Stock market sentiment ‘all goes back to the Fed’: Strategist

John Hancock Investment Management Co-Chief Investment Strategist Matt Miskin joins Yahoo Finance Live to discuss the market after November's job report came out and amid Omicron fears.

Video transcript

JARED BLIKRE: And now we want to get back to the jobs discussion. We're going to bring in Matt Miskin. He is the John Hancock Investment Management co-chief investment strategist. And Matt, thank you for joining us here today. I want to start out with the headline payrolls miss. That number came in at 210,000. Wall Street was expecting 550,000.

But some of the other numbers were pretty good, including the unemployment rate. That is at 4.2% versus expectations of 4.5%, ticking down from 4.6% the previous month. That's a pretty big jump right there. And then we have the labor force participation rate. That's ticking up a little bit. And also, as you can see on your screen, average hourly wages, those are up 4.8%. So some pretty decent numbers despite that big headline miss. I'm just wondering what you're making of it right now.

MATT MISKIN: Yeah, so overall, a decent report. I think the headline miss, though, is suggesting that we still have further to go in terms of jobs recovery. Yes, more people are entering the labor force. That's a good sign in terms of the labor force participation rate. And that probably actually helped the unemployment rate coming down a bit because now that the base there is actually bigger and that actually helps that denominator.

But what we're looking at is that wasn't actually the biggest report in terms of the market driver today. The non-manufacturing report from the Institute of Supply Management came in a little bit after. And that's really what drove the market to turn. After the jobs report, the stock market actually, in terms of the S&P 500, rose after futures were down. And then the ISM non-manufacturing report came out. And that's when it rolled over.

And what we're seeing is a bit of this bad news is good news. And then good news is bad news. And it all goes back to the Fed, because if the Fed sees really good economic data and these business surveys are blowing out expectations, some of the best business surveys we've seen in 20 years, that suggest the Fed is going to be likely to tighten a bit sooner. And that's what I think jiggered the markets today.

KARINA MITCHELL: And Matt, I want to ask you, yields are a little bit flatter, particularly at the long end. What is that messaging about confidence in the economy to support rate hikes when they do come?

MATT MISKIN: Yeah, we don't think the Fed is going to be able to raise rates, given how little longer dated bond yields have risen. And in fact, because they've fallen so much, it doesn't give the Fed much room at all. They'll invert the yield curve if they're looking to raise rates several times into 2022. And so we actually think that the bond market is going to be pushing back on the Fed. And it's really, to your point about the omicron virus and really about how bad COVID has come back as of late.

And I think that is sapping the growth expectations that gets priced in to the longer end of the curve. The longer end of the curve is saying that growth is going to decelerate here because COVID is really becoming a bigger issue again. And so, you know, the Fed's got to be attentive to that. If they invert the yield curve, that has historically been a recession barometer or an indicator of a potential recession. And so they don't want to do that. So they're in this really tough position. But we think actually they're going to end up backpedaling as we go into next year on this tawkish tilt-- or hawkish tilt-- that they actually started to develop in the last couple of weeks.

JARED BLIKRE: And nevertheless, we're seeing huge inflation prints recently. And we're getting CPI a week from now. And I'm looking at the expectation, 6.7% annually. You take out food and energy, still 4.9%. These have got to be 30-year highs by my mark, maybe even longer. I'm just wondering, when does the pressure come off the inflation front?

MATT MISKIN: Yeah, we see it really coming down in the second quarter of next year. And that's where the base effects actually start to rise. So, you know, in the first quarter of this year, inflation was low. Inflation was pretty damp as it relates to the pandemic and everything, as these comps. But into the second quarter of next year, you're looking at 4% or 5% inflation. I think that's going to help inflation come down. We got some housing data this week that actually showed housing prices on a year over year basis, they're starting to come down a bit. So that's a good development. Shelter's a huge component in inflation calculation.

So if some of these things get peaky, we think they're going to actually show a bit of deceleration. But we started to see these supply chain disruptions come off. Now with COVID coming back, they might stay a bit more. It's a tough dynamic as it relates to inflation. But a couple of other good developments, commodity prices have come down as of late. So, gas prices, oil prices have come down. That should lead into or bleed into lower inflationary prints in the future. And overall, we think inflation does decelerate, but it might be another three, four, or five months before that really starts to show up in the data.

KARINA MITCHELL: And I want to ask you really quickly, what happens to value in growth trades next year?

MATT MISKIN: Yeah, so we've been more balanced in terms of both those positions into-- in 2021. What we've liked is, you know, certain sectors within each. Into next year, you know, we look at quality as a factor. That's part of the growth space. It's not all of it. But good quality companies that have strong balance sheets, good profit margins, those are kind of the companies we look at into next year. I think in the value space, some of the defensive parts of the market, such as healthcare, can be a compelling addition or bolt-on to that quality element.

But you've got to be increasingly selective. You've got to look for good earnings revisions. We don't think the market's going to be as strong in 2022 as it was in 2021. And so it's going to be about picking those companies that can drive results, and if anything, pull back some of that cyclicality, so that energy, materials, the financials part, we would trim that, redeploy that capital in good quality businesses into 2022.

JARED BLIKRE: Yeah, it sounds like it might be a stock picker's market next year. And we're going to have to leave it there. But thank you for stopping by, Matt Miskin, John Hancock Investment Management co-chief investment strategist.