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Stock market sell-off: ‘Psychology is rotten right now,’ strategist says

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Interactive Brokers Chief Markets Strategist Steve Sosnick joins Yahoo Finance Live to discuss stock futures, retail sales, consumer spending, inflation, the Fed, and the outlook for the economy.

Video Transcript

JULIE HYMAN: Steve, you heard about some of what you were talking about. And I emailed you late yesterday, and I said is this it? Is this the exhaustion? Is this the capitulation? Is this the end of the selling? And you said, hmm, I don't think so. Tell us why not.

STEVE SOSNICK: Yeah, good morning, Julie. You know, I wish I could be more constructive about it, but yesterday was a truly ugly day. And those don't tend to get resolved, you know, the next morning.

Now, does this mean that we're going to see a lot more days like that in the short term? That's a bit tricky to say. I think we're-- I think we're going to get sort of a psychological bounce if we get to the 3,855 level on S&P when the headline, you know-- when the headline machine is going to say that we're officially in a bear market. I think that's probably a time that people will step in and do trading buys. I think you're going to have opportunities, but there's a lot of stuff here that just that doesn't add up to be the kind of thing that makes this market turn around, not least of which, you're not going to-- the Fed is not coming to the rescue anytime soon.

BRIAN SOZZI: Steve, doesn't-- the other problem here is that we might now be in a vicious cycle of news whereby plunging stock markets fuel a consumer spending pullback and markets go even lower?

STEVE SOSNICK: That's entirely possible. I think the psychology is rotten right now. And the normally, you do get the sell-offs. You do get the capitulation when you sort of get peak you know, rottenness in sentiment. But the problem is, we-- you know, I look at our customer data. We still see customers buying their favorite stocks, looking for that dip.

You really don't get the-- you've heard the term capitulation. And you really don't-- that's really what you need to sort of get at least an intermediate term bottom. And we're not seeing that.

You need to-- unfortunately, you need to have people sort of throw in the towel. So it's sort of a weird thing. What you're saying Brian is that yeah, the sentiment is rotten and can spiral out of control rotten, but until it gets peak-- peak miserable, you don't get that-- you don't get that lasting bottom.

- And so when could that peak miserable hit, from your estimation?

STEVE SOSNICK: Today. I mean, it could be today. It could be tomorrow. It's hard to say.

I don't mean to be flippant with you, Brian, but that-- that's really the problem is you can't estimate that. That's why I just sort of throw out things that might be catalysts. You could just get the psychological, oh, we're waiting for the bear market. And when you see that piece of-- when you see that big headline go across your screen, that's often a time that people step in and say, aha, see? We've reached a number.

What worries me more is just guys were talking about consumer sentiment at the top of the show and consumers. The retailers, like traders, get caught long and wrong. And I think people are going to see that their purchasing power doesn't go as far. And when it starts to hit-- if it's hitting the big guys, it's going to hit the small guys. And that really does affect sentiment. It's-- and I don't know-- I can't-- it's too difficult to gauge when that psychological change hits.

JULIE HYMAN: Yeah. I learned something fun from your note in reaction to yesterday's carnage, which was that your dad covered the retail sector as an analyst. So that was a fun bit of background to learn about. And I think this sort of conventional wisdom is that tech leads the market, right? But talk to us about the role that retailers play here. They're not necessarily as widely held certainly, as something like, tech.

But what role do they play? And could they be sort of the spoiler here? They certainly were yesterday.

STEVE SOSNICK: Yeah. You know what? I mean, this is from a kid who used to have to like, count shopping bags in the mall when he would go when he would go on with his father, just to sort of-- because that was the channel checks.

Here's the problem. The consumer is still about 70% of the US economy. And how does this consumer really get their point of view noted into the economy-- into the economy? It's how they spend it.

Now it's not always at stores. It's on services, as you guys note. But there's a lot of overlap.

Yes. You could argue Apple is a retailer as much as anybody else. But if consumers aren't spending, that's telling you bad things about the economy. The consumer is too big to ignore.

From a market point of view, the tech stocks, in terms of mar-- for market capitalization weighted indices, sure, the tech stocks dominate. Many of the retailers could fit into-- it could fit neatly into an Apple right now, in terms of market cap. But when you start to think about the signs that the consumer is spending-- sending, that comes through retail. And you showed the charts earlier. They've been in decline pretty aggressively. They didn't confirm the January highs.

So you know-- so this-- is not a good sign. If people aren't spending money-- well, they are spending their money at Walmart, but they're spending it differently. And if they're not spending it aggressively at Walmart, if they're not feeling good about things at Walmart, Target, et cetera, that sends a really bad signal going forward. And that's telling you the consumers are-- if not tapping out, putting a tight leash on their wallets.

- Steve, are we at this point now if the selling persists, as it has been, that might spook the Federal Reserve, and we might hear some less hawkish commentary from them within the next week?

STEVE SOSNICK: That's possible. I mean, I do think Chairman Powell-- I've called-- many times I've called him Goldilocks in a suit. And so I think he may try to assuage the market with rhetoric, maybe tone down some of it. Part of the problem is I think the Fed has been somewhat aggressive with their rhetoric because they've wanted-- because they've wanted to jawbone the markets a little bit, not to shock them when they actually do stuff. And so, yeah, perhaps they lighten up a little bit on the rhetoric, but I can't see them backing off completely. Inflation--

- Steve, they have. Steve, just to hop in. They have shocked the markets.

STEVE SOSNICK: That is true. And that's why-- that-- 100%. And that's their goal is to shock the markets. But I think they don't want to shock the markets with a surprise on Fed day. They want-- they want to [INAUDIBLE]-- they want to shock the markets over time. And we need shock.

We're running we're running inflation 8% to 10%, depending on your measure. And so that's why I think you may get-- you may get a softening in rhetoric, as you note. But I don't think they're going to really-- they're not going to turn around on any of their plans about QT or raising rates.

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