Fed may have to 'maintain course for credibility purposes': Strategist

Blanke Schein Wealth Management CIO Robert Schein and FWDBONDS Chief Economist Chris Rupkey join Yahoo Finance Live to weigh in on what the next moves from the Fed might be as fears of a recession continue growing.

Video transcript

INES FERRE: Here's the closing bell for today, October 5, Wednesday, at the New York Stock Exchange.

[MUSIC PLAYING]

[APPLAUSE]

[BELL]

SEANA SMITH: That does it for today's trading day. All three of the major averages giving back some of the recent gains. Dow closing off 41 points. Remember, though, went into the day up 1,500 points for the week. S&P up just around 2/10 of a percent. The NASDAQ the worst performer of the three, off just around a quarter of a percent. Energy by far the outperformer in today's market action. Lagging is utilities and real estate, both of those sectors off just about 2%.

For more on this, let's bring in Chris Rupkey, FWDBONDS chief economist. We also have Robert Schein, Blanke Schein Wealth Management chief investment officer. Chris, let me start with you. Just in terms of the news that we got out from energy from OPEC today, the cut in production, the impact that that's having on the energy market. What do you see that having-- I guess, how big of an impact do you see that having on the US economy here going forward?

CHRIS RUPKEY: Well, I mean, crude oil prices didn't go up all that much today. I think part of the problem was that the headline said 2 million barrels of cuts, which is greater than the actual cuts are going to be. I don't know. I mean, oil, when it was a worry, it was $1.30 back after Russia invaded Ukraine. We're nowhere near 1.30 right now. I don't think gasoline prices at the pump are going to go up all that much, especially if crude oil holds at this level.

So I don't-- the administration's got the biggest bang for their buck already. Gasoline prices were, what, $3.50 back when Russia invaded Ukraine. They went up to $5, came back down almost to 3.50. It's about 3.75 a gallon right now. I mean, that's about as good as you're going to get. And they were quite lucky in seeing gasoline prices at the pump coming down and helping in the inflation fight.

RACHELLE AKUFFO: And Robert, if we do continue to see perhaps these gas prices start to tick up once these oil prices start to [INAUDIBLE] as well, how much harder does this make the job for the Fed now and perhaps the hawkishness that we may see down the road?

ROBERT SCHEIN: Extremely difficult because inflation is everywhere. But the good news is we're seeing some signs of inflation moderating. And now we just need, as we have some economic data rolling over, we also want to look at the employment data. And the employment data, as we saw yesterday, was favorable with the JOLTS report. Job openings, that was down 10% or 1.1 million, which is-- it actually helps the Fed moving forward.

So tomorrow, the next day, we've got employment data that we'll be keeping a close eye, as well as the Fed. As far as the Federal Reserve, they have to stay hawkish, and they have to maintain their course for credibility purposes. So we could see the Fed continuing, at least in the course of jawboning their resolve.

DAVE BRIGGS: And Chris, we've got some data on the trade deficit. Your biggest takeaway from that and your expectation about the employment data coming Friday and how that may or may not shift the thinking of the Fed?

CHRIS RUPKEY: Yeah, the trade deficit is coming down. That's good for economic growth in the third quarter. In fact, it probably makes it for sure that exports are so strong right now that we're going to see probably 2% real growth in the third quarter coming up here. So that's good for the economy. I don't know what it does for the Fed. Obviously, the Fed would like to see the economy cool down even further.

In terms of jobs, I'm always hoping for a surprise number on the payroll jobs. It's amazing to me that it could still be 200,000 coming up, the consensus-- I don't have any disagreement with that-- on Friday. Why is it still running 200,000? Sometimes I think some of the seasonal factors coming out of the pandemic have screwed up the data. One thing the Fed is not going to like on Friday, I think the unemployment rate is going to do a U-turn. It went up from 3.5% to 3.7% a month ago. I think it's going to come back down to 3.5%. So they still got some more work to do.

SEANA SMITH: Robert, what do you think this all means for equities going forward? And I guess, what's it going to take for prices to stabilize from here?

ROBERT SCHEIN: Well, as we're seeing, a lot of volatility in the markets, both global markets as well as the US markets, and the one thing investors can be assured is to look at the third quarter earnings season, as we're embarking on it right now. If we look at the second quarter, we saw 75% of the S&P exceed expectations. We believe we will see much of the same. Earnings actually coming in better than anticipated. In fact, the bar is set super low.

But that being said, one of the key things in the transcript was the word "inflation." Over 5,000 times it was mentioned in the S&P 500. So that's going to be what we're looking at, is how these corporations are managing the energy costs, as well as the supply chain and everything else. And are they able to pass this on to the end consumer? We're going to see that play out and what the earnings reports are going to reveal.

RACHELLE AKUFFO: And Chris, what are your expectations for the consumer as they sort of try and hold on to what they're seeing with inflation, trying to at least look for some sort of green light at the end of the tunnel, but not quite seeing it just yet?

CHRIS RUPKEY: Well, it's cooled quite a bit. I mean, they don't have the $600 and $1,400 checks from early 2021 anymore. It looks like growth is going to cool consumer expenditures in real terms to 1%, coming up this quarter, in the fourth quarter of the year. That's good, but it's not a recession that the market's looking for.

The thing that worries me about consumer confidence, though, is we're starting to see signs of weakness and the stock market is spreading to the price of a roof over your head. That's never good. I mean, I haven't-- home prices, it looks like they've fallen now in July and August after going up month after month after month. That's not a good sign. It kind of reminds me of right before the housing bubble burst back in 2006, 2007. That could weigh on consumer confidence, going forward.

DAVE BRIGGS: Indeed. Robert, given the macro environment you've both laid out, where are the opportunities ahead?

ROBERT SCHEIN: Actually, if you're a fixed income investor, we're in the sweet spot for fixed income right now because patience was really coming to you. Earlier in the year, we had nothing. You were getting paid nothing on cash. And short-term equivalents right now, you're looking at 3 and 1/2% to 4% just to keep it safe, if you will. So for investors, we're taking advantage of that. But at the same time, we like energy once again-- energy, industrials, as well as materials moving forward. We believe that energy will continue to produce outsized returns in terms of profitability going forward.

RACHELLE AKUFFO: Well, a big thank you to our market panel there. Chris Rupkey and Robert Schein, thank you both so much this afternoon.