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Fed 'at or approaching peak hawkishness,’ strategist says

In this article:
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Carillon Tower Chief Strategist Matt Orton joins Yahoo Finance Live to discuss peak inflation, rents and CPI, the Fed's interest rate hikes, tech and growth stocks, the healthcare sector, and the bond market.

Video Transcript

JARED BLIKRE: We want to stick with the market talk here, bring in Matt Orton, Carillon Tower chief strategist. And Matt, good to see you here. Just want to ask you about tomorrow's CPI report, inflation really heating up. Street's expecting the headline number to be 7.2% with taking out food and energy, 5.9%. Haven't seen numbers like this in four decades. What do you think is going to happen? And what's going to be the market effect?

MATT ORTON: Hey, Jared. Good to see you again, too. And the report tomorrow is going to be, I think, very important to get a gauge of how and when inflation might be starting to peak. It's my belief that we're starting to get to the point where we're going to see some peak numbers from inflation, largely just because we had the base effects helping prop up inflation. And the same thing is going to go as we start moving forward.

And I think what will be important to look at in the inflation numbers as well is seeing where rents are starting to trend. That's a large, important component of the overall CPI number. So looking to see how strong that is versus the other components, I think that's going to make a difference. But when I talk to a lot of our clients, at the end of the day, regardless of what this print is, I firmly believe that we're at or approaching what I like to call peak hawkishness.

You know, where the markets came into this year looking for two rate hikes, we're now pricing in five rate hikes. There's calls for six or seven. Frankly, I think that's a little bit alarmist. When we look at what's happening, the fundamentals of the overall economy are really, really strong. We've seen great data. The jobs numbers last week and the massive upward revisions all point to a good economy with a very healthy consumer that is willing and able to spend.

And the key becomes how you position. It is my belief that you need to be very tactical with asset allocation to be successful this year and leaning into quality. Frankly, quality growth companies where you're growing your top and bottom line is very important, regardless of whether you're in a growth or value index. And I think that playbook is going to remain the same no matter what we see from the inflation print tomorrow.

JARED BLIKRE: And we've seen some of those growth stocks, even the big ones with quality balance sheets, terrific earnings, like Microsoft, get absolutely slammed-- coming back a bit now. Do you think the worst is over for what has been a very painful rotation to begin the year?

MATT ORTON: I do, Jared. I think we've seen some massive moves, some deserved, some not deserved, when you look at some of the mega-cap names that reported last week. And we've seen growth really move very, very quickly. And I think that's been in response to sharply rising real rates.

But I think where we're getting to the point where we're not seeing the same rate of change as we were at the beginning of the year, and frankly, a lot of those large megacap technology names that reported very good earnings are starting to see buying interest because they're cheap.

They have very, very high quality characteristics. They have high visibility with respect to their earnings. And that's very important during times of uncertainty with the overall macro picture. And so those are types of companies that you want to own, especially ones that have beat expectations and raised some of their guidance. That definitely fits into what I would define as quality growth.

And on the other side, another part of the market that really has vastly underperformed is health care. Even large cap health care, you've seen some names have life in them. I think some of the HMOs that reported earlier in earnings season had great, great numbers. And those are stocks and parts of the market that I think will continue to do well, especially because it's a naturally growing part of the economy with an aging population with a lot more chronic diseases that that, to me, is great secular growth. And you want to own the quality companies within that.

JARED BLIKRE: And what's your take on the bond market here? We've seen-- we're watching the 10-year. We're on 2% alert, everybody watching to see if we reach that magic number. But then we got lots of thresholds above that. Where do you see longer term rates topping out before we get that inevitable real flattening of the curve?

MATT ORTON: Well, we've seen a decent flattening already. When you look at just the 2s and the 10s, I think were trading around 60 or 70 basis points on the 2s, 10s. So you've seen a massive change at the front end of the curve, largely because we're baking in these expectations for rising rates with the Fed, but on the backend of the curve where we're looking at a little bit more uncertainty, perhaps a slowing rate of change for the economy. But the economic outlook, I think, remains strong. We're going to settle into a rate of growth that is above what we've experienced in the past, but certainly lower than when we had right out of the gates of COVID.

So I don't expect the long end of the curve to move massively. My target for the end of the year is 2.25 on the 10-year. I think you can go through that. But it's likely going to settle. And in the near term, I think tomorrow, if we have a hot CPI read, that might be the impetus to move through the 2 number. But again, these are just numbers.

And you've got to be able to be opportunistic. I think that's my word of the year, is when you have a move through a certain number, and you get a knee jerk reaction in the equity markets to it, that's the time to be opportunistic and really lean into companies that get thrown out of the bathwater, that are continuing to post really good numbers and grow, and that aren't tied to whether you're 2, 2 and 1/4, 2 and 1/2, that just have really good growth stories.

JARED BLIKRE: Yeah, buy the dip, but buy the quality dip. Kind of reminds me of--

MATT ORTON: Exactly.

JARED BLIKRE: --getting ready for the Super Bowl this weekend. Matt Orton, always great to see you here, Carillon Tower chief strategist. Thanks for stopping by.