Fed: The market won’t ‘be able to sustain’ more than 4 rate hikes, strategist says

Walser Wealth Management President Rebecca Walser joins Yahoo Finance Live to break down the latest in the stock market, what to expect ahead of today's Fed meeting, and what the geopolitical risks with Russia and Ukraine mean for markets.

Video Transcript

AKIKO FUJITA: But let's kick things off this hour with Rebecca Walser, Walser Wealth Management president. And Rebecca, you've highlighted this very tricky line that the Fed has to toe in terms of the messaging. It was already difficult going into this meeting in light of the recent volatility in the markets how do you think the Fed navigates the messaging?

REBECCA WALSER: Yeah, Akiko, it's very difficult, right, because they absolutely can't have 7% year over year inflation. That looks like they've not done their job at all. But yet, they had to stimulate us through the coronavirus. And so they didn't know the right place or the right amount. And so we maybe overstimulated, and that gave US inflation. And now they've got to pull that back.

And, you know, when you think about it, we were at $120 billion a month at the peak of stimulus between mortgage-backed securities and treasuries. And now we're slimming that down to next to zero in March, and now we're going to start running off. So we have a double whammy of going from stimulus to runoff, which we know that has a huge impact on the economy. But then we also are going to start rate hiking potentially in March.

So I think the Fed has a really difficult-- they're really in a rock and a hard place. And it's really difficult. And I'll tell you, Akiko, when they are seeing these high rate-- you know, swings of volatility, it makes them probably very leery of really coming out and saying a policy that will make the market go one way or the other.

But that's what they have to do. They are in this position. They're the ones that have to make the decision. And I think that, you know, the market is-- I'm thinking the market is expecting good news today because obviously, we're all to the positive. But it could go really bad really fast if we get comments we don't want to hear.

BRAD SMITH: And Rebecca, it really comes down to what we've also heard from both the Fed signaling, as well as some of the early banks that have gotten out there during earnings season and what they're anticipating. Some of them, as we were hearing from JPMorgan chairman CEO Jamie Dimon, expecting perhaps upwards of six, maybe even seven. So from your perspective, what is kind of that true expectation number of rate hikes that we should expect?

REBECCA WALSER: You know, Brad, I'm really thinking four is going to be where we level off. I know some analysts are saying as many as eight. Jamie Dimon obviously going up to six. You know, it seems really difficult. Now let's-- if we took-- we look at a macroeconomic perspective, we've had low rates, really, since too big to fail and quantitative easing 1, 2, and 3 in 2008 and '09, in those time frames. So we have never really truly normalized rates since the Great Recession back in 2008, 2009.

And so I guess if you're looking to normalize rates, that you could see these major eight rate hikes. But I think that in the short-term in the next 18 to two years, there's just-- I don't see how this economy, you know, absorbs eight rate hikes. So I'm going to go with four for this year as the upper bound. And any more than that, I just can't see that this market will be able to sustain. And I think the Fed does care. If the Fed didn't care, we wouldn't have stimulated so much in the last 20 months with corona.

AKIKO FUJITA: Rebecca, in the meantime, you've got a lot of viewers who are looking at their portfolios this morning, saying, you know, what do I do? If the volatility is going to continue, do I hang tight? Do I cut my losses, rotate into some of the value names? What are you telling your clients?

REBECCA WALSER: Yeah, that is a huge-- that is the name of the game, right? Where do we go in a period of volatility? It depends on the kind of investor we're talking. If it's a short-term investor, there probably are some trades that can always be made to-- with options and all of these things to make some shorts and all these things that can make some gains. Obviously, the financials we expect to do better when the rates go up.

But for the long-term investor who might be someone who's closer to retirement or are already in retirement, and this is what their portfolio that they're living off of, they really have to go more conservative because I do believe this is going to be a very rocky year for the market. There's going to be a lot of things that happen this year that are going to have an impact on the market outside of the Fed-- you know, the supply chain issues, what's going on with Taiwan and China and Ukraine and Russia. We've got wars, we've got geopolitical issues. We've got political issues at home.

So we have a lot of economic factors that beyond just the Fed, beyond just the markets, that are going to impact these markets, especially the supply chain and inflation. And so I would really encourage long-term investors to seek as much conservative safety while maintaining some positions in the market as possible.

BRAD SMITH: Well, what's truly been interesting is how many CEOs are continuing to discuss the amount of impact that the supply chain and combined with the global chip shortage and the chip crisis, that both happening at the same time, as we're going to continue to discuss throughout this hour, how much that actually is a major boon to inflation, unfortunately.

And so with that in mind, we're looking to see when some of those issues would be resolved. What do you think some of the necessary efforts are to push that forward and how quickly we can even see movement on some of those resolutions, especially with regard to chips impacting the inflation as well?

REBECCA WALSER: Absolutely, Brad. Well, I know that we're talking-- we're hearing talk of a new chip manufacturing plant being made out of Ohio, which we really could use. I think it's really sad that we didn't have a little bit better foresight to see that the internet of things, IoT as we call it in the industry, was going to need a chip for everything. And that means that the demand just-- you know, is a quantum leap in demand. And unfortunately, I think the whole world was sort of shortsighted and not seeing that actually come to fruition.

And so now we actually have to make these plans. The problem, of course, Brad, is these are long-term investments. These are long-term commitments, new plans, new things. So even if we get a new plan, even if we have these things, even if we bring stuff back closer to the United States and control our manufacturing, which is, obviously, difficult to do in the cost base, it's still a longer term solution.

So the short-term solution is, unfortunately we're going to have shortages, we're going to have the supply chain interruptions that we're seeing. We're going to have cell phones. The new cars, the new car problem-- I mean, I think dealerships could be going out of business because they can't get inventory. So this is a short-term problem that we're going to have to deal with. And we need long-term solutions that just can't come fast enough. And so it will have an impact, Brad, absolutely.

AKIKO FUJITA: Rebecca, really quickly here, you touched on what's playing out with Ukraine and Russia. I mean, how significant a risk is that really from a market perspective? Is this just about uncertainty, or could it be a bigger overhang?

REBECCA WALSER: Great question, Akiko. I actually expect that we will see an incursion by Russia into the Ukraine. Russia seems to have the opinion that Ukraine is really still theirs, and it was really not-- shouldn't have been partitioned in the first place. So I'm fully expecting that. I think the markets should prepare for that. And unfortunately, you know, it looks like America might be getting into that fray again and starting another deployment. And that is a really big concern.

And I think that when you couple a new war or a new kind of military exercise that involves military with the supply chain problems, the inflation problems, the fact that we've overstimulated and now we have to pull back and go from stimulus to runoff and raise interest rates, it is just so much for this economy worldwide to handle.

So I think, again, investors need to be really smart and prepare for volatility and prepare to be a little bit more conservative on the risk profile if they can't afford to sustain short-term losses 18 months or potentially longer. But I think people need to be prepared for a market that isn't as friendly as what we've been used to since 2009.

BRAD SMITH: Rebecca Walser, president of Walser Wealth Management, joining us here today. Thanks so much for the time and insights, Rebecca. Appreciate it.