Stocks rally as Evergrande fears fade

Tim Courtney, Exencial Wealth Advisors CIO, talks stock market rally following the Fed's comments on Wednesday.

Video transcript

- We've got Tim Courtney, Exencial Wealth Advisors CIO. And Tim, obviously we've been watching the bond yields really closely today as well. The 10 year climbing just a little higher, around 1.38 right now. What does it tell you about where the market is looking to in terms of the timeline for this tapering? In many ways, did the Fed kind of get it right in sort of dropping the hints ahead of this more clear statement that came out yesterday?

TIM COURTNEY: Yeah, I mean, I think obviously the market prefers more certainty. And the market knew this was coming. And really, the numbers I think on inflation and other growth numbers kind of forced this to happen probably sooner than maybe the Fed was planning on doing it.

But we've had this persistent inflation, you know, longer than the Fed had anticipated, at a higher rate than the Fed had anticipated. And I think it forced-- really forced it to come out with this language earlier.

But it probably does need to happen. Interest rates do need to be moving higher, I think, to reflect the growth that we're seeing in the economy and in prices. And you know, interest rates have had an outsized impact on the movement of markets really since the-- especially since the last quarter of last year.

As interest rates rose, you saw certain pieces of the market like smaller companies do better. And then as that started to reverse around the late first quarter of this year, you saw the opposite happen. You saw the large cap start to outperform.

So the interest rates are definitely swinging the markets probably more than they have historically. And I think it probably makes sense that this interest rate alignment comes in closer with what we're seeing the numbers on the economy and prices.

- And then, Tim, I mean, I guess when you look at the dot plot, obviously, they may have signaled tapering pretty well. I mean, Jay Powell has been trying to do so for months now. And we talk about his kind of expectations around inflation and what would be the right timeline. But the dots kind of moving forward here.

And back in June, you know, the median projection showed no rate hikes until 2023. And now you got an even split here in trying to figure out if that's going to come as soon as next year.

I mean, when you look at that, it sounded like Jay Powell was more dovish than kind of the committee members there, saying he wants a break between tapering and rate hikes. But I mean, how does that maybe impact things moving forward?

TIM COURTNEY: Yeah. I think as you've seen those dot plots-- and as you noted, you know, very few were showing interest rate increases next year. But each time that those have been released, you find more and more are looking at hikes and looking at hikes sooner.

So I think they've probably, you know-- they said they wanted to achieve inflation. I think they got that. And most of the members are seeing that it's probably time to, you know, probably reflect reality a little bit better and start to move the rates up.

And they also know that, you know, these rates have affected asset prices everywhere. We've seen those in the housing market, which looks like it's maybe starting to cool. But they're also-- in addition to wanting to get that growth and stimulate the economy, they've also seen asset prices move. And I think that's why you're seeing more and more of those dot plots move higher sooner.

- Tim, in many ways investors had kind of expected this, although the timeline was still in question. Yet, you've got a lot of investors who are today saying, look, what does this mean in terms of where I need to shift my focus for investments? What are some sectors or names that you're looking at right now that you think could-- maybe you'd want to add a little more exposure to in light of what we have gotten now in terms of messaging from the central bank?

TIM COURTNEY: Yeah. Yeah. I think at times like this where the market has run so far over a 16 to 18 month time period with no correction, and with-- you have tax talk, and there's lots of talk of regulatory changes coming-- I think it's prudent to remain diversified and own really all parts of the market. You want to-- I think you want to own growth pieces, value pieces, large pieces.

But the one area I think maybe this probably bodes well for the most would be some of the smaller companies and potentially some of the companies on the value side. They tended to outperform as rates moved up. They underperformed over the last several months as rates moved back down. But if we are looking at rates moving higher, I'd say you probably want to look at some small caps, which should do well under that environment. And plus, the earnings coming in from small caps has been very, very strong, setting records far above their previous highs.

So I think that might be a place where if you don't have exposure you want to add it. Maybe if you have some small cap exposure, maybe have a little bit more.

- Yeah, Tim, just lastly, I mean, when we talk about the wall of worry-- you know, a lot of people were waiting to see what was going to happen with the Fed. Obviously still a lot of question marks. I suppose in China we've heard from some people saying it's not a Lehman moment, though, and that's going to be contained over there. You never know, though.

So I'd be curious to hear your take in terms of, I guess-- you know, we saw the VIX now as we're showing on the screen come down below 20. What you think the senses are of moving past this September chop here and whether or not you think, you know, the risks as they were looked at just earlier this week waning now?

TIM COURTNEY: Yeah. Yeah. We did-- you're right. We did spike up above 20 on the VIX and now we're right back down under 20. I think our thinking is that the easy money has probably been made. We've had the market expecting a strong 2021. It happened. We got strong growth. We got great earnings. But-- and a lot of bad news or maybe less than ideal news was overlooked by the market over the last several months.

But we think moving forward there is likely-- we're going to have to earn our returns. We think they'll be positive, but that we're going to have to earn them, that volatility will likely be higher than what we've gotten used to over the last 18 months. And so I think probably the choppiness, which is more normal for markets to experience, I think that's probably here to stay for a while with all of the valuation expansion we've seen and all the additional questions like that you mentioned coming from China.

- Yeah, that choppiness something we've already got accustomed to in the first few weeks of this month. But Tim Courtney, Exencial Wealth Advisors CIO. Good to talk to you today. Appreciate--