National Chief Market Strategist Art Hogan sits down with Yahoo Finance Live to discuss the Fed factoring Russia-Ukraine into its rate hike cycle, inflation, energy sector volatility tying into the U.S. economy, and consumer-facing retailers.

Video Transcript

- Now, as Russia-Ukraine tensions continue to swing the markets with each new development, President Biden weighed in as he spoke to reporters today about the very high probability of a Russian invasion. Take a listen.

- Mr. President. What's Russia's response? How high is the threat of a Russian invasion right now?

JOE BIDEN: It's very high.

- [INAUDIBLE].

- Why?

JOE BIDEN: It's very high because they have not-- they have not moved any of their troops out. They've moved more troops in.

- But you said this is going to happen now.

JOE BIDEN: Yes. My sense this will happen in the next several days.

- Well, with that warning and other data moving markets today, let's bring in Art Hogan, national chief market strategist. Thank you so much for joining us. Now, hearing President Biden talk about this very high probability of a Russian attack after a week of mixed messages on Russia, how much of this is already priced into the market versus other things weighing on it, like inflation?

ART HOGAN: Yeah, such a great question. It's really hard to separate those two things. Because clearly, the two things we're most concerned about right now in terms of headwinds for the market and causes of volatility are clearly tensions in the Russia-Ukraine.

And that, as you said, we've seen headlines go in both direction that perhaps things are getting better, perhaps Russia will move some troops back. And now, it feels like, that narrative has slipped into, they're not, and it's getting worse, not better and that clearly, our concern over not just inflation, but what the monetary policy response to that inflation will be. And those headlines have changed quite a bit too.

We've gone from thinking the Fed would be very, very deliberate in their actions starting in March and telegraphed everything well for us to having some outliers on the committee just talking about being very aggressive, a lot more aggressive than what's priced into the market. So we have a couple of headwinds that we're really facing right now. And every day, the story changes a bit.

- So then in terms of strategy, some of the analysts that we've spoken to are taking this barbell approach to volatility balancing some of these high-risk and no-risk assets. But for bonds, which are highly dependent on interest rates, what's the strategy there as the Fed does prepare to rate hike-- to hike rates?

ART HOGAN: Yeah, so if you made a pretty clear notion that interest rates are going higher, you want to keep your duration short. You certainly want to adjust your 60-40 portfolios and have a less of an allocation in fixed income and certainly find alternatives in fixed income that will likely will write out the rising interest rate environment a little bit better. Things like BBCs and baby bonds and REITs as a substitute for some of that bond exposure you have in the classic example.

But in terms of the barbell, we'd certainly agree with that. You want to have access to growth. But that growth access needs to be manifested in the expressions of companies that are actually measured by PEs and not price to sales or price to revenues.

We've already seen degradation of multiples and the price-to-sales component. And we think that likely continues as interest rates go higher. On the other side, you really want to have exposure to things that do well in a rising interest rate environment. And that likely is the financials energy and industrials.

- Art, when we think about the Fed-- and, of course, they want to get their hands around inflation. But how does international conflict change the Fed's calculus, especially for what they've signaled thus far?

ART HOGAN: Yeah, you know, it's interesting, Brad. And that's a great question. So we oftentimes talk about the things that the Fed will likely bring up at their FOMC meetings and what's-- when you talk about around the table. And clearly what's difficult to drive direct line to would be a conflict with Russia and the Ukraine directed back to the profitability of the S&P 500.

But that second-order effect, what's bad for the eurozone-- clearly higher energy prices. And clearly, economic slowdown in the eurozone is going to have a direct impact on the US economy. So that certainly plays into how they think about what they need to do for monetary policy.

On one side, it cuts both ways, right? Higher energy prices are one of the problems entered in the inflation picture. But clearly a slowdown in Europe that we're very closely tied to is not going to help motivate them to be even more aggressive. So it's certainly part of the conversation. And we'll know more about that after they have their meeting in March.

- Some investors would look at prices and equities right now where they can kind of pick their basket of or their shopping list, if you will. Do you look at it as there's still room to the downside at this point in time with some of the volatility that we've seen play out over the course of this week? Or is this the time where you would expect investors if there were those that were going to set their entry points to do so now?

ART HOGAN: Yeah, I think that's a great way to think about this. You want to sharpen your pencil. You want to look at what's moved the most and yet, has probably the least impact on both rising interest rates and/or a conflict with Russia and Ukraine.

I think thinking about it that way sets you up to say, OK, you know, look how much damage we've done to traditional technology companies that are trading at incredibly low multiples right now, multiples of PE. The other side of that equation is how much of energy companies run up. And the defensives, like the staples, clearly gold. And make sure you don't get caught up in that swing high or right when that tends to crest and roll over.

We tend to see much larger movement in the anticipation of events, whether it's the start of a rate hiking cycle or the beginning of a military conflict. And once they began and once we have the actual event, they tend to roll over. So I'd be careful on some of the defenses and certainly be careful on some of the safety trades and the havens because they can roll over just as quickly as they've risen.

EMILY MCCORMICK: Art, what's your expectation right now for what move, whether it's 25 basis points or 50 basis points that we'll see from the Fed in March. And between now and then, what on the margin do you think could change this outlook since we will be getting another jobs report and more inflation data between now and then?

ART HOGAN: Yeah, such a great point. There's a lot of information that we get in between the now and the then. And clearly, another CPI, another PPI, another jobs report, clearly, all the regional Fed banks that have prices paid components baked into their reports.

Certainly, the industrial production capacity, utilization, which has a pricing component baked into it. So all the things related to inflation, clearly, if we see a peaking and a rolling over, that likely moderates the first move that they make.

I would also argue that if the Fed were ready at this juncture to go ahead and frontload this 50 basis points, we'd be hearing about that from a whole parade of Fed speakers and not just one from St. Louis. So I think that the Fed hasn't gotten to the point where they really want to message to the street, get ready for 50 basis points.

EMILY MCCORMICK: And zeroing in on one company specifically, Walmart, reported better than expected quarterly result-- [INAUDIBLE].

ART HOGAN: Yeah, Walmart was certainly doing a good job of [INAUDIBLE]--

- Yeah, Art, I'm just going to jump in here just very quickly. But I think the question that Emily was about to ask or get at was regarding Walmart. We saw some of those earnings. We've got a ton of retail data that came out over the course of this week as well.

When you pair what you saw with Walmart and essentially, of course, the largest brick and mortar retailer in the US and extrapolate what we may about the state of the consumer right now, is there anything that investors should be hanging their hat on from that report that helps give a little bit more insight into what types of products have still staying power even in light of some of the inflation that they are weathering right now?

ART HOGAN: Yeah, certainly. Great question. I think when we think about the consumer, we oftentimes wrap up our impression of how the consumer is doing around the last month that we've heard about. And the December retail sales were a bit of a disappointment.

But if you look at the entire fourth quarter, it was much better. And I think we front and loaded Christmas shopping season because people were afraid of inventory shortages and not being able to get the products that they wanted. So I think the Christmas shopping season started very early. And then Omicron certainly hit at some of the most important times of December when the consumer would be out there.

I think what's really important to take away from a Walmart and the retail sales number that we got for January is the consumer is alive and well, has very rock solid balance sheets. The personal savings rate is about two times a historic rate that we've seen over the last 50 years.

So I think you've got a well-employed strong balance sheet in the consumer. And they continue to be strong here. So when we think about that, what we really like to see, as we work our way into the springtime, is that mix shift of consumers looking to buy more services than they are goods. And I think that naturally will happen.

We'll see a flip flop of that equation where demand for services picks up and demand for goods normalizes. I think that helps the inflationary pressure we're seeing for a lot of goods right now.

- Certainly seeing that inflation continuing to persist. Thank you so much for your insights. Art Hogan there, national chief market strategist. Thank you a--