Fed’s rate hike forecasts will probably be ‘even-keeled’: Strategist

Aperture Investors Chairman and CEO Peter Kraus speaks with Yahoo Finance Live about the latest U.S. GDP numbers and how it could influence Fed policy.

影片文字轉錄稿

- All right. The US economy growing more than expected in the fourth quarter, even as fears of a recession loom. GDP rising 2.9% at the end of 2022. The growth coming slightly below that 3.2% number that we got for the third quarter. Taking a look at where we stand in the market, getting gains across the board. Dow up 138 points as investors digest that data on GDP, but also what we've gotten from earnings from a number of companies reporting their quarterly results.

We want to bring in Peter Kraus, Aperture Investors chairman and CEO. Peter, it's great to see you again. So how do you square some of that momentum that we certainly have seen in the market since the start of the year against that slowing growth picture that we are clearly starting to see play out in the economy?

PETER KRAUS: Well, I think the market is anticipating, as you said earlier, Seana, a 25 basis point increase in rates for the Fed, and probably more importantly, somewhat positive commentary with regard from Chairman Powell on what the future rate increases are. I think the risk in the market right now is exactly that in the near term. Powell could easily say on Wednesday next week that is raising rates 25 basis points, but he may think that doesn't mean it's the end of rate increases.

And there may be more than one or two beyond that. And that would actually take the market down. So I think the market is kind of waiting to see what the Fed says. I don't think there's a lot of upside in the market right now. There's probably more downside.

- But that GDP number in and of itself, is it enough, Peter, to perhaps change the rationale a little bit of the Fed? And does this look anything like a recession, a 2.9% GDP number and a 3 and 1/2% unemployment number? Take all the commentary aside, does this have the makings of a recession?

PETER KRAUS: Well, look, you know that the GDP number, which is an annualized number, is backward looking. We know by your chart, actually, that the first quarter and the second quarter of 2022 were negative GDP prints. Traditionally, that is a recession. Now, the National Board of Economic Research has not called a recession. And they may not. But there has been a significant reduction in economic activity on the basis of the Fed moving rates as much as it has.

So I think what's going to happen is the Fed is probably going to be even keeled, won't give you much of a view on whether or not there is a cessation of rate increases. The market will be modestly uneven, probably goes down a little bit, and then we get further into earnings season and we see what companies say about future earnings. And my guess is companies are going to be tepid about what they think their earnings look like in '23. And therefore, in the middle of this year, we're going to see a weak market. That will recover by the end of the year. We might have a recession in that time period. But that's what I think is going to happen.

- So, Peter, a market that will recover by the end of the year. So where we stand then at the end of 2023 essentially flat from where we are today?

PETER KRAUS: Yeah. Plus or minus 5%. The thing that we're not talking about is the credit markets. So the credit markets are set up very aggressively right now. Spreads are tight. People have been buying credit. They've been going out on duration. And there's been no real increase in credit spreads from the need to refinance. And if interest rates don't come down by the end of '23, companies are going to need to refinance at much higher interest rates. Their revenues are not going to be that much greater. Could be even less. And that's going to cause some downgrades and some credit risk. And that hasn't played through the system yet.

- Between now and the end of '23, though, Peter, what type of decline are we talking about? And because of that, how do you invest into this market?

PETER KRAUS: Well, look, my view on investing has always been don't trade. Invest. Equity markets are going to go up over time. We know that. If you're going to trade in the market, it's a very, very challenging thing to do. The market at 4,000 or thereabouts is reasonably priced. It's not cheap. It's not expensive. But it's reasonably priced. You can buy now. Market probably goes down 10% to 15% from here. But you would have to buy at that point. And most people don't. It's challenging to buy in a falling market. So I think if you average into equities over the next six months, that's a good entry point.

- Peter one of the common themes that we've heard from a number of our guests over the last couple of weeks has been the opportunity to oversee specifically what's happening in emerging markets and the play here just on China's reopening. How big of an investment opportunity do you see that being for the long term?

PETER KRAUS: That's a good question because you put a time frame on it, the long term. Emerging markets have been underperforming for 10 years, equity and debt. And both are interesting places to invest. Emerging market equity yields are probably between 7% to 8 and 1/2%. Emerging market equities have been depressed for 10 years.

Is China going to reopen? Yes. When? Who knows? Will China's reopening and India's continued growth drive emerging markets? Absolutely. Are they likely to grow faster than US markets in the next couple of years? Yes. Is it more volatile? Absolutely. Should you allocate capital to it? I would.

- All right. Good stuff. Got to leave it there. Peter Kraus, thank you so much.