Fed: Data shows 'not everything is settled in this economy,' analyst explains

eToro USA Investment Analyst Callie Cox joins Yahoo Finance Live to discuss the state of the U.S. economy, the path ahead for Fed policy, inflation, and what investors should be paying attention to.

Video Transcript

SEANA SMITH: Let's bring in Callie Cox, eToro USA investment analyst. And Callie, it's great to see you. So the big question is whether or not this rally that we've seen over the last couple of months during the summer is starting to fizzle out. Where do you think we're headed from here?

CALLIE COX: I am so sorry. I was muted.

SEANA SMITH: OK, we've all done that before.

CALLIE COX: I know. I know. Gosh.

So that's the big question here. And I think investors are really struggling with that right now because there's this one camp that thinks that the Fed is going to pivot, rate cuts are being priced in, inflation as a trend is getting better. But then there's this other camp that has a very valid point as well, saying, we're still way into the woods with inflation here. Prices are still rising 8% or more. And the Fed certainly sits on that side of the argument as well and has a lot of impetus to calm down markets as they are. So I think we're seeing a tug of war between those two parties here.

DAVE BRIGGS: What camp are you in, Callie?

CALLIE COX: What camp am I in? You know, I think it's worth being cautious here. We think the bottom is in, but I think it's really hard to see these markets rally back to new highs, given the circumstances that we're in. So bullish here, feeling optimistic, but really trying to tell our clients to maybe pump the brakes a little bit.

SEANA SMITH: So you're telling your clients to pump the brakes. I guess where should they be allocating their portfolio at this point?

CALLIE COX: Yeah, so if we want to go a little more in detail, we are talking more about the barbell strategies which have been a popular strategy over the past two years in just the depths of uncertainty that we've dealt with. But we're talking to our clients about staying defensive because it looks like markets are feeling a little tenuous at this point. But at the same time, if these are the early days of the bull market, if the markets surprise us and they rally from here, you want to have some exposure to that as well because it can be costly to miss those early days.

DAVE BRIGGS: Callie, your notes tell us over 90% of everyday investors have held onto their stock positions this year. Really high number when you consider all the volatility and all the uncertainty out there. But you say you're very worried that investors are getting ahead of themselves. What's your primary concern?

CALLIE COX: Well, retail investors haven't left this market, contrary to everything that we've heard. They've really stuck into it. They've held onto their positions. And some of them have even bought more. But we are seeing the speculation come back into the market. And we're just trying to tell our customers too that we haven't seen the full collateral damage in tech and crypto yet. And rates are still very high. Inflation is still very high at this point.

So there may be still more damage to come. And if you're trudging back into speculative waters here, you really have to remember to focus on those cash flows, focus on the utility because, in a high inflation environment, not everything is going to survive this.

SEANA SMITH: And Callie, one thing that the market is focusing on is the numbers that we've been getting out from the housing industry, especially this week, because this week alone we had housing starts drop 9% in the month of July. Mortgage applications are falling. Existing home sales down for six months in a row. How big of a headwind do you see this being to the market, to the economy here over the next couple of months?

CALLIE COX: Yeah, housing and other goods producers, a few sectors are really getting hit hard here. And the data backs it up here as well. Housing has been a direct reflection of what the Fed has been doing with rates. And it doesn't seem to be reviving itself anytime soon. They might stay cool for a while.

So the way that we're thinking about these sectors and balance with other sectors, they kind of net out when you're looking at the overall market, or they seem to be netting out. But at the same time, there will be second-order effects here. We're all just kind of figuring out what they are. And that's why we're warning customers and investors here as well. I mean, not everything is settled in this economy.

And we've had a lot of movement over these past few months. We need to see how everything plays out.

DAVE BRIGGS: What do you expect from the Fed at Jackson Hole in terms of further guidance about where they're headed?

CALLIE COX: A lot of hiking. And when I say hiking, I mean mountain hike. I'm just kidding. Powell has to step out and say something. People are clamoring for details here. A lot of Fed officials have come out over the past few weeks and given their opinions on where the Fed could go from here. And we've heard a little bit from both sides.

I think the Fed is really opening up its optionality here because it knows that things and conditions are moving quickly. But at the same time, the Fed is opening these doors, but they're not necessarily walking through them. And I think investors may be getting that confused a little bit.

They're thinking, the Fed is talking about the potential for a pivot. Maybe they're going to pivot. But the Fed is really opening these doors to show investors that they're going to focus on the data, as they always are. And they're willing to be flexible. And that doesn't necessarily mean they stop the hikes here, or that doesn't necessarily mean they're going to pull down these hikes. It just means that they're going to watch the situation very closely. And they're attuned to the downside risks.