Fed: ‘There’s bad news embedded in the good news’ surrounding rate hike slowdowns, strategist says

Threadneedle Ventures Founder Ann Berry joins Yahoo Finance Live to assess the economic trajectory surrounding the Fed's latest rate hike comments, the market outlook, and the forward forecast for the S&P 500.

Video Transcript

SEANA SMITH: We want to bring in Ann Berry, Threadneedle Ventures's founder. Ann, it's great to see you again. So we're looking at significant gains across the board. Dave and I were just talking about the fact, what we heard from Jerome Powell wasn't necessarily anything new. What do you think of the reaction that we're seeing in the markets today?

ANN BERRY: The euphoria is astonishing to me. To your point, we didn't really hear anything new. And I think it looks as though the market is responding to, we're going to slow down the pace of hikes. What the market seems to be ignoring is that the overall message is, rates are still going up. And that terminal rate, the level-- the interest rate level at which the Fed stops rising, stops increasing, looks like it's going to be higher than has been expected over the last 60 days or so.

So I think there's bad news embedded in the good news around pace. The end game I think is going to continue to be hawkish. And so I think that the NASDAQ move up that we've seen in response to this has been, frankly, for me, a little bit surprising.

DAVE BRIGGS: Is this one of those short-term gains that you think could lose all its air tomorrow or the next day by the end of the week?

ANN BERRY: I think it's going to lose its air, but I think the air is going to come out once earnings start coming out because I think what we've got at the moment is a bit of a disconnect. We've got macro policy optimism, meaning what the Fed has, in part, said today, which is slowing the pace. But what we haven't seen yet is going through the Q4 earnings cycle.

So we'll start to get those signals in mid-January, where I think we're going to continue to see margin pressure across sectors. I think we're going to get continued news on cost cuts, which is going to cause near-term pain for some of these companies. And as that news starts to come in, I do think we're going to see the balloon pop and some of this begin to deflate.

SEANA SMITH: So, Ann, while you are expecting that balloon pop, I guess, how much worse do you think it could potentially get then from here?

ANN BERRY: Yeah, I wouldn't be surprised if, at some point between now and call it April of next year, so once we do get through sort of Q1 earnings to 2023, we start hitting that 3,600 S&P level that we saw in the summer of this year. And it was that level that really caused people consternation. We saw that there was real negativity in the market at that moment. So I think we're down from where we are now. I do think we go back to that July level. Whether it's in February of this year or whether it's March of next year, I don't know. But that's my outlook.

DAVE BRIGGS: So Tesla stock popped thus far more than 4 and 1/2%. And it was 4:00 AM when Elon Musk got on the record, got on the board with this. Trend is concerning. Fed needs to cut interest rates immediately. They are massively amplifying the probability of a severe recession. I just-- I know you weren't necessarily up watching Elon tweeting at 4:00 AM, but what's your reaction to the content of that tweet?

ANN BERRY: Well, I think there's an embedded agenda in that. Look, there's the other thing, too, which is Elon Musk has gone and bought Twitter and slapped a ton of debt onto that business. And in a raising rate environment, that debt load, the interest burden, the limited amounts of cash generated by Twitter to service that debt is going to be a massive problem. So I'm looking less at what it means for Tesla, although that's, obviously, the more interesting public market story. I'm thinking about what the implications are for these rate hikes for Twitter right now, and it's not good.

SEANA SMITH: And taking a look at some of the other expectations in terms of a recession, the likelihood of that, Larry Fink this morning saying that we are not going to have an economy that is based on real growth. He then went on to say despite doom and gloom, more opportunities to invest in markets than a year ago. Does that make sense to you?

ANN BERRY: It makes sense in certain sectors to me, and where I do share that sentiment is when it comes to some of the more defensive stocks that have done pretty well, actually, in the last couple of months, but seemed to be relatively more interesting now, as we see this pop in the growth stocks.

Some of the places I've been looking at personally have been in, really, US domestic focused necessary services-- eye care services, for example. Pets remains a sector where you see a lot of resistance. Sort of old school businesses that have tend to be neglected in a lot of the glamorous stories that are around tech, where I also spent a lot of my time.

But I'll give you an example of a business I find quite interesting. UniFirst is a company that's entirely North America focused. It provides uniforms to industrial companies, outsourced business services companies. So this is a necessary business. There are others like it. It's not going to go away. They have some ability to take price. That's the kind of sector I'm looking at, and I think there could be some good value as we see the shakeout in earnings over the next couple of months.

DAVE BRIGGS: OK, I'm as reliant as Elon is on Twitter, so I've got another tweet for you, but it's yours. You quote tweeted someone who said, an S&P between 3,300 is probable Q1 next year. We're above 4,000 right now. Are you sticking by that?

ANN BERRY: I'm definitely at the 3,600. I'm not as low as the 3,300, but the thesis that drove that comment, it was a senior market commentator who made that comment this morning, was making the same point that I believe in, which is we haven't seen the full impact of, number one, the rapidity with which rates have been going up on macro demand in the US. We haven't yet seen the full impact of ongoing supply chain issues on margin.

And we haven't yet seen the full impact of declining consumer sentiment, which I know we saw these brilliant headlines about record Black Friday sales and really good Cyber Monday sales, but that means the consumer has continued to spend over the last five-day period cash and savings that they don't really have, which means that consumer debt levels are continuing to rise.

The cost of that debt, because rates are still going up, is going up and up all the time. And at some point, rubber's going to hit the road. And I'm nervous about that, and that's why that tweet this morning of a bearish outlook really resonated with me.

DAVE BRIGGS: Very interesting, a bit concerning. Ann Berry, Threadneedle founder, great to see you. Thanks so much.