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‘The biggest concern in the equity market would be a taper tantrum’: Expert

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Megan Horneman, Verdence Capital Advisors Director of Portfolio Strategy, joins Yahoo Finance to discuss outlook on the overall market, tapering from the Federal Reserve, and potential market impacts from geopolitical tensions.

Video Transcript

- I want to continue our markets conversation now and bring in Megan Horneman, director of portfolio strategy at Verdence Capital Advisors. Megan, always good to see you. So I'd like your take on what's happening in the market today, because we got these encouraging jobless claims numbers. We got some better-than-expected earnings from big retail giants, yet the market is sort of yawning at that news. So what gives today, do you think?

MEGAN HORNEMAN: I think that there's several things that are kind of keeping this market in a tight range here. There are a lot of risks out there right now. First of all, the market is looking stretched from a valuation perspective. It's continued to make record highs, even amidst some of the volatility that we've seen.

But we do have some economic concerns right now, just from the supply chain perspective, the inflation perspective. These things are probably going to be a problem for us longer than we had anticipated, especially since you're seeing some of the ports shut down in the Asian regions.

And then you have, obviously from a market perspective, I think the biggest concern in the equity market would be a taper tantrum. Interest rates are so stubbornly low. And I think that markets are just waiting there to see if we get some big move higher in interest rates.

Then also from the market perspective, don't forget that we're entering a very negative seasonal period for the equity market. So I think some investors are just sitting on the sidelines here. September, it tends to be the weakest month in a calendar year that we've seen. And then lastly, we can't ignore some of the geopolitical risks that are out there that may be keeping some people on the sidelines, and just keeping this market in a tight range right now.

- All great things there you just ticked off, Megan. But I want to get back to a possible taper tantrum. I'm interested to learn more about that, because I would have thought it's already been priced into the market. The Fed has been telegraphing pretty clearly when it wants to start tapering. We got those Fed minutes yesterday, and it looks as though most Fed officials seem to be on board with tapering sometime this fall. When it happens, it won't be a surprise to the market, will it?

MEGAN HORNEMAN: No. It's not like in 2013, where it was a surprise to the market when Ben Bernanke announced it. We do have a much more transparent Fed, and I think that they are expecting that this is going to happen. But keep in mind that interest rate environment. It does tend to overshoot and undershoot.

Right now, I think we're in this undershoot where yields are staying so low for maybe some of the other factors that I mentioned. And when the Fed really does start to taper and we do realize that economic growth can continue. Albeit not at those rates we saw over the past couple quarters, but economic growth still is very strong. And I think that interest rates are going to move higher from here.

- What about the geopolitical tensions and the situation that continues to unfold in Afghanistan. What, if any, market impact might that have? I think we're seeing it already play out in the commodities market in the dollar, where those assets are moving higher.

MEGAN HORNEMAN: I think the commodity market-- keep in mind, the commodity market has rallied so far, so fast. Again, another market that's kind of overshot the economic recovery. And right now, I think you're getting some moderation in commodities. But if you look, it's in a lot of those cyclical commodities that were leveraged to the global growth story. So I think it's a combination of both what's going on geopolitically, but I think more also, the concern with the Delta variant and what that means for economic growth.

In regards to what's going on in Afghanistan, I don't see that it has an immediate economic impact. I think the more immediate impact it may have is on confidence. And we're already seeing confidence that's a little bit shaky here. We saw that last week.

There is a lot of skepticism and uncertainty amongst Americans right now, whether it's the inflation environment and the Fed getting that under control; whether it's the Delta variant; whether there's skepticism over vaccines. And now you just have these very disturbing videos. All these things combined-- not one in amongst itself, but all those things combined can test sentiment, I think, going forward.

- What about outside the US markets right now? Are you seeing some opportunities on the global stage? And if so, where, Megan?

MEGAN HORNEMAN: So from a global perspective, we've been overweighting the international markets for quite some time now. I realize that they were kind of behind the curve when it came to getting the coronavirus under control. They were a little slow, and much slower than we were from the vaccination program.

But they're really picking up. They're reopening. They're reopening despite some increase in COVID cases. Their manufacturing is doing well, and their consumer confidence is rising. So we still think there's opportunity in the international markets. But specifically, the developed international markets.

We're looking for opportunities in the emerging markets. But right now, there just is so much risk, not only from the geopolitical side, but more from the COVID side, where we're seeing a lot of rolling lockdowns and shutdowns in specifically some of the manufacturing areas in those economies.

- And what about in China? We know that there's going to be some tighter regulation in the offing, especially for tech companies. We're seeing some more China shutdowns and a slowdown. While economic growth is continuing, it's not continuing at the pace that China had expected. What do you think the impact is going to be ultimately on the US, since we are such an interconnected economy?

MEGAN HORNEMAN: I think the biggest concern with China-- in regards to you mentioning their rolling lockdowns that they've had with COVID-- is the supply chain. We do, as you know, get a lot of supplies from China. So as you shut down some of the ports in China, including the third busiest port there, that does present a risk for the supply chain constraints that we have.

What happens there is, if we continue to have supply chain constraints through the rest of this year, then that still does leave the potential for pricing pressures, because the supply chain constraints and the inflation have kind of gone hand in hand as well.

- We're going to have to leave it there. Megan Horneman of Verdence Capital Advisors, always good to see you.