Market believes Congress will get debt deal passed: Strategist

Crossmark Global Investments Chief Market Strategist Victoria Fernandez details the impact of the debt ceiling deal, Fed rate hikes, and elevated recession risks on markets.

Video Transcript

- Well, it took President Biden and House Speaker Kevin McCarthy months to agree on a debt ceiling compromise. Now comes another challenge, getting that deal through a divided Congress in a matter of days. For more on the deal, we welcome in Victoria Fernandez, chief marketing strategist at Crossmark Global Investments.

Victoria, good to talk to you today. You know, I'm looking at the market reactions here. Pretty muted when you think about just how concerned investors seem to be going into, sort of, this x date. What do you make of the reaction here? And what are the potential risks that still remain?

VICTORIA FERNANDEZ: Well, Akiko, I think the biggest risk was not getting to an agreement between President Biden and Speaker McCarthy. So the fact that happened over the weekend, I think gives the market enough confidence that one way or another, whether they decide to take a hard path and continue to debate on this, or whether they take an easier path and vote on it and pass it on through, the market believes that Congress will get this passed.

If it goes to the June 5 date, maybe one day more than that, but the market believes it's going to get done. I think we're actually-- the House Rules Committee is actually meeting right now as we speak, to try to get it ready to go to the floor. So I think that's why, probably, we have a more muted response today.

We saw more volatility the end of last week when there was still tremendous uncertainty, but now, some of that has been removed. Doesn't mean we don't have more volatility to go. But I think a lot of it has been taken out of the market.

- Victoria, what do you think all this does if, in fact, Congress does pass this debt deal? What does this do for the Fed's calculus, in terms of the likelihood, how much does it increase it, that we will see another rate hike next month, in June.

VICTORIA FERNANDEZ: Well, I think it's not just the debt ceiling, Seana. There's also the whole fact that the banking crisis is eased somewhat, that was a huge thorn in the side of the Fed and what they wanted to do and continuing to hike rates. So that's come off pace a little bit. The debt ceiling now seems to be like it's going to happen.

We're seeing some weakening in some of the elements that the Fed wanted to see, not as much as they want, but some weakening. So I think it puts them in a little bit of a position where they feel like they might have better control of what's going to happen going forward. But we did have Barkin this afternoon, coming out and saying, look, he's on the higher end, he still thinks rates probably need to be raised a little bit more. So I think June is still a live meeting.

I know for a while, everyone thought it was going to be a pause and we would be done. But now you've got Fed Fund Futures showing you about a 65% probability of another 25 basis point hike in June. So the inflation reports coming out the day before the meeting will be key, I think, as to what they intend to do, and it doesn't look like inflation is coming down fast enough for them right now.

- Yeah, no question. We have seen a huge swing in expectations for the next Fed meeting. When you think about the data that we've gotten more recently though, to what extent do you think the chances of a soft landing have increased?

VICTORIA FERNANDEZ: Yeah, I do think they've increased. I mean, no one wants to be a bear, and I have been more bearish really thinking that we're going to get a mild recession later this year. I still think that's probably what's going to happen but the probability of a soft landing has increased as you look at some of the economic reports that are coming out.

And we're saying, OK, maybe we're starting to see some cracks in some of these elements, and some of the leading economic indicators in the labor market. Obviously, this week is going to be really important to see what the JOLTS are doing, what the payroll report tells us.

If JOLTS come down, right, if job openings come down, we get more people coming into the labor force, more participation, we see a little tweak higher in the unemployment rate, then, I think, that says, OK, maybe things are happening the way the Fed wants them, but I just don't think it's at a fast enough pace.

So I anticipate they're going to continue to hike rates, which means more pressure on the market. Along with the 500 basis points they've already done, we still think we get a mild recession at the end of the year supported by the consumer keeping us from even a heavier recession.

- Victoria, how are you looking at the data coming out of the housing market? We had the Case-Shiller report this morning, home prices higher for the second month in a row. How does that factor into the inflationary story, the Fed story, then ultimately, how the economy is holding up?

VICTORIA FERNANDEZ: Right, and you combine with higher prices of housing, the limited supply that's there. So as we learned in COVID, as your supply goes down and the demand is still there, you're going to get more inflation. So I think these higher housing prices could really be a sticky part, right, of the inflation.

We've been seeing it in the rents. People anticipated rents would have come down more than they have. Zillow, actually, last month said rents went higher. So I'll be interested to see what that number turns out to be.

But with interest rates higher, perhaps that pulls a little bit of the demand back. 30-year mortgage rates went to about 7.1% on Friday. So we'll see if that keeps consumers from buying homes out there. But with such limited supply, I think demand is going to continue to put some inflationary pressure.

- Yeah, housing market always kind of a leading indicator to see where the economy is headed. Let's talk about where the markets are right now, how you're positioning yourself. We've seen a lot of investors come on board here to talk about how they are bullish on the tech sector again. What are some of the sectors you're keeping an eye on right now?

VICTORIA FERNANDEZ: Yeah, so as I mentioned a moment ago, we still think at this point in time that we'll get a mild recession later this year. So we don't want to say we're completely risk on, you want to have some defensive posture in your portfolio. So do we have exposure to tech? Absolutely, we have exposure to tech, to NVIDIA, AMD is a name that we like.

But we also have some exposure to some of the more defensive names. So you look at a Kimberly-Clark, or a General Mills. We have some exposure there as well. I wouldn't say we're all in on any particular sector, we look within the sectors and see what are the quality names.

So those names that have strong balance sheets, good management teams that have been there for a while, good business models, good cash flow, That's what we're really looking for. And so some of those names like we mentioned already, along with a JPMorgan, even a PayPal. So you can get a little more cyclical exposure but still keeping on the defensive with the consumer being as strong as they are.

- Victoria, what about the small caps? Some of the names that haven't participated in the rally so far, year to date, with so much of the focus on those large cap, especially the large cap growth names. Is there an opportunity than some of the smaller players?

VICTORIA FERNANDEZ: There can be. Now if we're going into a recession, even if it's a mild one, we know that small caps are probably going to get hurt more than the large caps in that play. So maybe now is not the exact time to chase after the small cap market, especially when we've seen breadth be so narrow in the leadership of this market.

I would wait until we see breadth widen out a little bit, maybe see some of the financials, some of the energy names come back into play a little bit, and get a little more support for a sustainable rally in the market. And at that point then, I think you could go ahead and dip your toe back into small caps and start building them as the economy gains strength at the beginning of next year.

- Some good takeaways there as always. Victoria Fernandez, Crossmark Global Investments. Good to talk to you today.

VICTORIA FERNANDEZ: My pleasure.