The Fed's bar to hike rates is 'impossibly high': Scott Ladner

Welcome back and it’s time now for the word on Wall Street. Top investors watching your money. Join me right now is Horizon Investments Chief investment officer, Scott Ladner. Also with us is Chris McMahon. Great to see you, Scott. Thanks for joining the conversation. And Chris, I want to kick things off with you with a nice rally underway this morning for stocks. Take a look down industrials up almost 200 points this morning. The NASDAQ off of the highs of the morning, but nonetheless up 95 right now. Verizon just reporting its quarterly earnings. We’ve got a busy week of earnings. Verizon reported a beat on earnings, but it missed on revenue. The stock is higher this morning. It did post lower than expected wireless subscribers for the quarter, but the stock is up better than 3%. And this week we’ve got earnings from big Tech, Tesla, Meta, Alphabet, Microsoft. Tesla cut prices on three of its models in the US, including the top selling electric vehicle, $2000 cut from their respective price tags, cut price tags. Chris, your thoughts on the tech Titans reporting this week? And it’s an interesting week is that, you know, I don’t think Verizon matters very much with when we look at, I think the, the mega caps going to tell us what’s happening. We think investors are looking for a reason to take some gains off the table. Maria, if you look at the first quarter, it was, it was a fabulous first quarter, you know, and it was good news too, because the market’s broadening out a little bit, right? If you looked at Q1 this year, it was the, it’s the 11th quarter since 1960, which is wonderful. That’s great news. And if you look at where how they performed, it was not tech. Tech did great in the fourth quarter last year. It was actually 12 out of 12 in the first quarter of this year, which I think bodes well. Generally. If you look at I think the, the, the whole story is the whole secret sauce is in Netflix. It had a double beat and still we saw 10% give back. I think where people are expecting a little bit of a give back. And again, if you look back at the first quarter of the last time this happened, the average rate of return of the next 3/4 is 8%. That would mean a 20% year in the market. So I think that’s what we’re thinking. We’ll have a big end of the year. We’ll have a little bit of a give back tech. I think we’ll people are looking for reasons in these earnings, the mega caps this week, anything they could get to to say, let’s take some chips off the table and then keep our powder dry at the end of that second quarter going hard for the end of the year. That’s what we see. I mean, look, the second quarter has been rough for stocks. Let’s face it, we’re looking at decline since April one after a very strong first quarter and a strong 2023. Scott, part of the issue is interest rates. Look at the Treasury yield this morning on the 10 year. The 10 year has been rising, creeping higher, and it remains at around what 4.66% right now. It’s up better than four basis points this morning. We’ll get inflation data this week. We get the first read of first quarter GDP on Thursday and then the Federal Reserve’s preferred inflation gauge on Friday, the March PCE index. Scott, what are your expectations for the data? As far as the data go, we think it’s going to be, you know, pretty much in line with what we’ve seen most of this year, which is really, really strong economic data with, with a little bit hotter inflation that everybody’s really comfortable about. And that’s, and that’s part of the reason obviously while we’ve had some struggle in Q2, you know, we’ve gotten some hotter inflation prints that the Fed wants that’s caused the market to back out some of these projected cuts. We think at the end of the day, it’s not that big of a deal. I mean, you know, unless you get 10 year rates north of 5%, we think this is something the market can handle north of 5% could be a problem because you’re getting, you know, then you’re going to reignite inflation worries, you know, South of 3%, you know, slower than 3%. That’s also a problem because now you’re talking about recession fears. But anyway, really between 3 and 5% and 10 years, the market probably handle and anything South of four, you know, between 3 and 4%, we think that’s really that’s, that’s where small caps can really catch fire. They’re going to be, they’re going to have a hard time with, with, you know, as you pointed out, 10 year rates are on 4 1/2% right now. But you, you know, you see a three handle on that, on that 10 year rate. You’re going to want to be like out of tech and into small caps at that point. Well, look, next week we’ve got the FOMC and we’ve got the jobs data. Scott, every time you hear Jay Powell speak lately, he’s keep saying overtime, overtime, inflation will get there. Overtime. He seems to be pushing it out. You know, the expectation of 2% because he recognizes that there’s not a lot of wiggle room here to cut rates anytime soon. Yeah, you’re exactly right, Murray. And, and and there’s not right now, but, but that’s, you know, that’s actually OK. Because if you think about the reason why it’s the why we’re not able to cut rates right now because things are really, really strong, but they’re not. But they’re not strong in an acceleratingly getting getting hotter standpoint. And one, the one thing you need to look at for that is wage pressure. So we’re still getting really good wage gains, but they’re not continuing to accelerate. If they’re continuing to accelerate, we’d have a different call on this. We’d say the Fed needs to go and start hiking rates again. But so far, what the feds done, it hasn’t hasn’t really hurt the economy because it hasn’t impacted things that much. And and so they do have time to sit and wait and just let this hot economy continue to be pretty hot, but not too hot. That’s actually a pretty good recipe for the stock market. Yeah, I don’t know. I mean, there’s a reason that the S&P 500 is down to the lowest level since, what, February? The NASDAQ get a three month low, Chris. I mean, yeah, sure, the headlines look good in terms of the economy, but I don’t know if it’s so Goldilocks. You’ve got a lot of people raising their hands saying I’m not buying this, like a Jamie Dimon for example, who continues to worry about the macro story. And I think he’s right on Marie. I think the macro story is scary. When you look at the debt that’s happening, 2.2 trillion has to be refinanced in the next five years. And if you know that that new scenario analysis they’re doing is saying it’s more likely to see increases in interest rates and cuts this year. If we don’t see any kind of interest rate cuts where there’s a real problem coming was 250 billion by year end, that has to be refinanced at higher rates with properties that are already undervalued. The president responds with with snack food sizes, right. It seems as if he’s missing the entire concept of what’s happening here and we have that. We really need some leadership around this. And I don’t think people need to worry about late fees of their banks with the size of their Cheetos or whatever it is as opposed to saying how do we get this thing under control and really make sure that our commercial real estate market doesn’t collapse around and bring the economy with it. Yeah, that’s right. Because the expectation in the market, Scott, is that we’re going to see rate cuts. If we don’t see rate cuts, won’t we see a pretty good sell off in stocks later on in the year? Well, look, we’ve already priced out most of the rate cuts this year. So that’s all we’ve gotten so far Maria is because of some of those, you know, some of those cuts getting priced out and we entered the year with you know the market thing and bring cut six or seven times. We’re down to one, we’re down to 1 cut right now like that. That’s what’s in the market. And that cut really is not till after the election. And so, you know, the, the, the market has done the job of taking the cuts out of the market for, for the Fed. And that’s, you know, and that is part of the reason, obviously why we have seen some pull back. But now those cuts are out and, and we think the bar to hike is almost impossibly high at this point. I mean, every time you listen to Powell, he is trying to say over and over again, cuts are coming. We just don’t know exactly when. And then, you know, the pivot they made back, back, back and forth quarter was important. I think it’s something that investors need to pay attention to. All right. Well, we’ll be certainly doing that. Scott, good to see you. Thanks for joining the conversation. Chris, you’re with us.