Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss market sentiment, the U.S. banking system, inflation, a recession, and the outlook for the Fed.

Video Transcript

- There's a lot of conversation of course, even last week about whether or not the banks were doing the Fed's job for them, and given the fact that this is perhaps the most telegraphed recession, as some have called it that we're heading towards, what-- what should we make of the bank turmoil that's continued to take place and how much that either worsens the projections for a shallow or mild, or even severe recession?

STEVE SOSNICK: Good morning, Brad. You know, this is the problem with-- with banking crises. And I would say, you know, fortunately, it does seem to be relatively constrained so far. But unfortunately as we learned in prior crises, these things have a way of metastasizing over time.

So as of now, yes, to a certain extent there-- this does do the Fed-- this does do the Fed some favors in terms of taking some liquidity out of the system, but not in a good way. You know, first of all, you had-- you know, you have all this nervousness of bank accounts. Fortunately, not all the bank accounts were wiped out. That would have been extraordinarily deflationary and had terrible knock-on effects. And it will be up to policymakers to figure out what-- what is the right thing to do going forward.

But I understand why they did triage when they did. You know, you still had bondholders and stockholders in these companies largely wiped out. And that's a big-- a big, you know, diminution of asset, of wealth out there, not always equally distributed in that sense because it's not always-- not everyone who holds it.

But you know, the other problem you're having is just sort of the gears grinding, as people sort of get nervous and move their money from point A to point B. That's kind of a neutral in terms of where the Fed goes. I think it did some of the work for them, but not in the way they want to. It doesn't really attack inflationary expectations. It doesn't-- it's-- you know, the balance sheet-- their balance sheet grew even as they're doing quantitative tightening. You can argue it was temporary measures of banks depositing money at the Fed.

But it's a very uneven-- it's a very uneven way. And if you ask them if this is the way they want their job done, they will pretty much uniformly say, not a chance.

- Well, I don't know if there's any ideal when it comes to the Fed, right, in terms of how they want to do their job. We heard from Neel Kashkari speaking yesterday, and he said, we are closer to a recession, potentially because of everything that's happened. Is that a signal to the markets that the Fed might be done after this? I mean, that's not what the market is pricing in right now.

STEVE SOSNICK: It's not. And you know, you still had Bullard last week raising his price target is-- well, price target-- his peak rate target to about 5 and 5/8. You still have Kashkari, who acknowledges his is around 5-- 5 and 3/8 or something of that nature. So it's not clear that they're ready to call the-- call it on inflation yet.

This is really the conundrum that markets have. And stock markets, I think at some level, are just sort of choosing to, you know, to whistle-- to whistle past the negative alternatives. Couple of things here. Number one, peak rates do not equal pause-- I'm sorry, peak and pause do not equal pivots.

We've seen plenty of historical precedents for the Fed raising rates and leaving them there. So there's nothing to say that once this peak rate is reached, whether it's next meeting, the following meeting, or sometime thereafter, that they're going to just turn around and say, OK, yeah, we won on inflation. This is fabulous. You know, let's just-- let's just turn around job-- job done, pat everybody on the back and start cutting rates.

So if you're banking on a rate cut, it's gonna have to be for something else. It's going to have to be because of inflation or because of some other recessionary-- I'm sorry, because-- sorry, because of recession or some other force that forces their hand. And none of those are particularly market friendly.

So be very careful what you wish for here. You know, and that's-- that's kind of the issue is-- is-- do-- at what point is the Fed's job done/ I think because they left-- they left their foot on the accelerator too long, my guess is they're gonna be inclined to leave it on the brake for too long, unless of course, there's an accident. And you really shouldn't be hoping for that.

- So what are the best parts of the market to be in, as the Fed is very clear about making sure that they achieve their dual mandate? But at the same time, investors are just trying to figure out how they can best anticipate the Fed's actions.

STEVE SOSNICK: Yeah. This is really-- this is an interesting one. Because right now, I see it as almost a generational shift is-- is the people who've-- who've been through, you know, 2008 and prior, in other words, us older folks, you know, know that these things can unravel in a very, you know, inopportune way and over time.

I think that anyone sort of 40 and under, has only ever seen a Fed that's willing to just jump in and protect the stock market. Remember, now that's not always actually what the Fed is doing. They're actually, when they do jump in, the, quote unquote, "Fed put," I'll argue has nothing to do with stocks. It's only what the stock market reflects what's going on elsewhere.

And so you've either been conditioned to buy every dip because the Fed is going to come to the rescue, or you've seen this movie before and say, this doesn't end well. And I think you've got this real push and pull within the markets between two different camps of investors. It's not clear right-- who's right, right now.

Although the one thing that does worry me is the concentration in everybody's favorite stocks, so to speak. You've got now, Apple and Microsoft combining to be 25% of the NASDAQ 100. Stop and let that sink in, two stocks being 25% of a major index. They're 13% of the S&P 500, give or take combined.

And so I think the idea of just buying-- you know, you have to be much more selective and a little more risk averse I think, than the markets are intending to do. But it doesn't mean you just have to run for the hills either.

- Yeah, I mean, Steve, I'm over 40. I remember the financial crisis. I wasn't trading it. I was reporting on it. But like, can't there be a way that's neither of those? And I guess that's kind of the scenario you're painting.

In other words, like, is there imminent disaster? Is the banking system going to collapse? It doesn't feel like it. Should you go in here and buy like crazy? Maybe not. But like isn't there a third way, which is kind of what you're describing, that you just go in and kind of pick and choose here?

STEVE SOSNICK: Well, I think that's it. I think selectivity is important. I think being nimble is important. I think not being wedded to one-- you know, to one investment dogma so to speak, is very important. And that's really the-- you know, that's really the key. But-- but I think you have to back up and say, what are your assumptions? Am I-- am I essentially betting on some, you know, three-team parlay to come through that we won't get a banking crisis and we'll win on inflation and we won't get a recession?

Is that-- if that's your base case, think about what-- think about-- you know, think about that because a lot has to go right. If your base case is, we won't have a banking crisis and the Fed may back off a little bit and we may get a mild recession, well, that's-- that's something different. So just go through your scenarios and-- and put a probability on each of these things.

I think right now, the banking-- I think the banking crisis probability is certainly feels a lot less than it was a couple of weeks ago. I think, you know, each of these banks had a specific problem, in the case of Credit Suisse, one that had been building for years. So maybe it won't be as-- maybe it won't be as contagious as it was before. We certainly hope not.

But what is-- but I think you have to really think through the scenarios of, what do I expect happening? Am I-- am I implicitly banking on a good economy? Am I implicitly banking on recession? Am I implicitly banking on investing based on rate cuts? And if so, what's going to cause those rate cuts?

So you have to work through all these details I think, to get-- to get to the bottom line of what you should be doing. And that's not necessarily the same thing for every person.

- Steve, I certainly hope that you weren't banking on a three-team parlay after watching March Madness this weekend because that wasn't it.

STEVE SOSNICK: I live in Connecticut. So that's my-- that's been my team, so--

- You're riding high right now. Love it.

- All right, Steve-- Steve Sosnick, good to see you, Interactive Broker's Chief Strategist. Thanks a lot.