Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss the outlook for the bond and stock markets, volatility, and GameStop stock.
Video Transcript
BRIAN SOZZI: All right. Let's stay on the markets here and bring in Steve Sosnick, chief strategist at Interactive Brokers. Steve, always great to get some time with you. We just broke existing home sales. Disappointing read. Retail sales disappointed earlier in the week. How concerned are you that the economy is slowing down and the broader stock market still hasn't priced any of this in?
STEVE SOSNICK: Good morning, Brian. Yeah. That to me really is the question that we have to wrestle with, is the bond market is saying one thing and the stock market is saying another. The question becomes, is the bond market taking the Fed at its word in that we're really just going to go back to 2% inflation because the Fed is such a skillful manager, or are we pricing in some sort of recession?
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And the stock market doesn't-- you can argue that some of that got priced in. I think that to a certain extent what we saw earlier this month, this quarter, has been the market pricing in some of the economic worries. You can argue that the Fed mollified people because I've called Chairman Powell Goldilocks in a suit plenty of times before. And I think he did that yet again. He said what the market wanted to hear. But it's clear that things are not as robust as they were. And this is even before you start to include things like student loan moratoria ending in May and things of that nature.
The economy is slowing, which is not a bad thing. But the exogenous inflation is still there. It's going to be a tricky time to navigate. And let's not forget that as we've talked about before, we were looking for higher volatility this year. Moves up like we've seen this week are still volatility. They're just the kind of volatility that people want to see. Socially acceptable volatility, as it were.
JULIE HYMAN: Yeah. Green volatility I guess is a lot more socially acceptable than red volatility for sure, Steve. And so it sounds like, though, what you're saying is that maybe we should prepare for some more read volatility, right, that if stocks in particular are getting a little over their skis here, so to speak.
STEVE SOSNICK: Well, this is the thing. I think we got-- we came down a long way very quickly. There's still some stuff going on out there that, you know, if we get progress on the Russia front, that would be a positive for the market. You take away global uncertainty. That's a good thing. Equity traders are not good at all when it comes to dealing with global uncertainty. So that would be a positive. I'm not going to be completely gloomy.
But remember, as we were discussing, volatility means you go up and down. And so I think you're going to get some of each as we proceed through the year and as we digest what's going on at the Fed. The futures this morning didn't like some of the comments out of one of the Fed governors who sort of sided with Saint Louis' Bullard and looking for 50 basis points going forward.
Whether that takes hold or not, I don't know. The markets seem to be content with 25 here and there. Well, 25 regularly. The inflation is still to be reckoned with. Even though the Fed has stopped buying bonds, the balance sheet continues to grow. I was just looking at this number. It's up about $220 billion year to date, which is still averaging like $70 billion a month. There's still these excesses that have to come out. So as we balance the risks, this is what we see.
BRIAN SOZZI: And I should note, Steve Jim Bullard out this morning with a statement suggesting rates should be at 3%. How big a risk would that be if the Fed pushes on that gas pedal and starts to do some 50 basis point rate hikes? Do you think that's priced into stocks?
STEVE SOSNICK: I don't think it's priced in yet. I think the bonds are starting to price it in. We saw the two-year yield explode on that. For the first time, we've seen 3-5 inversion in a long time, meaning the three-year yield is higher than the five-year yield. Inversions signal tighten Fed policy and risk of inflation. We're seeing the 2s 10s at about 20 basis points last I looked. That's flat as a pancake. I don't know that the market is prepared for it. But again, there's still money coming in. The balance sheet is continuing to grow. I think that would be the thing that spooks the markets more is actually starting to see the Fed balance sheet finally plateau and then start to reverse because if there's still money flowing in, that's on the positive side for risk assets.
JULIE HYMAN: Yeah. And Powell signaled that we might at least get some more of a plan at the May meeting. So Steve, we've been sort of talking around this. But just put most simply, if stocks and bonds are telling different stories, who's right?
STEVE SOSNICK: That is always the million dollar question, Julie, because, ultimately, I would say in terms of getting the economy right, bonds usually do get it right more often than stocks because bond traders are less distracted by all the noise. But if you're trading government bonds, what Ryan Cohen is doing in GameStop is thoroughly irrelevant to you. All you're worried about is economic policy and inflationary expectations. And you don't even have to worry about credit if it's the full faith of credit of the US government. So they are laser focused on economic events. Do they get it wrong? Sure. Everybody gets it wrong. But I think if push comes to shove, I've typically tried to follow the lead of the bond market when it comes to macroeconomic factors rather than the stock market.
JULIE HYMAN: While we have here, since you are a derivatives guy, I got to ask you about witching, right, the options and futures expiration here today. What do we need to know? What should we be watching for today in particular? Or can most investors sort of overlook these quarterly events?
STEVE SOSNICK: A few things that I highlight here. What we saw this morning, the 30-point downdraft in S&Ps that has now been erased and then some, that is largely exploration related. You see a lot of movement pre-open that is now behind us as the AM expiration, which as index futures and index options go off the board.
As you start to get into the equity portion of the program, or the ETFs that expire at 4 o'clock, 4:15, what we start to see there is you want to be looking for large-- if you're looking at a particular stock, you want to see where there is large volume and large open interest because that tends to be they can act as a magnet. They can act as a little bit of an accelerant. If markets are really on the move and a stock sort of heads through a strike-- let's say, you know, right now we seem to be heading upward.
If we had upward through a strike, every time a stock moves through an expiring strike, some traders have to rehedge. It's just the mathematics of it. And it tends to be that the public is long and the pros are short. And the pros-- and I don't want to just say the market makers because that gets overused. But hedge funds, other professionals tend to be more eager writers than individuals. They tend to hedge. And so if they find themselves short calls and the stock's going up, that can be a bit of an accelerant to the market. You may have heard the term gamma squeeze that came into play during the meme stock craze.
That was the effect, where you sort of as you go up through a strike, those who are short calls find themselves having to rehedge on expiration, meaning buy stock or buy other calls, which can have a positive feedback effect. Of course, the opposite can happen as well. But right now, we seem to be in motion to the upside. And that would be the thing to watch. And, again, sort of look to where you see big option volume or big open interest in a particular line. And that would probably be your trading target for the day in some of these names.
BRIAN SOZZI: Steve, we know are you are a student of the meme stock movement. You've watched GameStop. What do you make of this company? Do you think they have a plan? Do you think that a lot of these retail investors need to wake up and realize maybe there is no plan. Maybe they have nothing up their sleeves.
STEVE SOSNICK: You know what, you said it earlier, Brian, that this company, you know, people forget that they have these stores that they're clearly not putting money into, that their plans are not in focus. It's not a normal investing situation. There's nothing normal about this. And so it's going to do what it's going to do. My gut, my history of watching stocks like this is they usually resolve themselves to where they should be. And that is based upon earnings, cash flows, projections, et cetera. I don't see where it is in GameStop. I'm sure I'm going to get flamed on Twitter for this.
BRIAN SOZZI: Oh, you are.
STEVE SOSNICK: Oh, I know it.
BRIAN SOZZI: Me too.
STEVE SOSNICK: But I don't see why this is a $90 stock. It doesn't make money. There's no real plan for making money. Maybe if NFTs take off, there's that hope. But even so, we're seeing some of the excesses in crypto start to come out of the equation. So I don't know. I just I can't value it. On the other hand, it's not something you want to short because, do you want to be taking on the mob? So I tend to watch most of these stocks as an interested observer. Although, be aware, you know, the trend has been lower. The air has been coming out of some of these balloons.
BRIAN SOZZI: We appreciate you taking a stand on GameStop. And I'm sure your Twitter feed is about to get very active, my friend. Steve Sosnick, Interactive Brokers chief strategist.
JULIE HYMAN: He knows from experience.
BRIAN SOZZI: Yeah.
STEVE SOSNICK: Oh yeah.
BRIAN SOZZI: Just here reporting the news. Thanks so much.