Lael Brainard comments on reducing balance sheet ‘certainly lit the market up’: strategist

First Franklin Chief Market Strategist Brett Ewing and Quincy Krosby, LPL Financial Chief Equity Strategist, join Yahoo Finance Live to talk about the market outlook in relation to the Fed's interest rate hikes, inflation, earnings season forecasts, and investing against economic slowdowns.

Video transcript

- Here's the closing bell for today, Tuesday, April 5th. Take a listen.

[DING DING DING]

[MUSIC PLAYING]

DAVE BRIGGS: And with that, a whole new hour of "Yahoo Finance Live." We'll break down the market moves now. I'm Dave Briggs along with Rachelle Akuffo and Brad Smith. We'll bring in now our market panel to digest that as well as some comments from the Fed governor, Brett Ewing, First Franklin Chief Market Strategist, and Quincy Krosby, LPL Financial Chief Equity Strategist with us. Good to see you both. So Brett, let's talk about the news from the Fed governor, Lael Brainard, that they would reduce the balance sheet at a rapid pace. Is that what we're seeing a reaction to? Is it an overreaction?

BRETT EWING: Well, I think certainly markets can overreact in the short run. But look, where everyone's really waiting on the Fed minutes to come out tomorrow, so we can get a little more clarity on the committee and how they actually felt about the runoff, but, yes, she certainly lit the market up today with those comments.

DAVE BRIGGS: Quincy, want to get your reaction as well because this certainly outlines the FOMC's plan to unwind the balance sheet.

QUINCY KROSBY: Well, it does. And I think you know, if the minutes come out, remember, they're already old. If they are perhaps more quote unquote "market friendly," I would actually defer to Lael Brainard's comments, and Mary Daly, also who spoke today. The fact is the Fed has made it very clear, and I think Ms. Brainard mentioned, it's paramount that they go after inflation and do whatever it takes to staunch the rise of inflation and try to squeeze inflation out of the market.

It's paramount. They're going to do it. And I think the market is getting the sense that this is going to be a choppy patch for the markets. The Fed may go until it breaks something. We'll have to watch. But it's clear that this is their mission, and they are going to go ahead with it full steam, more than 2017, more than 2018. I think Lael Brainard pointed that out, too, in terms of the runoff from the balance sheet.

RACHELLE AKUFFO: And as we look at inflation, Brett, and we look at some of the cost pressures, at what point do we think that's going to be reflected in the earnings seasons.

BRETT EWING: Well, I think they brought earnings estimates down in the first quarter, a lot of uncertainty right there with all the inflation numbers ramping up and uncertainty of geopolitical tensions and with the Fed doing what they're doing. I'm expecting actually some of the earnings estimates over the next couple of quarters to start going back up a little bit from the lows here. It'll be interesting. We've got earnings season ahead, looking, I'm monitoring the topline numbers.

I want to see some revenue growth, continued revenue growth. Everyone knows margins are going to be compressed with the commodity spike, and all of the input costs going up. So that can get a little muddy right here. But again, we want to watch that top line number and see if there's any acceleration in the forward guidance.

DAVE BRIGGS: And Quincy, you said you expect the Fed to move ahead at full steam. Some are projecting two consecutive meetings of 50 point rate hikes. Is that what you expect?

QUINCY KROSBY: I think they're going to have a 50 basis point, either this meeting or the meeting after that. I think they want to get it going while they enjoy the strength of the labor market, because, after all, if they start getting too tight and the market feels that the Fed is not leading us to a soft landing, you're going to see the labor markets weaken as companies say, well, let's hold off or even let's let folks go. So I think they want to move while they have the benefit of a strong labor market.

So that makes me think that when she said today, you know what? We are going to move, it's going to be faster. It's going to be quicker, that perhaps 50 basis points is definitely on the table. But I think that they may just go ahead with it.

BRAD SMITH: There's also the international side of the market consideration, Brett. And when we think about that, going into this upcoming earnings season, what most closely are you going to be listening to from companies as they signal their forecasts and what type of impact they're anticipating?

BRETT EWING: Well, there's certainly a lot of international disruption with the war going on in Ukraine. And that's definitely going to impact some of the calls in their earnings. It's very disruptive over in Europe right now. Energy issues, food issues, that's going to trickle over into some of our international companies, no doubt about it. I wanted to go back, though, to a comment that we're talking about the Fed, and are they going to do 50 basis points.

I want to point out that it's very rare for the market-- there's over an 80% probability of a 50 basis point hike going into the May meeting. That's very rare. And I really do advise that the Fed takes advantage of that, where the market is overshooting their own forecast. I think they should definitely do the 50 basis points.

RACHELLE AKUFFO: So then Quincy, with that in mind, then, how should people be positioning their portfolios, since they do have a lot of this choppiness we're still seeing in the market, and also then waiting for what the Fed is going to do next?

QUINCY KROSBY: Well, you've seen the market adjust. You've seen consumer staples gaining investor interest. You've seen health care start to move up. The market is adjusting for this, and the market will continue to adjust for it. It's interesting, too, that yesterday, for example, you saw the leadership and technology do quite well. Today it's off.

The message from the Fed today is, don't think we're not prepared to do it. Don't think we're afraid to do it. We're going to, it's paramount. And that, I think, has made the market understand we are going to slow down a bit. But as we just heard, you know, companies are doing well, though we may see some revisions downward. But overall, companies are, in terms of their cash flow, their margins, they're still OK.

And Americans, by the way, have over $4 trillion in cash in the financial system, in banks. So it isn't as if the economy is heading towards an immediate recession, or softening immediately. But the fact is the market always looks ahead. And the market today has been responding to get more defensive.

DAVE BRIGGS: And Brett, given that aggressive stance from the Fed, does it create any opportunity for certain sectors? If so, what are they?

BRETT EWING: Yeah, some of the opportunities that we're looking at, really, is in the asset, the small to mid-cap corporations. And in particular, I've got a couple of individual stocks in the housing sector, or related to them, because I think that the market is just selling the sector off blindly. And they are throwing the baby out with the bathwater.

So, you know, two companies if I can, Floor & Decor and Alarm.com. I think the market's misunderstanding. These companies have been decimated here in the last four months. But the market really is not understanding the business models on their expansion, their TAM if you will, that tangible market that they can still expand into, going forward in the commercial space.

BRAD SMITH: Just to follow up on that very briefly, because when we think about how people, consumers right now, are trying to figure out if they are going to get an existing home, if they're going to get into a new home, when that new home might be delivered, all of these factors, at a time where consumers are increasingly placing or at least experiencing energy price pressures that may have them move off of some of that ability to purchase a home in this immediate term, what are you seeing in the data to suggest that some of the very companies, or even the asset type of plays within the home sector, are viable right now?

BRETT EWING: Well, I think that the housing sector is very strong. The fundamentals are there. Look, we've had over a 1% spike, I mean 30 year mortgage rates just hit the highest level today in over a decade, over 5% in fact. So that's a big move in a quick amount of time. And I think it's normal for the market on those stocks to react to that.

But let the dust settle here. I think that mortgage rates will settle back down going into the end of the year. And a lot of these companies have already been really sold off so badly, like Toll Brothers, for example, or Alarm.com or Floor & Decor, they're at the cheapest valuations that we've ever seen. And I think there are a lot of opportunities in some of those individual names.

RACHELLE AKUFFO: And Quincy, based on where we are in the value stocks versus growth stocks, where do you think we are on that curve, and when do you expect to see a rotation?

QUINCY KROSBY: Well, you know, you would have thought yesterday that the comeback of the growth stocks in tech, big tech is the major representative of that, at some point what we're going to see happen, because we always see it in a cycle in which there is going to be quite a bit of chop, is that as the economy slows, and, again, just softens, at least a little bit initially, we'll probably see the growth stocks, the interest will come back. There's been a tremendous mispricing, as we just heard alluding to the housing market.

But a tremendous mispricing across the market, as the market has had volatile days. The baby does get thrown out with the bathwater. And managers look for those names that have strong balance sheets, and look for an entrance.

So what will happen is that right now, we look for the value in the areas that are more defensive. But then they become more expensive. But then again, as the economy begins to slow, what you look for is a move into growth, because also what will happen is the Fed will finish the rate cycle.

And if they break something, guess what? They'll come in and lower rates, because that typically is the Fed's reaction. And the market will pick that up. And I think what we have to look for is the jobs market.

If that starts to slow in the material way, and if we start to see rather than adding jobs, but layoffs, the market will assume that the Fed understands they have broken something. And that will bring rates down and we'll start to grow again, and growth stocks really kick in.

RACHELLE AKUFFO: Certainly, you'll be keeping an eye on that. A big thank you to our market panel, Brett Ewing, First Franklin Chief Market Strategist, and Quincy Krosby, LPL Financial Chief Equity Strategist. Thank you both for your time this afternoon.