Investors ‘clinging on to any hope’ of disinflation, strategist says

Hargreaves Senior Investment and Markets Analyst Susannah Streeter joins Yahoo Finance Live to discuss investor sentiment, inflation, the state of the market, the expectations for the U.S. economy, consumer confidence, and the outlook for a recession.

Video Transcript

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RACHELLE AKUFFO: Well, we've heard from President Biden and the Fed this week while in the thick of earnings season, and, of course, investors seem to be interpreting their messages as a sign of better days ahead. The S&P, as we can see, they're up about 7.66% year-to-date. The NASDAQ up about 14 and 1/3 of percent. And the Dow, there, up about 3%.

We're seeing that markets might be pricing in the end of the inflation problem. Or could it be that investors just have a case of FOMO and are really getting in on the action now? We're joining now to discuss is Hargreaves Senior Investment and Markets Analyst Susannah Streeter. Good to see you, Susannah. I mean, we saw some volatility creeping into that FOMO rally, but, as we look, all three major indices still in positive territory, especially the NASDAQ.

How would you characterize investor sentiment right now?

SUSANNAH STREETER: Yes. I think what's happening is that investors are clinging on to any hope that inflation really is coming down much more sharply. And that's when Jerome Powell talked about disinflationary forces taking hold. You saw recovery, really, on Wall Street yesterday. Now, there has been a bit of a decline so far in the session because, again, I think the focus has shifted a bit to his other comments, where he said that, actually, the job was going to take quite some time, well into next year, really, to see inflation perhaps falling back down to targets.

So there is still some concern about what this will mean for the US economy. Interest rates have to be hiked a little bit more and stay there, perhaps, for longer. So I think that's why you're seeing a little bit more weakness seep in today. But overall, I think it is a glass-half-full approach rather than glass-half-empty.

RACHELLE AKUFFO: So then do you think the markets are pricing in the right amount of risk, given that they also digested what they're seeing with earnings season? Some macroeconomic warnings still ahead in some of these earnings. But do you think they're pricing it incorrectly at this point?

SUSANNAH STREETER: It is extremely difficult to assess whether or not the price is absolutely on the ball right now because, of course, the data does tend to change. Surprise on the upside, and surprise on the downside. For example, here in the UK, we've had data out, or at least a forecast anyway, from the National Institute of Economic and Social Research estimating that, actually, the UK will avoid a recession, partly because we've seen inflation start to come down and consumer confidence, and company confidence, and optimism begin to creep up, creating this positive loop.

Now, if this positive loop, of course, can continue, that certainly could help. Because if people feel a bit more confident, they're much more willing to spend. And given just how reliant both the UK, the US economy, and European economies are on consumer spending, a lot hinges on that.

RACHELLE AKUFFO: So then is it too soon to say whether or not we're in a bear market trap or in the next leg of a secular bull market, or perhaps a bit of touch and go and something in between?

SUSANNAH STREETER: I think it's real touch and go right now. Look, there are plenty of glimmers of hope on the horizon. We've had the reopening of China following those really drastic COVID restrictions, and infections are easing. That certainly helped lift a confidence that demand will return there. We are over an energy shock, for now, at least, in Europe, partly because of really high production from the energy giants.

So, in some ways, you know, we're seeing updates from those giants coming through. BP and Equinor estimating that demand is going to be strong and cash will be flowing in because, of course, gas is so valuable. As we transition to renewables, you really do need it in the mix, and so that's likely to keep their profits, certainly, ticking over in a very buoyant fashion. I certainly think as though, at the moment, investors are reading more upside than downside right now.

But still, let's remember, as I was indicating a little bit earlier, data does surprise on the downside and the upside. And as the central bank policymakers have said, they have to keep a really, really close watch on those readings. Because if there's any hint that the inflation respiral is proving a lot more sticky-- and that means that interest rates will have to be ramped up even further-- the worry will rise and resurge again, that there could be harder landings for economists.

RACHELLE AKUFFO: And we did hear, of course, from Atlanta Fed President Raphael Bostic that it could be another 25 basis point hike, it could be a pause, it could be a pause and then a hike, perhaps, even up to 50 not being off the table as well. How as an investor do you really try and, I guess, protect yourself as best as possible or really find the opportunities in this sort of touch-and-go environment?

SUSANNAH STREETER: Well, certainly, as always, it's ultra-important right now that you're well diversified across sectors and-- and geographical regions, of course, in such turbulent times, and across asset classes as well. That's, you know, first of all. And certainly, I do think what investors are doing is not looking, you know, backwards at what's happened. It's looking forward to try and get indicators about what will be ahead.

And that certainly means reading all of this economic data and the predictions that we're getting from so many sources. But certainly, diversification is absolutely crucial right now. And certainly, you know, you've got to look at valuations, historic valuations. And there certainly could still be some resizing to come in terms of the tech giants.

And I do think that there perhaps should be, still, a little bit more caution, particularly in that sector.

RACHELLE AKUFFO: So not time to dive in quite yet. Still a lot more movement going on, as you are saying there. Hargreaves Senior Investment and Markets Analyst Susannah Streeter, thank you for joining me in this morning.