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Beware of the inflation shock

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Yahoo Finance's Brian Sozzi breaks down the rise in yields over the past decade and how inflation continues to impact investors' portfolios.

Video Transcript

JULIE HYMAN: Well, today we find out what Brian is really training those lasers on in that graphic. Inflation-- inflation shock! That's what you're talking about in today's-- sorry, I tried to-- you know. We got to mix it up every day with those lasers.

BRIAN SOZZI: Beware of the inflation shock, Julie. At least, that's the-- according to a new note from the fine folks at JP Morgan, specifically Mark Kolanovic. I always enjoy his notes. But he's discussing that over the past decade-- and he's right to call this out-- that a lot of portfolio managers on the Street have only known a deflationary environment. And he's right. For the most part, there really hasn't been a whole lot of inflation over the past decade. And as a result, most money managers have never seen a rise in yields, commodities and value stocks all happening at once.

And what he is saying, essentially, is that portfolio managers, by and large, are not prepared for this new world where yields go up, and you have very strong inflation, which we are now starting to see. And he thinks stocks and ESG names and growth and low volatility styles, those are at risk because of this inflation. And hence, portfolio managers going to have to dump some of those stocks and start betting more in reallocating portfolios on value stocks and along those lines.

Now we have seen that trade start to work so far. What JPMorgan is arguing is that this trend could start to pick up more as some of these inflation concerns pick up even more, and we get more-- or we just get stronger inflation readings in the months ahead. And I think one of the biggest benefits, guys, from this deflationary environment over the past decade, it's the moving FAANG stocks. I mean, these have been easy trades. You've had low deflation. Hence, companies like this have been able to put up monster earnings growth. But that dynamic is starting to change. And I think that's why you start to see a little more volatility creep back into this FAANG spot.

MYLES UDLAND: Well, I mean, I think it's interesting, Sozzi, if we wanted to use 10 years as the marker, I mean, really, no one who's managing money for the last 30 years has seen material sustained inflation pressures on their portfolio. I mean, we've had events. You had the 1994 bonds scare. You had the temper tantrum, 2013. Obviously, tech bubble and financial crisis, all of that.

But I think inflation as something that's driving long-term-- a long-term crank in interest rates and thus, a long-term degradation in the purchasing power of your incremental dollar, I mean, that's 40 years old. We're going to wake up, and it's going to be 50 years old, not too long from now. And we're still going to be saying beware inflation. Because part of the reason why those FAANG stocks have done so well is the broad tech deflationary environment.

Remember, we're talking to the CEO of Booking Holding coming up in just a minute. I mean, that's a company that has disrupted a major industry that was full of friction not too long ago. And I think that how travel digitizes is probably not at the end of its evolution. And I don't see those benefits not accruing to consumers, in a way, going forward. And I think, again, it speaks to the digitally deflationary impulses in the economy. And so, I understand we're in an inflationary period now for commodities.

But there is-- I don't know-- to me, Julie, there's too much harkening back to periods of inflation that are just out of sync with where the economy feels like it is today. We can all play this back when there's a major inflationary problem in five years that's been going on for five years. But I mean, I'm not-- I'm just not seeing how we're getting from here to there.

JULIE HYMAN: Yeah, I kind of-- you know, it's tough to figure out where to go on this because you don't want to fall into the trap of saying, well, we haven't had inflation, and things have changed. And so you can't have inflation that's non-transitory. I think I'm just going to wait and see what happens. And luckily, I don't have to be an investment strategist and tell everybody else what to do.