Stock market: 2023 will have ‘some twists and turns,’ strategist says

RDM Financial Group and Hightower CIO Michael Sheldon joins Yahoo Finance Live to discuss the expectations for Fed Chair Powell’s speech, tech stocks, inflation, markets, and the outlook for the economy.

Video transcript

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- The third thing you need to know today, the Fed remains in focus this week. Markets will likely be on edge ahead of a speech by Federal Reserve Chair, Jay Powell, on Tuesday. Powell's disinflation comments last week sent the markets higher. Could we be in store for something similar when he speaks again tomorrow? Let's take a quick look at the week ahead with Brad.

- Quarterly earnings, consumer confidence, and the State of the Union all coming up this week. Here is what you need to know.

- You ready for this?

- The week's big earnings report comes Wednesday from Disney, the first one since Bob Iger returned as CEO. Revenues are expected to be up about 7% year over year with a slight decline in profits. The stock is on a roll, though. Up 25% in January, easily beating the broader market.

Disney's "Black Panther" and "Avatar" equals, they dominated the quarter's movie box office performance. On TV, President Biden will speak to Congress and the nation for his second State of the Union address. Among the top issues expected in Biden's address, inflation, the economy, gun control, police reform, and the war in Ukraine.

And the markets will be anxiously awaiting the delivery of the newest consumer confidence numbers. The University of Michigan numbers come out Friday. Latest reports show consumers are not feeling that great about the economy. The Fed's aggressive rate hikes hitting consumer-spending hard, especially for big ticket items like cars and houses.

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- Let's talk more in particular about the Fed talk expected tomorrow. Michael Sheldon is joining us, RDM Financial Group and Hightower CIO. Michael, it's great to see you. There is now a lot of talk that maybe the market misinterpreted Jay Powell's commentary last week as being too dovish. Do you think that's true? And if so, are we going to hear him try to correct that tomorrow?

MICHAEL SHELDON: Yeah, it'll certainly be interesting. I mean, the markets overall have benefited from a number of tailwinds over the past several months. So we had falling inflation. We had falling interest rates and a falling dollar. Those all helped the markets bounce off their October lows last year.

And then just over the past couple of days or so, we had the Fed meeting last week. So the Fed raise rates by a quarter point as expected. But in his testimony following the statement, Fed Chairman Powell mentioned the word "disinflation" 11 separate times. So that indicated to the markets that we're closer to the end of the current rate hiking cycle, and I think that the Fed is aware of the fact that inflation is coming down.

And then add on to the fact we had a blockbuster jobs report on Friday, and that certainly provided further fuel. So Tuesday will be important for the Fed because I think to the extent that Powell may push back a little bit and maybe be a little less optimistic in terms of when how much more the Fed is likely to raise rates and how-- and the fact that Powell-- that the Fed is likely to keep rates unchanged for a period of time. That could at least cool the markets off just a little bit.

- Well then, to that point, Michael, do you fade the move in tech stocks?

MICHAEL SHELDON: I'm sorry. Say that again.

- Do you fade the move in tech stocks? Tech stocks seem to have rallied based on what Powell said last week on in terms of disinflation. I mean, do you still like tech stocks here? What do you do with them?

MICHAEL SHELDON: Oh right. Good point. So last year was an unusual year where over the past decade or so, growth stocks have outperformed value stocks, and investors have gotten burned trying to give up on growth stocks in large cap tech stocks too soon. Last year, again, was an unusual year because we saw a high inflation and rising interest rates. I don't think inflation is going back down to 2% immediately. It is heading in that direction.

But more importantly, interest rates are probably not going down to the level they were. At the beginning of last year, remember, short term rates were at 0%. Real rates were negative. There was $18 trillion of negative yielding debt around the world. So I think interest rates are coming down off their highs, and we're likely to see the Fed move to sort of a pause this year. So I think there will be a place, ultimately, for tech stocks to participate in the market rally, but I think it's too soon to say we're just going to go back to the market leaders that were the leaders for the past decade. At least right now.

- OK. And so for anybody who's trying to, I guess, best anticipate when the Fed might pause or when that pivot may look apparent, when and how long do you believe the Fed is going to need to see that trend, and then for the markets to be able to anticipate that pivot is coming?

MICHAEL SHELDON: Well, I think it's clear that inflation is coming down, especially on the good side of the economy. What the Fed's been watching is the sticky kind of inflation in things like health care, in wages, and in rental apartments. So even there we're starting to see some signs that these are coming down.

And if you look at a number of commodities, for example, if you look at steel, natural gas, lumber, those are coming down, even wheat prices. So inflation overall is coming down. The part that's sticky is the part that's wages. And it's interesting that even though we had a blockbuster jobs report on Friday, wages actually declined slightly on a year over year basis.

So the difficult part for the Fed is this is an unusual type of economy, and I think they're going to be twists and turns throughout this year. When you think of the R-word-- I was thinking about this. When you think of the R-word, you typically think of "recession." And we think there's probably going to be a shallow recession as we go through the next several months into the summer, but that, ultimately, investors will look ahead to a recovery in the economy and corporate profits that we had into 2024. So there will be some twists and turns as we go through this year, and investors will have to have a little patience.

- And as they have patience, Michael, what should they be doing strategically here?

MICHAEL SHELDON: I think, again, the last 10 years we're all about being in the US and being overweight growth versus value. What we've seen is equal-weighted S&P 500 has outperformed the market cap-weighted S&P 500 over the past year and a half or so, maybe a little bit longer.

And I think if investors were very overweight tech, I think you want to move a little bit more to the middle of the style box and have a little balance between-- a little more balance between growth and value. International is also dramatically underperformed the US over the past 13 years or so, and it's a little too early to say that foreign markets are going to be the market leaders. But it's something we're taking a look at, especially if the dollar has peaked and is starting to go down. That should, in theory, provide a tailwind for foreign markets, although it's a little early to just make that call that foreign markets are the new market leaders.

- Michael Sheldon, RDM Financial Group Hightower CIO joining us this morning. Mike, thanks so much for the time. We appreciate it.

MICHAEL SHELDON: Thank you.