Current bear market is 'not the time to be a hero,' strategist explains

Crossmark Global Investments Chief Market Strategist Victoria Fernandez and KeyAdvisors Group Owner Eddie Ghabour sit down with Yahoo Finance Live to talk about the outlook during this bear market and the Fed's position amid inflationary and labor market pressures.

Video Transcript

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SEANA SMITH: That wraps up another strong day for the market. All three of the major averages well in the green. Look at that. The Dow closing up 826 points, S&P up just over 3%. The NASDAQ the outperformer of the three, up just about 3.3%, well above 11,000. And taking a look at some of the sector action, all of the S&P sectors closing in the green. Energy the leader there, up just around 4%.

We want to bring in Victoria Fernandez, Crossmark Global Investments chief market strategist, and Eddie Ghabour, KeyAdvisors Group owner and author of "Common Sense Bull." Great to see both of you. Eddie, let me start with you. So a second day of gains. Jared was saying that that doesn't always-- it's not always good news here for the markets when you see two days so strong back-to-back. What do you think?

EDDIE GHABOUR: Look, I think this is just confirms that we're in a bear market. And this is a bear market rally because that's the type of environment where you see these huge rips. I mean, there's no doubt we came into this week oversold after what happened last week. But we have definitely been cautioning investors on getting sucked into these bear market bounces.

And look, we have some data points coming out this week in regards to the job data. The next week, we have CPI coming out. If those numbers are hawkish, then more than likely, in our opinion, you're going to see these gains go down, go away, and hit new lows. So right now is not the time to try to be a hero and pick the exact bottom because I think there's going to be more downside than upside here as we go through these next few months of this recession and watching a Fed continuing to tighten into this slowdown.

DAVE BRIGGS: Victoria, is this fool's gold?

VICTORIA FERNANDEZ: Well, that's one way to put it, I think. I mean, I agree that we're probably just in a bear market rally right here. When you look at some of the technicals and some of the internals of the market, they're not giving you this clear signal. I mean, we had about 20% of the S&P over the last couple of days that have hit that plus 2 standard deviation move.

Typically, when you're hitting a bottom and you're going up from there, you're more 50%, 60%, 70% of the S&P doing that. You look at your bull-bear ratios and some of these more sentiment things. And they're telling you things are good, but again, as mentioned, you're coming from a very oversold position. So you don't want to chase the market. But I don't think that means you sit on the sidelines either.

I think you have opportunities because you're going to get pullbacks. You're not going to have days like this every day. You should get a little bit of a pullback coming up. You can take some opportunity to pick some quality names because there's going to be continued volatility. And those are the names that will perform best.

RACHELLE AKUFFO: And Eddie, as we look at some of the data that comes out, we know that the Fed is data dependent. And a lot of analysts we've spoken to saying, look, because of the lag, perhaps, the Fed is overtightening. What are some of the questions that your clients have right now about how they should be proceeding when you are in this sort of cycle?

EDDIE GHABOUR: So, look, well, this is an environment I would argue that no investor alive has ever seen before. We've never seen a dynamic where we're coming off of such a massive bubble, where we have the dollar at 20-year highs, we have inflation at 40-year highs, we have a war going on, and we have a Fed that's tightening and an entire globe that looks like it's heading into recession.

So because of this, we've stayed very cautious, and we have a very large cash position. Again, and we continue to stress the fact that we're in uncharted territory. And we're not going to risk a lot of our clients' hard earned capital in an environment like this, where a lot could, unfortunately, go wrong.

And look, the Fed continues to say, they're going to wait until the data shows that we're close to their inflation target. Everyone tries to put a spin on it as to whether they're going to get dovish. The numbers that are going to come out on inflation this coming week, whether it's rear view data or not, is not close to where they want to be. So they're not going to spend dovishly after they've just pounded the table on being hawks because then they lose all credibility.

And lastly, I'll leave you with this. If they were to announce a dovish spin, asset prices would go through the roof. And that's exactly what they're trying to avoid. So they are in a very tough spot right here.

SEANA SMITH: Victoria, earnings season could really test some of the optimism that we've seen, at least in the market, over the last two days. When it comes to earnings expectations, yes, we have seen some of those estimates revised lower. Have they been revised low enough, do you think?

VICTORIA FERNANDEZ: Well, we're down about 6%, a little over 6%, Seana, in earnings estimates right now. And I think a lot of it is going to come down to the fact that we're going to need to see what margins are doing. We had margins at 12%, 13% a couple of quarters ago. It's continually come down. Obviously, we've had supply chain issues do a little bit better. We've seen some commodity prices come down. So that will be a little bit of a benefit to margins. But obviously, there's still some concern.

And when we talk about the Fed being data dependent, earnings is going to be key to that. But I also think we need to be careful. You look today at, like, the JOLTS number. We had one piece of good news in the sense that job openings is maybe taking a little bit of the higher rate.

But we still have the labor market report coming out on Friday. We've got ISM services on Thursday, which I think is going to be a key component to what we think inflation is going to do. So, yes, earnings needs to come down, but we need to see a lot of other factors change before the Fed even thinks about taking a pause.

DAVE BRIGGS: Openings plunging by more than a million, certainly significant. Eddie, your thoughts on Victoria's take there on earnings expectations? And you also say generational wealth opportunities are ahead of us-- for those that do what?

EDDIE GHABOUR: So, yeah. So look, I think the job number-- look, the JOLTS number that came out today is definitely a move in the right direction for what the Fed is looking for. But again, to my point earlier, it's nowhere near the data line that they're looking for. So this is why they're going to continue to tighten.

And this generational wealth that I think is going to be an opportunity that we haven't seen in a long, long time is going to materialize in our opinion in the first half of next year. Like it or not, the Fed is going to tighten while we're in a recession. And in our opinion, it's going to have markets go much lower than where they are now. It's not going to be a straight line down.

But at the end of the day, we think they're going to have to come in and save the market and the economy sometime next year. That's going to be the time that investors want to jump in if they have the risk tolerance and take advantage of opportunities that they probably didn't think they would have at the beginning of 2022.

So this is why we're keeping a lot of dry powder because we do not want to miss out on this opportunity, just like we see during any boom and bust period. We're going through a bust period right now. And if you have cash, it will work to your advantage.

RACHELLE AKUFFO: So Victoria, if you have cash on hand-- and I know that you're looking at potentially a recession for next year-- where would you be putting it?

VICTORIA FERNANDEZ: Yeah, so I mentioned a little bit earlier that we're really looking for the quality names because of the volatility that we're seeing. But we think because of the very low selloff position that we've been in coming into this week, we think you can add a little bit of beta, a little bit of cyclicality to your portfolio. That doesn't mean you don't want to not be defensive. You do. You want to be defensive.

So we're looking at healthcare names like HMOs. Elevance Health is a name that we like. But we think you can also, at the same time, add a little bit of the cyclicality, like a UPS or an American Express. You just have to be very choosy and focus on quality balance sheet, quality earnings, quality management names, so that yes, you can have a little bit of cash in your portfolio, keep that defensive posture, but start to add a little bit for the bear market rally that we anticipate here.

RACHELLE AKUFFO: All right, so there you go, everyone. Do your homework. Victoria Fernandez and Eddie Ghabour, thank you both for joining us this afternoon.