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The Fed ‘is actually on the curve right now,’ 1879 Advisors vice chairman says

James Bruderman, Vice Chairman of 1879 Advisors, and Hank Smith, Head of Investment Strategy at Haverford Trust, join Yahoo Finance Live to discuss the effects of inflation on the economy, Fed policy, and the odds of having a recession.

Video Transcript

EMILY MCCORMICK: Welcome back to Yahoo Finance Live. I'm Emily McCormick along with Adam Shapiro. Let's take a look with where markets are trading with just over a minute until the closing bell. As you can see here, quite a reversal from what we saw earlier on during trading. The NASDAQ now in positive territory after trading lower earlier by more than 2%. And here's the closing bell.


ADAM SHAPIRO: OK we've got the closing bell on the first day of the trading week, the trading session now finished. And look at that. The NASDAQ actually looks like it's going to settle in positive territory. We saw the Dow and the S&P actually retreat from the lows of the session. Dow is going to settle down about half a percent, the S&P 500 is going to settle down a little less than a quarter of a percent off about 6 points. And again, the NASDAQ probably going to settle up about 7 points.

Let's talk about all of this with James Bruderman, 1879 Advisors vice chairman, and Hank Smith, Haverford Trust head of investment strategy. And Hank, I want to get to something you've pointed out right at the top, that the odds of a recession occurring in the next 12 months are extremely low. And yet, we keep seeing data that consumers, and I realize facts are not necessarily feelings, but consumers feel that a recession is coming. So as an investor, shouldn't I be paying more attention to what the consumer feels than perhaps the facts on the table?

HANK SMITH: Very interesting. It's also very interesting that consumers are responding to surveys one way but behaving quite a different way. So the University of Michigan Consumer Confidence Survey has trended down for the last six months. Yet consumer behavior, they're still buying. And they're buying big ticket items. So do you pay attention to what they're saying to surveys? Or do you pay attention to what they're doing? I think you pay attention to what they're doing, which is very different.

And by the way, a lot of the consumer surveys track the price of gasoline. Consumers do not like to pay more for gasoline. That explains a lot of the confidence surveys trending down.

EMILY MCCORMICK: James, taking a look at the market action we've seen over the past week now, the NASDAQ composite had been lower by more than 2% at session lows today, had posted its worst weekly decline since February 2021 last week. And yet we closed in positive territory today. What do you make of this market action? And do you think that now could potentially be a buying opportunity, at least in the near term here for these big tech stocks?

JAMES BRUDERMAN: Yeah, look. We've got a strong economy underpinning everything. GDP for the year should easily be in the 3% range. Certainly higher up front and maybe dipping a little under 3%. But still really strong all year long. So I think that's the big driver behind the growth, especially in the stock market. And with that kind of GDP, I think we continue to see earnings growth. We've certainly seen upward revisions in earnings even as we get into the earnings season. So I think Q1 earnings looks good. And I think there's enough power in the economy's tank to continue powering things through for the year.

ADAM SHAPIRO: James, I want to follow up on something. It's going to be the big theme tomorrow Jay Powell is going to be speaking about at the confirmation hearing. And I'm curious, James, do you think that he could do something that would tank the outlook, at least for the the first quarter? He could certainly stumble. Doubt he would. But is there anything you're worried about?

JAMES BRUDERMAN: Look, I'm most excited-- obviously, seeing Powell speak tomorrow is important. I'm more excited about CPI. But with regard to Powell, look, last year, I was really concerned that the Fed was behind the curve. I think some of the reaction we've seen over the last week is the markets, or at least a lot of participants are thinking maybe the fed is going to get too far ahead of the curve and maybe hit the brakes a little bit too hard. I don't think that's the case. I think the fed is actually on the curve right now. We're in the camp that we'll see maybe 3/4 percent increase in fed funds rates this year.

We think that tapering will finish up by March. We think they'll start maybe reducing the balance sheet at or about the same time. I think that was actually what caused some of the hiccup we saw last week. But quite frankly, I think Powell is going to project where we are now. And I don't think that we're going to see a lot more hawkish from what they've already stated.

EMILY MCCORMICK: Hank following up on this same idea here, what do you think the bigger risk for the fed is right now? Is it tightening monetary policy too quickly and spooking the markets on that front, or not tightening enough and allowing inflation to continue and continue to spook markets?

HANK SMITH: Well look. I think a lot of this has to do with what happens with COVID. Does the pandemic fade into something more manageable and endemic? Or are we going to have another year 2022 continued variants, and we just don't get out of this pandemic? Because if the pandemic fades, I think a lot of the goods inflation starts to come down as supply chain disruptions get worked out, and consumers shift from buying goods to spending on services and experiences.

Then the big question is, is the wage inflation and the rent inflation, is that a multiyear kind of spiral? Or does that come under control soon after the goods inflation comes down? So I think those are the variables. I kind of agree with James. I think the fed has done a pretty good job. Maybe they should have started the tapering earlier. But they've certainly accelerated that and will be done by March. And we agree three, maybe four, rate hikes. But you're still looking at a low interest rate environment either way through 2022.

ADAM SHAPIRO: Hey, Hank. I just want to follow up real quick on that. And I'm looking at an energy sector today. It was down about 1/4 percent. But it was gangbusters 2021. And if you look at where it's been in the last 52 weeks, it's up over 51%. What you just said about the low interest rate environment, it seems like energy would still be the sector a lot of people should consider going forward over the next 12 months.

HANK SMITH: Well yeah. Look. They're not building out rigs or focusing on bringing cash back. You've got demand up, supply down. And look. How-- it's ironic that the previous administration was pro energy, which was great for consumers and businesses, but not so good for the energy sector as the stock prices came down with the price of oil. This administration seems to be anti-carbon energy, which is not good for consumers and businesses, but it's been great for the companies as oil has gone up.

So I think longer term, one thing we do not have to worry about is the supply of oil due to hydraulic fracturing. We're never going to be talking, at least in our generation and the next generation, about peak oil, which rears its head, that concept, rears its head every couple decades.

EMILY MCCORMICK: James we're about to get some quarterly earnings results from the big banks at the end of this week. When you think about profits for this year, what companies or sectors might see the most strength in earnings and continue some of the momentum that we've been seeing since last year?

JAMES BRUDERMAN: Well I like technology. I think especially with the wage growth that we've seen and the shortages in the labor market, I think tech companies are great compounders, especially companies like Microsoft where there's a lot of opportunity for businesses especially to seem to use productivity to offset some of the other costs that have been going on. Certainly there's with rising interest rates, financials are looking good. But in our minds, that's really just a macro play.

We love health care. And health care had a good day today. We think health care is poised to have a very good year.

EMILY MCCORMICK: All right, we'll leave it there for now. James Bruderman, 1879 Advisors vice chairman. And Hank Smith, Haverford Trust head of investment strategy. Thank you both so much for your time.