A Fed rate hike is not a ‘draconian kind of effort,’ the strategist said

Oppenheimer Chief Investment Strategist John Stoltzfus joins Yahoo Finance Live to discuss the earnings season, the effects of higher interest rates, the economy, job growth, tech stocks, and the outlook for the Fed .

Video Transcript

BRAD SMITH: Welcome back, everyone. Futures this morning pointing towards a mixed open. The NASDAQ in negative territory, just about there. All this while investors dug into disappointing tech earnings, which had a big impact on some corporate results here, while US GDP came in better than expected, with the US economy -posted its first period of positive growth for 2022.

However, things may not be as good as they seem. Joining us today, we have John Stoltzfus, who is the Oppenheimer chief investment strategist. Maybe we’ll start some of the profits coming in. From what you’ve seen, how does that kind of reach the rest of the income period for you?

JOHN STOLTZFUS: Well, thanks for joining me on the show. Really appreciate it. Always good to be on Yahoo Finance. First, we have to say, things are really better than expected. If we look at double-digit returns in terms of gains in– across the board– not in total, but rather, in terms of what’s been reported so far, with 227 companies out of 500 companies that have -report, you achieved triple digit revenue growth in energy and double digit in industrials, consumer discretionary, real estate, and utilities.

Now, of course, you have technology is in the red. Your finances are a bit low. And both tech and financials are slightly in the red right now. So what we’ve got to say is, overall, in a mixed bag kind of environment, what would expect, that’s what we’re getting.

So, you know, I think the effects of higher interest rates starting to slow the economy, that we have economic growth, as you just heard, in the third quarter. We have a slowdown, somewhat, in terms of consumer participation, but have shown stability, if not stability. And job growth continues to be remarkably resilient, even as some employers who overhired began making layoffs because they had a hiring panic.

JULIE HYMAN: Hey John, Julie is here. I’m trying to figure out, as I look at the tech landscape right now, we’ve had some notable busts, right? Meta is now clearly on the consumer and advertising side, but some of the others are missing out as well. I mean, Microsoft Enterprise spending should be better. Then you have ServiceNow, which is really great. So, like, how do you synthesize and think about the big picture when it comes to technology?

JOHN STOLTZFUS: Well, when it comes to technology, which happens to be one of our favorite sectors, what we’re looking at here, we’re looking for, because it’s so unfavored, what we want to look for are the companies that stay. is profitable, continues to have good cash flow, and pays some sort of dividend ideally.

So that’s really where, in technology, it’s the GARP-ier, or the Growth at Reasonable Price, technology area. We’re always looking for babies being thrown out with the bathwater here when investors get impatient on a quarter to quarter basis in that area. And we continue to like industrials, consumer discretionary, and we also like financials, where we think ultimately, we’ll get a rising yield curve on a more traditional basis.

BRIAN SOZZI: John, have investors been headfaked by a report, and others, I would say, like Caterpillar? You know, Julie was talking about the top of the show where the new home sales went down. But you have Caterpillar having a really strong quarter. Is it as good as it looks?

JOHN STOLTZFUS: Well, you know, I think what to do when you look at those, if I recall, the chart that you put out, it shows that there is strength in terms of energy areas. In a certain place, I think– that’s where we go. Thanks for showing this.

BRIAN SOZZI: That’s why we’re here.

JOHN STOLTZFUS: Resource industries–

BRIAN SOZZI: That’s why we’re here.

JOHN STOLTZFUS: –and construction. I mean, all these things, it depends on where you’re building and what you’re building to meet the needs. In terms of housing, you’re looking at a moderate slowdown, really, where interest rates have jumped since the beginning of the year in terms of mortgage rates.

But still, there’s this element of stability because the consumer has more money than anyone expected at this point with all these rate hikes. And it’s common for businesses to want to have enough employees in case things happen.

BRAD SMITH: John, how stable are those businesses if a recession or a real recession is felt, seen through business results, seen through consumer behavior, doesn’t start until mid-2023, as some economists expect, and will last until, what , 2024?

JOHN STOLTZFUS: Yes, we just don’t see it that dark. And we are– while we are strategists– on my team, we have an economist among us, and I work with economists. I have been in this business for 39 years. I can not believe. It’s been a long time. I didn’t start at age 12, but still, it was a long time ago.

But my point is, when we look at the economic data, what we see strikingly is the stability contained in it, as it relates to the consumer, where we see a relatively positive turnaround, albeit moderate, in the consumer. sentiment, and we’re just acknowledging the fact that employment numbers aren’t falling that much. And again, what we see when we see these layoffs, it tends to be in areas where employers are panicked about hiring coming out of the pandemic. And as a result of that, we can’t help but think that’s normal.

Economists, who are looking for a recession here, have to see that the NBER has changed its methodology a little bit because you have to see jobs actually fall, and you have to see consumer spending really roll. And that’s just not happening this time.

And it’s probably because there are elements of it that have been fixed because of what happened to the economy during the pandemic, all the stimulus, overstimulation, and now a Federal Reserve that, as it increases– how much money is worth, it really healthy. This is the end of free money. And free money has fueled speculation. But we don’t think it’s going to be a draconian kind of effort by the Fed in the end. We think it won’t be a Volcker, but more like a Bernanke.

JULIE HYMAN: And John, soon, what are the implications for when the Fed starts to loosen its current tightening?

JOHN STOLTZFUS: I think we’ll have to wait for that, Julie. I think it will happen next year. And we think what your– the words you used, we think, are really very important. I think it will be a winding down. I think they’re kind of a relief down the road, say, when it comes to slowing the pace of increases in their benchmark rate. I think we will get 75 bips.

I think it was pretty obvious that in November and December, it was almost— I think the market will be shocked at 50, but I think it can survive at 75. But I think if we go into next year, it is going to start trailing lower because I think the market just needs to feel that the Fed is having an impact on curbing inflation, not ending it, at this point in the process.

BRIAN SOZZI: John Stoltzfus, Oppenheimer chief investment strategist, always good to see you. We will talk to you soon.

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