Markets face ‘pretty whippy’ 6-8 weeks, strategist says

Horizon Investments' Scott Ladner joins Yahoo Finance Live to discuss rate hikes from the Fed and Bank of England as well as volatility in the market.

Video Transcript

AKIKO FUJITA: Scott, it feels like it has been a step down every day of the week here. How much of what we're seeing today is a direct reaction to, really, concerns that the Fed is moving too aggressively too soon?

SCOTT LADNER: Hey, Akiko. Yes, quite a lot of it probably. And it's not-- but, you know, let's be honest. It's not just the Fed. Today, in reaction to Liz Truss's budget, you know, UK markets are pricing in 100 basis points for November. So it's not just the Fed that's going really hyper aggressive right now. It's the BOE. It's basically-- it's everybody except for the Central Bank in China and Japan. Other than those, everybody is going really, really hyper aggressive.

And the problem with that, as we all know, is that they're targeting a lagging indicator in CPI or BCE. And if they're targeting a lagging indicator and they're being very fast and aggressive with their rate hikes, the probability that they get it right and avoid some sort of recession or avoid some sort of hard landing is asymptotically low. It's just probably not going to happen.

And so this is what the markets are trying to grapple with right now. Not only following multiples, which has been the story of most of this year, but now we're going to start hearing about earnings downgrades. And that's probably the next leg that we're experiencing right now.

AKIKO FUJITA: So many-- so much of the jitters we're seeing today driven by the big swings we're seeing in bond yields today. We mentioned that the shorter end of the curve spiking in a big way, the 10-year up as well. I mean, how much higher does it get? If we're talking about the two-year at 4.2% right now, what are you looking at?

SCOTT LADNER: Yeah, I think, actually, we're probably right about where we're going to get to on the 10-year. The market reaction today, we're seeing two-year rates up a lot. And we're seeing, obviously, 10-year rates up in places like England. In the US, 10-year rate's actually down a basis point or two right now.

And so I think that's the market saying, hey, listen, we think that we know that the Fed is going to go super aggressive. And so short end rates-- that is, the two-year rate-- can continue to go higher. But at some point, they're going to break it. And rate cuts will end up following. And what they're doing right now is not good for economic growth. And it's certainly downward pressure on inflation.

And so economic growth and inflation are the things that really drive the 10-year rates, whereas Fed policy really drives the two-year rate. And so we're starting to see the market discern and sort of discriminate between what are the drivers of a two-year rate versus a 10-year rate. I think we're starting to see that the 10-year rate kind of peaking out around the 3 and 3/4-ish is probably about as high as we're going to get this cycle because the Fed is being so darn aggressive.

AKIKO FUJITA: With that said, there's a lot of investors who are looking at the bond market saying, well, these yields don't look so bad when you look at the broader markets right now. Is this kind of a time, you think, to maybe move into bonds? Or how are you looking at your portfolio and potentially shaking things up?

SCOTT LADNER: It's a little bit tough to call getting really aggressive moving into bonds right now. Really, frankly, it's hard to get aggressive moving at anything right now on a day like this. But it does probably make some sense to start nibbling in duration. But we wouldn't play in the belly of the curve. We wouldn't play in the short end of the curve necessarily.

If you're going to start nibbling on duration, you probably want to go out about as far as you can stomach in terms of the curve because that is where we're going to start seeing some real value. And we might be getting close to those points right now. But you just-- you're going have to stomach some volatility over the next month or two. This is going to be probably a pretty wimpy next six to eight weeks.

AKIKO FUJITA: So in terms of equities, where do you move then, Scott? Do you just hold cash? Is this kind of the safest way to go, given that so many have said that there could be significant downside going into year end?

SCOTT LADNER: Yeah, I mean, look, if you have some sort of de-risking instrument or some sort of process or algorithmic process to get you in and out of markets and deal with risk in that way, that's one way to address it. If you're going to be more of a buy and hold kind of person and sort of move within equities, then probably moving more closer to the US is going to continue to make sense.

It's been sort of an old story. It's been the story all year long. You want to be as close to home as possible if you're a US investor. That's still going to continue to be the case. And we're probably getting pretty darn close, Akiko, to the place where you want to be start moving away from value securities and more towards the growth securities.

So those mega-cap tech names and the really growth-y names, not the profitless growth tech names, but the profitable tech names, that's going to be a safe haven in terms of where we can actually get to in equity markets because growth is going to be scarce pretty soon. And that which is scarce is valuable. And we know that those mega-cap tech names really have quite a lot of growth. And so that's-- they will start picking up some value and some allocations as we move into the back half of this year.

AKIKO FUJITA: Yeah, some good takeaways there, as a lot of investors reassess their portfolio today. Scott Ladner, Horizon Investments chief investment officer, appreciate your time today.