AI Stocks, Treasury Yields & Oil: The Biggest Risks Facing Markets

Wall Street is looking at mixed to flat trading and this does come after a steep sell-off on Thursday as escalating tensions regarding the Middle East conflict as well as rising Treasury yields sent shockwaves to equity and bond markets.

Now we did see Brent crude surge past $100 a barrel yesterday while the benchmark 10 year yields spiked to a new 18 month high of 4.71%.

Inflation concerns are back up and forcing traders to bet that the Federal Reserve may have to raise interest rates rather than cut them at the same time, ballooning AI cap forecasts from Alphabet and Tesla have not helped while here to break down what this means for investors and how to position portfolios in this volatile environment is co-founder and CEO of key advisors wealth management.

Good morning.

Thank you so much for joining us.

So we are looking at some signs of stabilization in New York morning trade, but we have to keep in mind that bond yields do remain elevated.

So if yields do break past recent highs and climb closer to 5%, how concerned are you here and what can we expect to see?

There's no question that the 10 year over 4.7 and trending towards 475 is going to be a real problem and it's really going to come down to whether or not we re-escalate this war even further.

We would expect some type of news over the weekend, maybe today, who knows, but we're at a critical inflection point right now and we have been buying this.

Dipped the last two weeks, but when we look at it objectively 2 weeks ago, rates weren't near where they are now.

We've seen a steep increase.

Now we still think the probability is we're close to a peak in rates short term as well as oil short term.

So these buys will hopefully pay dividends, but we have to respect the fact that if we do go and really escalate this war substantially from here.

You're going to be seeing oil well over 100 and yields accelerating, and that's not going to be bullish short term.

So you know you have to be really nimble in this market and you have to make sure you're positioned obviously correctly because it's been a tough trade for tech.

However, the broad markets held up really well when you look at the S&P.

And the equal weight S&P, they're not that far off from highs, so I'm extremely impressed with how resilient the market is, which is reinforcing our bullish sentiment that if the market was really concerned about things really escalating, I think you would see the S&P, as well as the equal weight down much more than where we are today.

Yes, I think perspective is key here, Eddie, as you just mentioned, because there are a lot of competing headlines on this Friday morning yet once again and we'll have to wait and see what happens when it comes to geopolitics in the Middle East.

But when it comes to the raid outlook, of course we're Counting down to the July Fed meeting, which will take place next week and we'll have to see what comes out of the central bank.

But do you think investors out there need to be prepared for a higher for a longer environment and what does that actually mean for the investment landscape?

So when we look at Fed policy, I think when you look at the meeting next week, I don't think they're going to raise interest rates or imply that they're going to be doing any tightening in that meeting.

So we look at next week's meeting as a bullish catalyst because the data that we got last week from an inflation standpoint showed quite a bit of deceleration.

Now the biggest risk for us, in our opinion from a monetary policy perspective is.

If oil, oil is gonna drive the bus on everything, uh, in regards to Fed policy.

So if oil stays elevated at this level through the month of August, then I think you have a live meeting in September, which is when they will tighten.

And if they do tighten in September, you know, you're gonna see another dip.

So our capital markets assumptions right now is we're gonna get a rally next week heading into mid-Augus.

August and then it's going to be inflation dependent.

If the inflation stays sticky, the probability of a tightening cycle for the month of September increases, and then I think you see another big dip before the election.

So it's been a real choppy and tough year from the market perspective, but this is why you have to stay nimble and you can't just, uh, you know, close your eyes and hope things work out.

Yes, and Eddie, you just said oil will drive the bus, but we are keeping a close eye on diesel prices as well, so I guess it really depends on the bus, but we can't ignore earnings since we have been paying attention to the hyper scales.

Alphabet did disappoint investors after turning cash flow negative.

So given the rotation we're seeing in the broader market, are you advising clients out there to trim heavy tech allocations and rotate into actual defensive sectors right now?

So we actually started doing that at the end of May and beginning of June.

We talked about it uh in the media, we talked about it in our webinar.

We've been tweeting about it that we started taking money from some of our tech sectors as well as the S&P due to the concentration in the MG 7, and we rotated into healthcare, some ETFs as well as individual stocks.

We also rotated some S&P exposure to the equal weight S&P.

With the thought processes it would lower volatility.

Now, we didn't think we'd see a 30% drop in some big cap names from the top from June 1 to where we are now.

And so what we've started to do is use some of the cash and some of our defensive positioning in the last two weeks and started to buy some of the areas that are down 15 to 30% in a short period of time because we think the trend is still bullish.

So, uh, we were blessed that we got defensive at the right time and now we're Actually increasing some of the offense to get into some of the semis and some of the cybersecurity stocks and software.

We favor those three areas in tech over the mag 7 because we think the back half of the year will show an acceleration of growth, especially in software, because of how much they've been beaten up.

So rotating in and out of these areas has been really critical for us in managing the volatility for our client portfolios. and Eddie, finally, before I let you go, we have about 60 seconds here, but between geopolitical war escalation, AI cap, fatigue as well as inflation, investors out there are anxious.

So what do you think is the single most important action that a retail investors should take right now to protect their wealth for the rest of 26 heading into 27?

I think right now, and of course everyone's risk tolerance is different.

I think having a more broader diversified strategy right now to play the broadening out like an equal weight type of strategy that we started to implement at the beginning of June and end of May time period should level volatility.

My concern is folks that are highly concentrated in the high risk tech trade because of how well it's done.

They're going to see a lot more volatility in our opinion, but they're gonna have to base it off their risk tolerance.

But in our opinion, it's going to be a real bumpy ride heading into the election, especially if this war gets worse.

Uh, so you're gonna have to buckle up, be nimble, have some defense.

There's times that you should be completely offense, and there are times that you should have some defense.

And right now, I think a blend of that is prudent, uh, for investors considering the environment we're in.

Yeah, and speaking of which, we do have to keep in mind that it is a midterm election year as well.

So Eddie, great having you back on the show.

Thank you so much for joining us today and have a great weekend.

Thank you.