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'Too many people are focused on inflation,': BMO Capital Markets Chief Investment Strategist

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Brian Belski, BMO Capital Markets Chief Investment Strategist joined Yahoo Finance Live to break down why investors are focused on inflation and what to expect the remainder of 2021.

Video Transcript

Let's bring in another, Brian-- Brian Belski from BMO Capital Markets, he's the Chief Investment Strategist-- to talk about what we're witnessing in these markets and where we're headed for the second half of the year. Brian, good to have you here. You're predicting S&P what? 4,500 by the end of the year. Is there any one particular thing? Or is it just the fact that the Fed really isn't going to pull back for a long time?

BRIAN BELSKI: I think there's a lot of things. Thank you so much for having us, Adam. We really continue to believe that the stock market is the market of stocks. And what we've really seen for the last several years is too many investors focusing on macro and quantitative factors. And as we transition this market into more of an earnings and fundamentally-driven market, while the returns could be a little bit lower-- obviously, than what we've seen with respect to our multiple-driven market and a momentum-driven market-- we think they're going to be much more consistent and stable.

It's not simply the Fed but the Fed's policies and the fiscal policy is clearly creating the stimulus. And this quote unquote, "cheap money" has actually helped these assets create. But we continue to believe that too many people are focused on inflation.

The inflation focus has really been going down since the first quarter, not just since these hot CPI prints. It's been the predominant theme that we've been dealing with and talking to our clients through. And I don't think that's going to go away anytime soon until everybody gets what they want. And what they want the Fed to start actually talking about tapering and not just talking and thinking about tapering.

- Brian, you mentioned too many people are focused on inflation. I feel like I'm so sick of talking about this over the last several weeks. But I guess from the market's perspective, what do you think the market is anticipating when it comes to inflation? And I guess, how bad do you think the market is on this more transitory theory?

BRIAN BELSKI: I think more and more, Seana. That's a great question. You know, one of the best books I've ever written, read, I'm sorry, on the investment world has nothing to do with investments called "The Art of Contrary Thinking," when everybody's thinking one way go the other way, especially if you have data that backs that up. So what's the data?

Since we started being scared about inflation, which was February if you remember, our bond yields are down pretty dramatically, that's number one. Number two, if you take a look at what's causing a lot of disinflation, it is some of these supply shocks, which you said at the top of the hour Taiwan Semiconductor came up and talked about the chip shortage ending sooner than later. Number three, some of these other issues with respect to inflation and how we measure inflation has been a problem for the majority of my career that has been going on really for 40 years since inflation kind of peaked in 1982. So I think we're trying to be too academic with this, Seana. And when everybody is on one side of the coin I'd rather flip the coin and go the other way.

- When you talk about going the other way let's talk about tech, because one of the things you're saying is buy tech when there's any big tech weakness. Do you see any weakness coming down the pike for the big names? Are you looking more at the medium players or even smaller players in tech?

BRIAN BELSKI: Well, I think, it's tech is broadly design, though, Adam. I think that we've already seen a lot of the weakness in the big tech and some of these big tech names, including Apple have been underperforming this year. And quite frankly, we believe those names are still the names that you want to own on a regular basis, whether it's Apple, Amazon, Google, Netflix, Facebook, Microsoft, I think, those are the names that are showing the most consistent and steady growth.

And we've been on record all year long saying, don't sell tech, don't sell tech, don't sell tech. And I think, when too many people got too value oriented, and to cyclical oriented they began to underperform when tech began to recover again. And specifically these big names, I think, the higher multiple names nobody likes to kind of chase and talk about.

I think you have to be much more selective and be much more thematically driven. And we have the good fortune of running a mid-cap portfolio and all-cap portfolio for our clients real-life money clients at BMO. And we want to focus more on themes, like a stock called Sonos, which is an audio theme, even Spotify we own that name, which is more of an audio theme, . So it doesn't have to be just these go-go momentum tech stocks, there's a lot of great names out there that join themselves with the fundamental theme.

- Brian, what about the Russell 2000? And we just talked about some of those bigger players, the bigger names that are out there in the market that's catching a lot of investors' attention. But when it comes to the Russell 2000, again, today we're seeing it off just around 1%. It's been an underperformer since the start of the year. When you see that underperformance in some of these small caps, I guess, is that worrisome at all to you?

BRIAN BELSKI: No, Seana, because. I think, we have such a huge snapback right from March. And you know, our call all along has been we want you to be moderate across asset classes about growth and value. So equal weight growth and value, equal weights MOM and large-cap.

And I think, the best opportunity on a relative basis is going to be in those small-cap names, especially given the fact that these names have a lot more cash and balance sheet strength than they've had historically. And I do think you're going to get a nice little pop back in those names. It doesn't make a lot of sense the small cap short near term a weakness, especially given how rates have gone lower actually. So we actually think we're going to see a catch-up trade and small-cap stocks here in the second half of the year

- Brian Belski, BMO Capital Markets Chief Investment Strategist, thank you for helping us understand how we should position for the second half of the year.