What is the Fed's path for interest rate hikes?

Will the Fed continue to raise interest rates at their June meeting? Belpointe Chief Strategist David Nelson breaks down how the Fed's upcoming decision could impact markets while commenting on China's economic growth outlook.

Video transcript

RACHELLE AKUFFO: The debt ceiling fight is history. Just last week, the senate voted to approve a bill last week that raises the debt ceiling for two more years, sending the legislation to President Joe Biden's desk a few days before the US potentially ran out of money to pay its bills. So with a signed bill to raise the nation's borrowing limit, all eyes are on the central bank's June meeting. The equity market seems determined the Fed will pause rate hikes.

But for more on that, we're joined by David Nelson, Belpointe Chief Strategist. Good to see you, David. So a lot of people expecting this pause, but is it a pause with cuts ahead as the market seems to think, or is this a skip with a sort of wait and see approach by the Fed?

DAVID NELSON: It's probably a little of both. Right now the markets are pricing in a pause. But Fed Fund futures are pointing to some kind of a hike in July. And there's some hawks out there. You had former Secretary of Treasury under the Clinton administration, Larry Summers was just out over the weekend saying that if the Fed stands steady, they should hike by 50 basis points.

The market seems to be getting used to the fact that it's going to be higher for longer, and we've actually seen something of a rotation in the last couple of days down into some more cyclical shares. We'll see if that carries the carries through.

RACHELLE AKUFFO: I mean, and speaking of what's been carrying a lot of the equity markets so far this year, I mean, if you took out the FANG stocks, NVIDIA, and Tesla, they've really been driving the S&P 500 this year. What are we then seeing with this melt-up? Is it market psychology or does this perhaps look like the beginning of a bull run? And does it have legs?

DAVID NELSON: We're living over-- we're trying to live over 4,200 in the S&P 500. That was a pretty important breakout for stocks. And yes, it's largely been carried by just a few sectors. As a matter of fact, coming into June, there were only three sectors positive for the year-- communications, technology, and consumer discretionary. Everything else was in the toilet.

That, kind of, changed on Friday last week. And we started to broaden out on the heels of a pretty robust jobs report, plus 339,000. That's actually good news for the market so we can start to broaden this out. And the market is getting used to the fact that it can maybe weather the higher rates and that maybe recession isn't exactly in the cards.

RACHELLE AKUFFO: So what are some of the risks that you're keeping an eye on as we do see this, sort of, start to spread more broadly?

DAVID NELSON: In terms of risk, probably the biggest risk out there is certainly the Fed. If they really push the pedal to the metal and they slam on the brakes, that's a big risk. But the biggest risk I see longer term is, in fact, China. And not even just the geopolitical aspect of that and the fact that we're, kind of, decoupling.

It's still the second largest economy on the planet. They're still struggling there. As a matter of fact, they're struggling so much that they're actually blocking access to information. That tells me it's worse than I thought. And when the second largest economy on the planet starts to slow, it's pretty rough for global growth. So it's going to hit us in one way or another.

RACHELLE AKUFFO: And, I mean, people were really banking on this post-COVID economic recovery for China. But, I mean, when you look at the latest data even on trade, exports falling 7 and 1/2% from a year earlier in May, imports down 4 and 1/2%, do we yet have a read then on what the Chinese recovery is going to look like, especially if you couple that with the US then bracing for recession?

DAVID NELSON: China has a history of doubling down on bad policy, and they seem to do that continually. The fact that the world, not just the United States, a lot of countries in Europe are looking in one way or another to shore up their supply chains. And it's not lost on some of the largest companies out there.

Even Apple, which obviously has a large codependency in China, not only as a customer, but is certainly their largest manufacturing footprint is now moving some of those facilities to India, maybe a better demographic for them. As that continues, that's got to weigh on China. And I question the health of their economy in the years looking forward. It's certainly not going to be the engine of growth that we thought it was going to be.

RACHELLE AKUFFO: And we certainly didn't hear that come up much in a lot of these earnings calls. I mean, we heard a lot about some of the macroeconomic things but not so much, perhaps the potential damage that might come from China not bouncing back as quickly as possible. What are your expectations then in terms of really opportunities for investors in this sort of environment?

DAVID NELSON: Well, the good news is that earnings are starting to look up. Coming into the year, the earnings estimates the 12-month forward look-ahead was continuing to go down. We've come so far in the first half of this year. I think the second half isn't going to be as big as I thought it was.

But the good news is that we're on the other side of the debt ceiling crisis and that in a couple of months portfolio managers like myself are not going to care what 2023 earnings are going to look like. We're going to be looking ahead 12 months. That's going to include part of 2024, which is expected to be up about 12%.

So I think the mindset is, kind of, shifted from to the glass as half full. There's a point when the market goes up enough that the emotion swings from fear to greed. And I think that's what we're getting right now.

RACHELLE AKUFFO: Speaking of swings, got to talk GameStop here. I mean, five CEO exits in as many years, three CFOs as well. We have Ryan Cohen now coming in as executive chairman. Do you see a viable path forward for GameStop at this point?

DAVID NELSON: For me it's, kind of, like fantasy football. It's a great training vehicle, but there's nothing here from an investment point of view. They've been bleeding cash for years. They continue to bleed cash, revenue declines, so now Cohen's at the helm.

The physical retail footprint for gaming, I don't think that's really there. If they were really serious about doing something positive for this company, they would think about shrinking the business, go for a smaller footprint. Maybe even private equity could extract some cash flow out of this company. But for me, millions and millions will be made and lost on this stock just trading it. But for me there's nothing.

RACHELLE AKUFFO: Well, that's that meme stock line for you. It does come with all those risks. A big thank you there, David Nelson, Belpointe Chief Strategist. Thank you for joining me in this morning.

DAVID NELSON: Thanks for having me.