‘It’s a little premature to fight the Fed outright’: Strategist

Steve Sosnick, Interactive Brokers Chief Strategist, joins Yahoo Finance Live to discuss the outlook on the Fed, moves in the bond market, and outlook on the overall market.

Video transcript

ALEXIS CHRISTOFOROUS: Investors are gearing up for the Federal Reserve's two-day policy meeting this week. And while the Fed is expected to reiterate its commitment to easy monetary policy, investors will be watching to see if concerns about inflation will have any effect on its forecast especially after last week's hotter-than-expected report on consumer prices. Joining us now is Steve Sosnick. He is chief strategist at Interactive Brokers. Steve, good to see you. So what are your expectations for this week's Fed meeting, and do you think it has the potential to be a big market-mover?

STEVE SOSNICK: Yes, Alexis, I do think it has the potential. I think they're going to try to avoid making this a market-mover, but it does have the potential. You know, as one of your earlier guests alluded to, the Fed has very much a-- you know, a needle to thread or a tight rope, whatever analogy you feel like picking, because they do want to see some inflation in the system but don't want inflationary expectations to get out of control. I think we are starting to see inflationary expectations ratchet up, although we're seeing some of the commodities a little bit lower today. But you know, we're definitely hearing about labor cost inflation and stuff like that, and I think the Fed has a really tricky job.

The other thing I think the Fed really has to address, because they haven't really said so much about it, is the growth of the reverse repo facility. So you've got a Fed, on one hand, that has committed to monetary stimulus and bond purchases and on the other hand, basically having banks come to the window to drain about a half trillion dollars in liquidity.

And so something got to give. It seems kind of silly to be, you know, sort of like running a hose into your basement on one end and running a pump on the other end to drain the basement. At some level, that doesn't seem sustainable, and I have a feeling that Chairman Powell is, if not going to address it in the statement, I think he's going to get some questions about that. It will be interesting to see how he answers it.

KRISTIN MYERS: So Steve, I want to ask you about inflation. You were obviously just talking about that tight rope that the Fed is going to really have to walk here moving forward. Now, this is a question I think Alexis and I have been asking every single guest almost every single day over the last couple of weeks, and so I'm just going to ask this straight up.

What do you see the inflation narrative being? Are you in the camp, like the Fed, that these moves are transitory? Or are you in the camp-- and we have heard many people come out and argue about this-- that essentially, right now, the Fed is getting it totally wrong, at least when it comes to inflation? Where do you stand on this issue?

STEVE SOSNICK: I'm going to say I stand somewhere closer to-- somewhere in the middle, but on the side of the Fed is risking getting this wrong. The reason being I think that the labor cost inflation, which, by the way, is an interesting problem for them because if you're all about full employment and all about-- you know, which involves making people's lives better by being able to earn a living, it's tricky because that's inflationary. But on the other hand, it's a good thing if people have more money in their pockets and higher wages. Well, it's good if you're the person. It's not so good if you're the employer. And that's a push-pull, but that's a whole other societal thing I won't get into.

But I think the labor costs tend to be a bit stickier. Commodities go up and down. You know, we're not hearing about lumber zooming to the moon every day. It's come off its highs. You know, we are hearing about sort of drought in a lot of the West. That may have an effect on agricultural prices. But these things tend to move up and down. Labor tends to be sticky.

I think that's why you're seeing employers go with signing bonuses or other non-salary type of incentives to get people in. Because if you give someone a $500 or $1,000 signing bonus, they don't expect another one of those. If you raise salaries by a couple of dollars an hour, that's a sticky cost. Salaries tend not to come down. And so I think that's really the push-pull, and I think that it's tough because they have the mandate for full employment but you run the risk of overheating if you're not doing much about, you know, the monetary stimulus just continuing to fly in.

ALEXIS CHRISTOFOROUS: Steve, I'd like your take on what we're seeing in the bond market because I think it was a bit of a surprise that we saw the 10-year yield hitting a lowest level at about three months on the heels of that hot inflation report last week. It sort of begs the question, what do bond investors know here that equity investors don't?

STEVE SOSNICK: Well, I think bond investors, you know, at the root of it-- bond traders, certainly, are still subject to the same rules of supply and demand as everybody else. And I think what you saw was-- the CPI numbers came out the day after futures rolled, and you get some dislocation sometimes in all futures markets the day after a quarterly roll. And I think what you had was people widely expecting the numbers to be worse than expected. And they were.

The problem is, if everybody is on one side of the trade, if enough people are waiting for people to sell on the result of bad news but everybody sold in advance, you get an air pocket, and it reverses the other way. And I think you're seeing a lot of technical factors in the bond market, particularly as we get into quarter-end.

When we think about last quarter, when we-- when the rate-- when the yields really accelerated into March 30-- 31, rather-- which was about the high end of rates, I think there was a bit of an overshooting in that direction. And I think now, people caught on the other side may be overshooting as we get into quarter end, you know, not wanting to be short, whereas last quarter, they didn't want to be long.

So I think you get those dynamics. I think bond traders-- you know, you're talking about a product looking-- trying to look 10 years in advance. But we're all analyzing the-- you know, the daily swings, there's a bit of a disconnect in that. And I think that's why you can sometimes see trades going off at levels that don't necessarily seem fundamentally representative one way or the other.

KRISTIN MYERS: So Steve, let's talk about investors and how they really should be approaching their portfolios at this time. Of course, there is the saying, don't fight the Fed. It seems like a few folks really want to right now, especially around these questions around inflation. So how should folks really be approaching their portfolios, be navigating through this period that we are in right now?

STEVE SOSNICK: Well, I think it's a little premature to fight the Fed outright. Right now, you know, you don't want to-- you really don't want to be fighting them. There's just too much money flowing in at this point for you to be aggressively working against them. It's lifted asset prices dramatically. Whether or not it's lifted actual inflation, it's certainly created inflation in financial assets. We-- there's little doubt of that.

That said, I think I would take a more defensive posture. I mean, in talking about sometimes when markets act a little counterintuitively, I think we're seeing that in tech stocks today, where they're acting reasonably well despite some legislative talk that could be extraordinarily unfavorable to them in the long run. But I think, you know, as of-- at the moment, FOMO defeats risk worries. And so I think I would start to move a bit more cautiously while not necessarily panicking out of stocks. But I think the-- there's a tremendous amount of enthusiasm priced in them right now, and I think that is somewhat dependent upon infrastructure spending and Fed accommodation. And either of those can be pulled away at any moment, and that would be-- I mean, the Fed-- that comes back to the Fed's tightrope acts.

ALEXIS CHRISTOFOROUS: All right, Steve Sosnick, chief strategist at Interactive Brokers, thanks so much.