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Fed 'normalization' will ‘take a lot longer than everybody thinks’: Strategist

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BMO Capital Markets Chief Investment Strategist Brian Belski joins Yahoo Finance Live to discuss the outlook for Fed policy and the markets.

Video Transcript

EMILY MCCORMICK: Let's stick with the topic of the markets and the Fed with our next guest. Brian Belski is BMO Capital Markets' chief investment strategist. He joins us now. Brian, thank you so much for being with us. Looking at the market reaction to Fed Chair Jerome Powell's hearing from this morning, we have US stocks turning positive, tech is outperforming, and Treasury yields are retreating, especially on the long end of the curve. What do you think that markets heard that they're responding to from Powell?

BRIAN BELSKI: Well, Emily so great to see you, and thank you so much for having us on Yahoo, first hit of 2022 on your network. So we always loved being on with you. So I think the key thing on his testimony was this whole notion of extrapolating duration. If you're a fixed income investor, duration and convexity matter the most, and it sure sounds to us like he is really positioning for this, quote, unquote, normalization, which is a terrible word by the way and way worn out. It's going to take a lot longer than everybody thinks, and that should not come as a surprise to investors.

You know, one of the things, you know, one of the luxuries of doing this job for a long time, we've written a lot of year ahead reports in terms of our forecast for the year to come. And we tend to get really reflective, so we kind of went back and looked at what we were writing in 1998 but then also 2009, '10, '11 when we were actually quite critical of the Fed, thinking that they should be more aggressive in terms of pulling back QE. And it took a lot longer for them to do that. In fact, they didn't pull back QE until 2014.

So again, I think the biggest comment on most investors mind that we talked to around the world would be a, quote, unquote, policy mistake, Emily, that the Fed might be too aggressive. Mr. Powell basically came out today and said this is going to be a process, as we like to say in Canada, process, with respect to how long this is going to take. And I think that's what's calming investors, especially considering the riot that has been the technology sector leading up to today.

- Brian, when you said process, I could see my grandmother in Montreal, can you get me some Nanaimo bars? I got to ask you, when we look at what Powell-- there was a lot going on there today, and, yeah, we're all focused on inflation. And we're focused on how do you roll off an $8.8 trillion balance sheet. But as an investor at the end of the day, not much is really about to change, at least in the next six months for us. Or is it? And if it is, how do we prepare?

BRIAN BELSKI: No, it isn't, and I hope your grandma is enjoying her Chesterfield as she sits and listens and watches you on Yahoo Finance. But just had to throw a little Canadian wisdom. You know, this is going to take a while, and I think that's what, again, is the key thing. And you know, we want things right away, right? We want the new new. We want it right away.

And I think this vacuum, quote, unquote, to the markets in right now before earnings come out for the fourth quarter in year end 2021, it caused a lot more of this volatility than should have been. If you take a look at how markets performed in 2021, growth in value were very close, small, mid-cap, and large, very close. And from a longer-term perspective, you know that it takes years for big cycles to move if you're going to move into growth or move into value or move into small cap or move into large cap.

And I think the consistency of US company earnings is the key thing, Adam. I really believe that. And I believe that North American stocks, your grandma's stocks in Montreal in Canada, are very well positioned as well. So this is out of consensus to still like large cap and still like North America, for I think it's probably the 75th year in a row that strategists and economists are telling you to buy Europe and emerging markets. But that's way too consensus for us.

I just think that investors are going to continue to pay for consistency. And they're seeing that, quite frankly, in technology. All of technology stocks are not equal. They're not painted with the same brush. And some of these technology companies in terms of the secular growth areas, what we'd like to call the consumer staples tech, things like Microsoft, and Apple, and Netflix, and Google, are some of the most consistent earners in the entire world, let alone the S&P 500.

EMILY MCCORMICK: Brian, going back to the Fed, the Fed has been very communicative about its intentions to start raising interest rates this year, speed up the tapering process, and consider the run off process. Given that these have been communicated, do you think investors should still be bracing for the market to react with volatility similar to what we saw after last week's Fed meeting minutes were released when we do get that first move on interest rates on that definitive announcement? Or do you think this is getting priced in ahead of time as we hear these discussions in real time from the Fed?

BRIAN BELSKI: It's a great point, Emily, and the market can't help itself, and investors can't help themselves with respect to this fire-aim-ready type of mentality. When they hear news, they react, but that, typically and historically, especially the last, I would say, three years has created unbelievable opportunities just like it has in technology over the last week or so. So yes, so we do believe that market participants will continue to be reactive. Remember a lot of the, quote, unquote, professional money managers, especially the hedge funds, have massively underperformed.

2021 was a terrible year for all these supposed smart people in the hedge fund world, so they're going to try to continue to be reactive and trade around the market. But that's why we've said stick with your process, stick with your discipline, be fundamental, believe in the secular bull market, money is still cheap. And we still think that the US and Canada, for that matter, North America will lead in terms of equity assets.

EMILY MCCORMICK: All right, we'll leave it there for now. Brian Belski, BMO Capital Markets' chief investment strategist, thank you so much, and it's always great getting your perspective.