Oil prices sliding today and concerns over demand disruption.
Shanghai issuing new lockdowns due to a rise in COVID-19 cases,
the oil price dip may ease inflation fears in the market,
at least temporarily. But does it also mean an economic slowdown could be coming?
Let's bring in Tony Dwyer,
Canaccord Genuity chief market strategist Tony Great to see you.
It's been a while, you say that.
The markets are like scaredy cats.
I mean, I'm those are my words,
but they're overestimating certain fears at this point.
Well, I think the biggest fear that it's over estimating at this point is the 210 flattening or the five year to 30 year.
And I understand why we use that.
It is very useful at times,
but I think the most important thing we could talk about is why do we use the yield curve?
Because it measures the difference between what a bank or lending institution gets its money at,
what they have to pay versus what they charge or invest it at that spread is how much money they make.
So the real thrust of the banks or lending institutions liquidity.
Has come from deposits so since February of 2020 there has been actually 4.75 trillion trillion dollars put into commercial bank deposits,
so we're using the three month and five year.
The average duration according to the Barclays Aggregate Index is about 6 1/2 years,
so we're measuring what the banks are getting their money at.
That deposit rate three month versus what their lending it or investing it at.
And that's steepened. So the fear is definitely there.
Asia seems to be a mess with more lockdowns.
Europe is heading toward a recession,
if not in one because of a once in a generation ground war there and the US is being affected by higher rates.
So it certainly is slowing down.
But we don't look for a recession because that yield curve that's driving the lending is still very positive.
Tony, it's Karen. Thanks for coming on.
Do
you think that? How well do you think
the yield curve are changed?
Depending on what the Fed does?
If we see 50 let's say the next two meetings,
this already priced in, is it not?
What do you think?
I I think it's priced in right at this point.
Everybody's talking about so many rate hikes.
Karen, when we look back at the only time that there's been this divergences that I can find this kind of divergences in the 2:10 yield curve versus the three
month five year yield curve was 1994 when Alan Greenspan was so fearful of of inflation that they hiked rates seven times in a row.
Two of them were 50 basis points and then there was a 75.
They doubled rates. The market acted.
Similarly, in that you had a 10%
crunch in the beginning of the year,
a lot of choppiness around the end of the first quarter rallied into August,
almost to a new high,
and then that slower economic backdrop hit it again toward December.
So it retested the low.
And then you didn't look back for four years.
So I think we're in this environment.
We've called it tumultuous there.
There's no question inflation is high,
rates are going higher, the feds in a box,
no matter the slowdown, they've got to raise rates.
So Tony,
it's Steve good to be with you,
so when you when you look at this I used to remember you saying that whatever does your rate inversion that you're looking at it only signaled the recession maybe
18 to 24 months later in the market usually moves up about 15%
between then and the actual recession.
Recessions are normal, healthy and natural.
Your words when you look at what Chairman Powell is doing right now.
Do you think he is just?
Being extremely hawkish with his rhetoric and where where the balance sheet reductions is actually going to be another rate hike so that he's front loading so the market can
catch up and the back end of this he's going to come out and be a lot more dovish than his rhetoric would assume.
Well, I I think that's going to ultimately be the case,
Steve, because the feds in a box.
They have two mandates, inflation and employment.
There's no world in the next couple of months where they get better in terms of inflation.
So the Fed is looking at this data.
Remember, the data can change you and the Fed could change pretty quickly.
Just remember 5 months ago,
not five years ago, five months ago,
the Fed said that there will be a very long lag between when they stop adding to the balance sheet and when they do the initial.
Rate hike, well, unless that means 5 minutes that changed so five months from now,
it's hard to say that your that your scenario,
Steve doesn't play itself out for now.
the Fed has to sound hawkish,
they have to control inflation expectations which were well anchored until a few weeks ago when I find interesting is going back to to Mel's comments and what you guys
were talking about earlier the the the market seemed to be almost pricing in a recession trade because the.
Tap the areas that should do the best with higher rates have been lagging in the areas that are doing that should do the worst.
The Fang stocks. The Mega cap valuation names they're doing better.
It's interesting if you look at the New York Fang index.
I was looking at this on Bloomberg today.
The 10 day rate of change is never been higher on the Fang index,
outperforming the S&P 500. That's in a higher rate environment.
That tells me the markets beginning going back to Karen's point,
it's beginning to potentially price in some form of a recession.
That's what happens in this kind of transition of monetary policy and economic activity.
Tony, great to see you,
thanks.
Thanks Mel, see you guys
can a court Mike is that the message of the markets in your view?
Well, I would say that at any point of uncertainty one of the things that you should be looking for is idiosyncratic growth.
You know the tech names have represented that.
I I don't know about names like Netflix necessarily,
which is part of Fang.
But the G in there is definitely appealing to me.
You know, Alphabet, I don't see any reason why people aren't piling into that.
I mean, I, I think that's still down as I looked at today's close,
I think it's off maybe 150 basis points on the year and Amazon just ticked into the green but.
You know to me of those two,
I would much favor being an alphabet.
I mean, you know if you're thinking to yourself,
what do I want to be in Adam market multiple?
How about solid and idiosyncratic growth?
And that's what it represents.
Yeah, I agree on that.
And I on Google. I also think Netflix is 0.9 PEG ratio.
Again, that's price to earnings growth is is is the same price really as Google it?
It's actually particularly cheap and and I also think that we're now back to down 5%
off the all time. Lies in the middle of an aggressive Fed hike and I think markets have climbed that wall of worry.
I think it's a lot what's going on.
We all know our sentiment was three weeks ago.
We all know that we've now moved 12%
higher on NASDAQ stocks. So the question is,
we always get a a multiple correction in a tightening cycle,
typically two turns or more.
We certainly had gotten that as of where we were a few weeks ago.
I do think you're in a case and there's a chart out there.
I don't if we have it out there,
but Goldman had a report talking about buyback activity and again in an environment.
Where you have, you know less opportunity for growth and or companies that actually are concerned about the volatility environment they are buying about stocks,
Goldman says. They're gonna buy back 319 billion in stocks this year,
which would be an all time record.