Fed has to be 'very careful' with rate cuts: Scott Zelniker

Welcome back This time now for the word on Wall Street top investors watching your money. Joining me right now is UBS Wealth Management Managing Director, Private Wealth Advisor and Portfolio Manager, Scott Zelnicker. Also with me this morning is Mark Tepper. Scott, thanks very much for joining us this morning and welcome to the program. Thanks. Thanks for having me. Yeah, I’m happy to. You’re joining the conversation As we talk about markets this morning and look at earnings as well as the Federal Reserve and its next move, take a look at futures. We got a rally in the Dow, up 180 right now largely due to some earnings news, United Healthcare rallying about 6 or 7%. That’s adding a huge amount of ground to the Dow. The NASDAQ is negative, although we’re here too, we’re off of the worst levels of the day. And I want you to comment on interest rates as well because the Federal Reserve Chairman, Jay Powell will be speaking this afternoon at 1:15 PM Eastern and the yield on the 10 year right now is 4.6%. The futures market is pricing in a 50% chance of an interest rate cut at the Fed’s July policy meeting. But I spoke with the founder and editor of Grants Interest Rate Observer on this program a couple of weeks ago. He was the first person to bring up this idea that we actually could see a hike in interest rates. We’re going to get a cut in interest rates. Here’s Jim Grant with me a couple of weeks ago here. Watch, you’re not expecting a cut in rates anytime soon. No, I they they they, well, they they might decide that that 3:00-ish is fine 3% inflation. Yes, it’s concerned over the inflation rate and to focus on financial stability as they would define it so. But however, I think there’s also a chance for you this year that that the Fed raises if they are confronted with an accelerating rate of inflation. They feel they have no choice. And who’s to say that the 3.2% thing couldn’t go up? We have an $80.00 oil price, no longer 70. Scott, I know you’ve been thinking that we would see higher for longer for some time. What are you telling clients now? Yeah, so back in 2022, we were telling clients the Fed was raising interest rates under the cover of a strong economy and that technology would lead us out of whatever market turmoil we had. That all turned out to be true. Early this year we were telling clients not to expect cuts. I mean, that was what everyone was calling for. And we even told clients don’t be shocked if rates go up 1/4 or 1/2 before the cycle was over. So what do you want to do then, Scott? I mean, look, look at the backdrop here. We’ve got oil prices this morning at around $85 a barrel. Israel is likely going to respond to Iran’s missile attack over the weekend. We could see actually a a response retaliation imminently. How does this geopolitical issue weigh into your outlook? And what about the price of oil, which of course is elevated going into their busy summer driving season. Yeah, well, it’s all interrelated. You know, the markets have had a good run. We, we feel like, you know, when you look through history, markets don’t go straight up. You’re going to have volatility in here and we like the markets long term oil, It’s really interesting, right. I mean I hate to use these words, but it was almost a relief that Iran’s attack on Israel played out the way it did. We were able to. Well, I say we, they were able to to really thwart any damage. And it’s out there. I mean, the Fed has to look at it, whether it’s the Fed or anyone else, right? There’s three types of risk, the risk you’re willing to take, the risk you’re not willing to take and the risk you don’t know you’re taking when the Fed is looking at all the data, they have to deal with things that they don’t know, but they do know that oil is out there and they’ve got to be very careful with rate cuts here. Their credibility is at risk. So do you think that we’ll see any rate cuts this year then data dependent, I mean I hate to sound like them, but data dependent. The job markets been strong and we we could sit here where we are for, for quite some time, that’s what that’s what I think Mark and and I think you’ve said this many times as well later on to this Mark Chepper, the earnings story, we have Bank of America reporting a double beat this morning. The major banks profits falling on lower customer interest payments. We’re waiting on Morgan Stanley which will be out any minute by the way. Bank of America down a fraction, Morgan Stanley up a fraction this morning. Mark, your thoughts on earnings, yes. So with regards to these banks, I mean, look, Ma has been strong whenever, whenever a business is able to enter into a potential acquisition opportunity and not be afraid of 9 to 12 months down the road after doing a bunch of due diligence, the cost of the acquisition going sky high because interest rates are going up. Obviously, the fact that it seems like interest rates will not go any higher, maybe at some point they go lower, that’s good for MA. Trading revenues were obviously up substantially. A lot of that probably fueled by the AI hype, Ozempic hype, the Bitcoin ETF’s coming online, like those were all big things that happened in the first quarter. And then obviously, the wealth management division market was up roughly 10% in the first quarter. Those, obviously, those revenues are going to track any movements in the market. So those are all the good things. The issue is obviously loan demand is softening, right? So, and I think that’s probably a combination of two things, #1. Interest rates are high, so it’s deterring businesses from wanting to take on additional debt. But number two, small business owners are incredibly pessimistic right now, like the small business optimism number that the NFIB rolls out every month, It’s actually below where it was at the depths of the pandemic. So small businesses are not optimistic and interest rates are incredibly high for them to go out and secure debt. Maria, we’ve been talking about the elephant in the room for well over a year now and that is obviously commercial real estate, right. A lot of these bigger banks have much less exposure. It’s this is normally a regional bank issue, but office vacancy rates are at an all time high. That’s certainly a potential issue. One of the things that’s working for these banks right now is that the borrowers and lenders are actually playing nice in the sandbox right now. And rather than the banks going down the path of telling these, these property owners, hey, we’re going to foreclose, they are extending mortgage terms for a few years to give these property owners a chance to try and get get back to even somehow, someway. So I think as long as they play nice in the sandbox that could mitigate some of those negative effects coming out of commercial real estate. Yeah, Scott, what about that? How are you allocating capital right now, Scott? Yeah. So we’re we’re doing some muni barbells, playing both sides of the rate curve. On the long end, if rates do come down, ultimately you’ll make money there on the short end. If rates go up, we’ll have the money, we’ll reinvest. We’re also starting to buy some small caps. You know, in our business, I’ve been doing this for 32 years. Sometimes you have to be wrong in the short run to be right for the long run. And I think you know you can start looking at an underperforming sector like small caps now. So small caps have been waiting to catch a bid now for a couple of months here and no luck. If we’re going into a period here where we seeing a further sell off in stocks, don’t small caps get hard hit harder than large caps? They they typically do. Remember my line here, right? Sometimes you have to be wrong in the short run to be right in the long run. If you go back to 2022, we were talking about technology leading us out of whatever funk we were in, right? The market was down 20%. If you remember they were talking about gluts and ships and we were explaining to our clients that no matter what comes out of the economy in the next wave, technology would be a leader. I think the same thing is going to hold true for small caps.