Rising rates are ‘really stirring up markets,’ market strategist says

JPMorgan Asset Management Global Market Strategist Meera Pandit joins Yahoo Finance Live to break down market action, discuss rates, volatility, and the outlook for the 2022 stock market.

Video Transcript

- The S&P 500 is closing in on its third consecutive weekly decline. If that goes down, it would mark the first time this has happened since September 2020. Let's talk more about this wild week for the markets with Meera Pandit, JP Morgan Asset Management Global Market Strategist. Meera, nice to see you as always. How much longer do we have left in the selling?

MEERA PANDIT: We are likely to end and enter into this different period, from a market perspective, in which the market is really grappling with this new reality that we're going to see less fiscal spending this year, not only less accommodation from a monetary perspective, but actually monetary tightening. And amidst that, we've seen a rapid rise in rates recently.

Now, we did expect rates to move higher. And yet, a lot of that has really been pulled forward to just the first few weeks of the year. So that's really stirring up markets. And ultimately, with less accommodation throughout the rest of the year, we do expect to see some more protracted periods of volatility.

So how we're navigating that is really gearing towards quality and balance, and making sure that we're not invested in any of those areas that are getting hit the hardest, like some of the frothy more speculative areas of the market, and ensuring that areas with high valuations have the profits to back it up right now.

- So Meera, what does that mean for tech holdings then? Do you stay away? Do you sell? Do you just put those on the back burner for a while?

MEERA PANDIT: Rates are putting some pressure on tech stocks. But that is just one piece of the puzzle. Because where we're headed to is an environment of slower economic growth towards the end of the year. And investors are really going to be looking for opportunities for growth.

So to the extent that some of these higher valuation stocks still are producing durable consistent profits, we do still want long term holdings in many of these areas, particularly because they are taking advantage of some of these huge secular growth themes. But we've also seen a lot of concentration in the market itself in some of these top stocks. So it's making sure that we have the right amount of exposure going forward.

- Meera, we were just talking a little bit about this, but does the Fed deserve a large part of the blame for what we're seeing here in the tech stocks sphere, but now increasingly in the S&P 500?

MEERA PANDIT: We're seeing a huge shift in Fed policy. Last year was a year where good news was good news. But also bad news was good news because you did have fiscal and monetary support to come and swoop in. And that's a very different tone and very different course of action that we're likely to see this year.

So to some extent, yes, this policy shift is weighing on stocks more broadly. But it is going to create this environment where we're going to see a lot more differentiation on the basis of quality earnings within the stock market where not everything is going to go up, not everything is going to face a strong recovery. But we really need to make sure that we're careful about what we own.

And further to that point, I think that the environment we were in last year was toggling between US value and US growth. And right now with both down, I think it's a really important time to revisit that international allocation as well. Because we've seen markets like Europe and Japan so far roughly flat this year, emerging markets slightly up.

So last year, in an environment where it was hard to resist US stocks, this year we have to make sure we're properly diversified across international markets as well, and can be a different source of return while US markets are facing quite a bit of volatility.

- So Meera, where do you think, internationally, is going to be the best opportunity of those that you talked about?

MEERA PANDIT: I think first out the gate, we're going to see areas like Europe and Japan come back. I think they're further along in the progress of their recovery. And indeed, both of those areas have a really high degree of cyclical exposure. The US is about one third exposed to cyclical sectors. In Europe and Japan, that's North of 50%. And remember that cyclicality is really levered to the recovery.

So as we move from last year, the year of US recovery, to this year, the year of international recovery, those should be some of the stronger areas out the gate. And then we'll continue to keep tabs on emerging markets, which could start to see a turnaround later in the year.

- All right. Duly noted. Meera Pandit, JP Morgan Asset Management Global Market Strategist. Always good to see you. Have a good weekend.