No 'bullish catalyst' for markets in short term, says strategist

Stocks (DJI, IXIC, GSPC) are performing mixed following the Federal Reserve's decision to keep interest rates stable. The central bank revised its rate cut estimates to a single cut in December. To discuss the implications for markets, Megan Horneman, chief investment officer of Verdence Capital Advisors, joins Market Domination.

Horneman notes that the Fed's prediction of just one rate cut was not surprising, saying there were “far too many rate cuts baked into the market.” However, she expressed surprise at Fed Chairman Powell's hawkish turn during the meeting, saying his previously dovish tone had “fueled this optimism around rate cuts for this year.”

Regarding the near-term outlook for markets, Horneman is cautious, saying: “I don't really see what the potential catalysts for upside are, and that's the problem. That's why we're a little cautious here in the market. downward catalysts.

For more expert insights and the latest market action, click here to watch this full episode of Market Domination.

This message was written by Angel Smith

Video transcription

Investors are looking to ignore a mixed Newsweek, marked by slowing inflation and the Federal Reserve's withdrawal from interest rate cuts.

Let's dive straight into what moved the markets here with Megan Horne, Cio at Verden Capital Advisors, Megan.

Good to see you.

So, you know, let's start there, Megan with the Fed.

I'm interested in hearing your opinion.

Of course, we heard from Jay Powell yesterday and they reported a reduction for 2024. Megan did that surprise you.

Um No, actually, we always thought there were way too many rate cuts priced into the market.

It surprised me a little that he sounded a rather hawkish tone in this meeting, because he has been dovish over the last few meetings and our concern is that this will fuel this optimism about rate cuts for this year.

We started this year thinking it would be a second half of the year story, not a March story like most people were doing.

And right now, we still think the Fed probably needs, as they said yesterday, more consistent data that shows that inflation is, is officially behind us, Megan.

Even if you read his comments as being more hawkish and a lot of people did at the same time, the market doesn't seem to have read him as being hawkish or reacting to it as if they were.

What do you think ?

Um, unfortunately, I think the market sees what it wants to see and it wants rate cuts and that's what we're seeing in the bond market and in the stock market.

The story continues

I mean, the rally that we've seen in bonds tells you that, you know, they want these rate cuts and investors want to see rates go down.

But I think it's a little bit, I have, I'm afraid that the market will become a little bit complacent about what we can see in the second half of this year and what they have the capacity to do in reducing rates. perspective.

Also, just Megan, short term, here.

What do you think would be the potential catalysts for this market?

Megan, you know, feeding days are a thing now.

The gains are in the rearview mirror in the short term.

What do you see?

I don't really see what the potential upside catalysts are and that's the problem.

This is why we are a little cautious in the market.

I see more catalysts to the downside.

Um, you can see from a political perspective what's happening in Europe right now.

Let's not forget that we have a presidential election coming up.

Um, the valuations in the market are a little frothy.

We got a month of good inflation data, but we still have a long way to go before we can say this is behind us and the Fed could begin a rate cutting cycle.

And so, given that, if you're more cautious in the market, how do you express the fact that we have an overweight in cash right now.

We are not overweight on these high-growth technology stocks or even sectors.

We look at the value of the market, but we are overweight cash in our overall allocation so that we can take advantage of opportunities, because it has been a long time since we had a correction in this market.

We had, you could say, a slight decline this year, but we think that we could experience a correction during the second half of this year.

So if there was a, a correction there, Megan and, and you wanted to put some money to work, where, where would you look?

What, where would you be opportunistic?

Honestly, if you look at the small and mid cap sector, that sector hasn't really participated in this rally as much.

Um, I would love the opportunity to put some money to work in this space, but it's also very cyclical and it can be interest rate sensitive.

So we are cautious on this point, but this is where we will look at the pullback of the correction.

Does this take into account all these risks that we might see from an economic perspective in the future?

So we like that side of the market.

We think this is the least appreciated area.

Do you think we need to lower rates for this to really bear fruit?

Um, that's usually when the Fed has to step in and cut rates.

It's because the economy is doing less well.

Um, you want to be able to get, that's when these, these, uh, small and mid cap stocks, that's when they tend to get hurt and, but then , coming out, coming out, coming out of the recession or coming out of the economic slowdown, these are also the ones that are recovering the most.

So we can be a little ahead if valuations factor in this downside risk, because they are the ones who will benefit the most from it.

Megan.

Thank you so much.

Happy to see you.

THANKS.