There could be 'more slack in the system' amid Fed's inflation-employment mandates: Strategist

Acorns Chief Investment Officer Seth Wunder discusses inflation pressure and breaks down what the latest CPI report says about the state of the market.

Video Transcript

- Looking at Treasury yields right now. We have seen that pullback on the back of the inflation report. We're going to break down those numbers in just a bit. But take a look at where the 10-year yield is trading right now. Down about eight basis points. Now, we saw those moves on the back of inflation data this morning. Consumer prices in April coming in better than feared, as April's headline figure grew at 4.9% on an annual basis. That is the smallest 12-month rise since April of 2021 and the first reading below 5%, I should say, in two years.

For more on the latest market action, let's welcome in Seth Wunder, Acorns' chief investment officer. Seth, good to talk to you today. We saw the data this morning. You would think that's positive news, at least in the expectation of inflation at least moderating here. What do you make of the market reaction?

SETH WUNDER: Yeah. Well, thanks for having me. I mean, I think if you look at this morning's data, it's actually just one piece in a narrative that we've seen for quite some time now. And if you look at the underlying components of CPI, except for shelter, we've been in a decelerating mode for many months. In fact, ex shelter, CPI is only at 2%. And the shelter component this morning we saw was the first downtick since February of 2021. So it's been over two years of upward moves in the shelter component. And to see that roll over now I think is quite encouraging.

The market's normalizing to it, which is healthy. You see rates down. You see the market, and particularly growth sectors like tech, outperforming. But I think this is the beginning of a real sustainable trend now in the change of narrative. And so we'll see how it plays out from here. But I think these are good components to inflation, for sure.

- Seth, I got to ask you-- so we did have some recent jobs data that came in better than expected. We have this latest inflation print today. What is your expectation from the Fed. Before this data came in, there was an expectation that there may be a pause coming up at the June meeting. What are you seeing now?

SETH WUNDER: Well, so the Fed has two mandates. They have full employment. And they also have price stability. They're not solely determined on breaking the labor market if inflation finds itself into a better footing, which is where we seem to be heading and we have been tightening for quite some time.

And so the reality is the Fed funds rate is now above the inflation rate, which is restrictive by definition. And to the degree that the shelter component continues to decelerate, which it should because it's the math of it is an amortizing amount over a longer period of time, the need for the Fed to keep raising rates starts to diminish. And, in fact, staying too restrictive as we see some economic slowdown may not be the place to be either. And so the market's really starting to discount Fed rates going the other way I think at some point in the back half of the year.

So I'm not so focused on the fact that the jobs market is so strong that it means the Fed has to keep raising. It's really that inflation component that the Fed should be focused on. And if we can sustain a level of job strength, which we should be able to for some time, and we see the participation rate climb, which it has been, there could be a bit more slack in the system than maybe people are discounting.

- So the expectation of a pivot largely diminished here. But we are expecting here those rates to stay higher for longer. How do you invest in that kind of environment? You look at something like today. I mean, we've seen some of these tech names come back to the forefront. Is that a place that you're a little more overweight on?

SETH WUNDER: Yeah. So think about it this way. So if the Fed were to pause and/or eventually get themselves into an easing mode, let's say, we're still going to be dealing with rates at a, quote, unquote, "much more normal level." And I think what the average investor has to appreciate is that we really had about 14 years from the global financial crisis into last year of abnormal rate environments that were 0. A 3%, 4%, 5% rate environment is healthy, right. We want a cost of capital. It limits the amount of excess. It creates interest income for people who have diversified portfolios. And think about whether it be the 60/40 portfolio or just diversification in general. And it really creates decision making around asset classes to be a thoughtful conversation.

Those are all good things and the environment that we've invested in for decades. And within that, you'll have different phases of opportunities on a subsector basis. So initially, you'll see the rate-sensitive stocks do quite well. So the growth stocks and tech stocks in general. But then we would likely see after that a more broadening of the market, which would be healthy considering that we've seen a fairly narrow market up to this point. So I would imagine tech and growth would be the first phase of relief. And then from there, you would see other sectors soon follow.

- So, Seth, you're talking about the current environment. But let's say the environment changes and there is, the R word, a recession. What is your advice about how investors should position their portfolio in a recessionary environment?

SETH WUNDER: Yeah. OK. So I'm glad you asked that. So, one, recessions are normal. And we should always remember that in the context of being scared about certain words like recession and so forth. Second of all, the Global Financial Crisis being the last major recession, if you exclude COVID for a second, that was an abnormal once in 100 year historical period. And that is not the reflex that everyone should have about every time they hear the word recession. There was plenty of mild recessions. And, in fact, the stat that often needs to be repeated for people is that there's been 15 recessions in the last 100 years. 7 of them have seen the stock market go up.

And so by default, recession does not mean broad-based market weakness, even though it probably will mean a bit more volatility. Within that, the strategy really is being consistent with one's investments. I mean, if you are dollar cost averaging or be consistent for the long term and there's market volatility, you get to buy more of the market at lower prices. And so if half the outcomes are positive and it's a normal process that we think about how we invest over the long term anyway, being able to take advantage of either dips or sustained downturns for some window of time is really quite a healthy way to think about investing.

- All right. Seth Wunder. Tried and true principle there. Dollar cost averaging. I like that one. Thank you so much for joining us today.