation situation hopefully improving over the course of the year, then I think that will improve quite dramatically. What we need right now is a dash of reality. And I think earnings season will bring that.

- Well, Craig, do you think the Fed will bring that dose of reality? A lot of folks we're talking to right now suggest that the Fed may be more aggressive than the market thinks in raising interest rates to fight off inflation. How concerned are you about what the Fed might do this year?

CRAIG ERLAM: I'm not concerned about the Fed. I think they've made a good move. I think the move that came in December was warranted. And I think it was something the market wanted a few weeks before the Fed made that move. Jerome Powell was telling everyone that inflation is still transitory and that almost we just need to be patient. And that created more of a stir in the markets than what the Fed has done right now. That was because people were feeling that the Fed wasn't going to do anything and allow inflation to get out of control is a bigger fear.

The fact the Fed is now talking about stepping up to the plate and raising interest rates, maybe even slightly trimming the balance sheet, although I think that may be a little bit premature, and I don't think they'll react to that quite as quickly as people are fearing, that is a positive move. I don't see the Fed as being a big headwind for the markets. In fact, the recent shift I think is being more positive and more sustainable.

- All right. Craig Erlam, Oanda senior market analyst. Good to talk with you this morning. We'll check back with you soon. And I do want to mention quickly too this ongoing move in the 10-year yield. 10-year yields have now hit their highest level since January 2020. And I can't help but to think about some of the things we've talked earlier this week with DoubleLines' Jeffrey Gundlach, was really locked in on this move higher and what it might mean to markets more broadly and telling us, in fact, that he's starting to worry about a potential recession beginning later this year and continuing into early 2023, in part because of these rising yields and what's going on in the bond market.