With Federal Reserve rate cuts anticipated by May, Brett Ewing, First Franklin’s Chief Market Strategist, joins Yahoo Finance Live to discuss the sectors he believes present the best opportunities in the current market landscape.
Editor’s note: This article was written by Angel Smith
Video Transcript
AKIKO FUJITA: Well, the NASDAQ and S&P 500 hitting all-time highs this year, helped, in part, by Magnificent Seven stocks, which account for roughly 50% of the S&P gains in 2024. So how high can these stocks continue to go?
Our next guest thinks the rally still has legs. To break this down for us, let’s bring in Brett Ewing, First Franklin chief market strategist. Brett, good to talk to you today. I want to start with the base case that you have here, because you say that you’re actually expecting four to five rate cuts from the Fed, because you don’t think the economy is going to be on really sound footing for much longer.
Talk to me about what it is that you see in terms of the clouds that are forming around what looks to be a pretty resilient macro environment right now.
BRETT EWING: I think when you look at the data right now, it looks pretty strong. We’re looking out for, I think, some things that I think are going to occur over the next few months is in the CPI, the shelter component, who has been just really stubborn and not rolling over the way we needed to. And that accounts for 36% of the CPI.
But we believe you’re going to see that come down over the coming months. And it’s going to give the Fed a little bit of green light to move forward. Also, we’re looking at softening the labor market. This is a big week for jobs. We have JOLTS out tomorrow. And we have the jobs report this Friday.
So it’s going to tell and paint a picture for us what’s going on there. We believe that the labor force is softening. Continuing claims just hit 1.9 million. I think the JOLTS number is going to come in a little light tomorrow. So we’ll see.
RACHELLE AKUFFO: And Brett, you put in your notes that you believe the rally still has legs, as most professional investors remain too defensive. If this is what it looks like when they’re too defensive, what do we expect to see then happening in the next few months?
BRETT EWING: Well, we’re looking at some of the hedge fund positioning. There’s a lot of positioning right there, where they’re still in the value area and not fully exposed into some of the growth areas. And I think that this trend could continue for a while.
One of the areas, though, that I don’t think the market is really positioned for is probably our favorite asset class going forward, which is small cap stocks. And when you’re ever– once that first rate cut hits, that’s usually one of the top performing asset classes for years following that first rate cut.
AKIKO FUJITA: So any particular names you want to throw out there that you think maybe investors should be looking at. if does, in fact, come down to, as you have pointed out, four to five rate cuts?
BRETT EWING: Well, I think investors, depending on their portfolio without going into individual names, I think, you can play small and mid-cap stocks through ETFs– I think that’s a good way– index mutual funds. But if your portfolio– I think, today is one of the greatest opportunities to get in that space.
On a relative PE, it’s one of the cheapest entry points we’ve seen in almost 20 years. Again, we think that we’re going to have rate cuts at a pretty moderate to slow pace, which is healthy for stock markets going back and looking at history.
And we believe once those rates cuts start happening, we believe that the small cap and mid-cap areas are going to run the strongest.
RACHELLE AKUFFO: And Brett, I have to ask you about areas that you’re staying away from. You’ve got homebuilders as one of the areas. Talk us through that. And, perhaps, any other sectors that you’re steering clear of.
BRETT EWING: Well, we believe the homebuilders have had their incredible run. No doubt about it. But we believe that mortgage rates will decline over the coming 12 months. Now, our theory is that inventory or competition to new home builders will increase.
And so as that inventory rises, we believe that there’s a lot of pent-up demand with people that haven’t been able to move, because of their mortgage lock scenario. So we think transactions pick up. And it’s going to cause competition for the homebuilders going forward.