Fed Chair Powell ‘going to stay on message,’ strategist says

Envestnet Co-Chief Investment Officer Dana D’Auria joins Yahoo Finance Live to discuss the expectations for the Fed ahead of Wednesday’s FOMC meeting, investor sentiment, longer-term risks, the importance of diversifying your portfolio, and the outlook for rate hikes.

Video Transcript

RACHELLE AKUFFO: Investor expectations are set for the Fed to trim the size of its rate hike again as the narrative for a pivot remains unclear and recession concerns linger. But what does this spell out for the year ahead? Here to discuss is Dana D'Auria Envestnet Co-Chief Investment Officer.

Good to see you, Dana. So a lot of optimism priced here priced in here at the moment. They'll be looking at that basis point hike but wondering, should we really believe the hawkish tone of Fed Chair Powell given this movement? What's your take on how investors are really reacting right now?

DANA D'AURIA: Yeah. It's actually so interesting, because don't fight the Fed, right? But the market is absolutely sending a different signal. The market is absorbing the economic data that we've seen come in. There's absolutely an expectation of a pivot and a lower terminal rate, and not only does this year, but even more so as we move into next year.

Meantime, the Fed keeps telling us, no, expect a higher terminal rate, 5 or above. And we're going to hold-- or hike and hold, right? So even when we're not actually hiking rates, we'll be holding it for a while. So I mean, the question, of course, becomes, how do you as an investor sort of react to this? And I think some of it is yet to be determined, right?

We'll see economic news that may or may not impact the Fed. But net net, I think, assuming that the Fed will pivot earlier than what they're saying is a riskier kind of a bet. I think it stems from years of having the Fed kind of step in, and that was years, you got to remember, of inflation not being what it is today.

RACHELLE AKUFFO: Is there anything you think Powell could say at this point that would really surprise the markets?

DANA D'AURIA: I think Powell has to stay on message. There are things he could say. I think if he was more dovish than folks expected, that would really-- that would surprise the markets, right? But I don't expect that at all. I expect, actually, that he's going to stay on message.

And even if there is the thought of, hey, depending on where the data goes, maybe we do ease off a little bit more quickly than expected, he's not going to say that today to the markets at all. I mean, we have sticky wage increases. We have earnings expectations being put into the market now, right-- declines in earnings expectations.

And that's happening kind of slowly, right? As companies come out, analysts are slowly sort of downgrading expectations related to things like operating margins, companies not able to necessarily pass on greater price increases at the rate that they were facing in terms of wage inflation, et cetera. So all of that has to work into the market. But I don't expect any expected news from Powell today.

RACHELLE AKUFFO: So then as we look at things as they work their way through the market, as we look at the Fed's medicine still waiting to take hold in the broader economy then, what does that mean in terms of how you allocate your assets in this period?

DANA D'AURIA: Yeah, look, a few big takeaways-- one, and you're hearing this, I think, a lot of places-- but if you're not globally diversified, if you've had this mantra in your head about the last 10 years, US outperforming, and why do I need international stocks-- I think we actually just recently had, with the mild winter that Europe is experiencing and the change from expectation of a pretty hefty recession in Europe to now, hey, they might avoid recession altogether, it really kind of tells you something about markets in general about the value of prognostication at that level.

If you're not globally diversified, you really should be thinking about that. Markets are cyclical. 10 years of US outperformance, yes, but what happened in the last decade? It was 10 years of earning nothing in the S&P 500. But if you were internationally diversified, you had a return coming to you.

RACHELLE AKUFFO: And obviously, a lot of focus on the Fed, but what are some of the risks that investors also need to be paying attention to? You mentioned international markets. You have China reopening. You have the debt ceiling. What are some of the biggest risks do you think that investors should be paying more attention to right now?

DANA D'AURIA: Yeah, I think we have-- the market has short-term risks and they have long-term risks. Short-term risks, the debt ceiling debacle-- it's just painful that we have to continually go through this. I think the US and Denmark are the only two countries that have this sort of a system where we spend the money, right-- the debt ceiling debate is about paying the bills that we've already created. It's not about future spending.

But we do this to ourselves, right, where we have to now play fast and loose with whether we're going to pay the bill or not. So that's going to roil markets. And depending on how much brinksmanship-- I mean, we saw what happened in 2011 and it was pretty painful on markets.

So I think that's a risk short-term. You mentioned it-- China reopening, where that goes, the bad economic data coming in, markets repricing on earnings, et cetera-- earnings not probably going to be what even they're forecasted now. We've got more repricing to go. Long-term, we're pricing in more structural differences.

Are we going to get back to inflation at 2% or are we going to be living in a world with a little bit higher inflation for longer-- 3% maybe, et cetera? Those are longer term risks and that leads you to say, hey, you know, PE multiples may not be what they were in the past. The expected return on stocks may not be what it has been.

RACHELLE AKUFFO: And at what point do you think we'll get to some sort of sense of normalcy? Obviously, it's still macroeconomic pressure still weighing on earnings, keeping an eye on margins. At what point do you think we'll see, perhaps, a leveling off of some of this volatility?

DANA D'AURIA: Yeah, it's an interesting question because, like, what is normal at this point? So much change in the last few years-- we've gone from a world where tech is kind of defensive to back to growth being more risky because there's cost to money. I would say in terms of normalcy from the Fed, we are getting there.

The highlight, I would say, is last year we had so much volatility in terms of just these very abrupt and very high increases. Now, at least, we're kind of in a place where the data is coming in where we expect it to, right? Inflation is coming in where we expect it to. We're seeing a rolling over.

So I do think that markets will benefit, if not by its Fed pivot, by some understanding of what the Fed's going to do-- not as much volatility in what that rate is going to be. And I do think, to a certain extent, that is its own return to normalcy.

RACHELLE AKUFFO: And as we await a pivot whenever that does end up happening-- obviously, we still have to have a pause before we even get to the pivoting point then-- how should people start looking at their portfolios trying to plan for the future right now?

DANA D'AURIA: Yeah, well, so, in addition to kind of that whole global diversification, we do get asked about, should fixed income be part of the portfolio or in the same amounts that it was? And I would say planning ahead, you do want to think about what your fixed income position is in the portfolio.

You've already experienced a lot of the pain, right? So watching the ag drop 13%, double-digits, in the same year that the S&P drops 18%, very painful and raises questions about the traditional 60/40. But on the other hand, how much more pain do we really expect? Even if the Fed goes as high as it says it is and the market has to reprice a little, that's nothing like what we experienced last year.

So I would say just dealing with advisors and retail clients-- looking at how much balance do you have in the portfolio, whether you expect a pivot and great markets ahead or not, making sure you're paying attention to that client's risk tolerance and say, do I have the right balance? Do I have safer assets in there at the allocation that they need to be?

RACHELLE AKUFFO: Certainly have to take a closer look at portfolios right now. A big thank you there to Dana D'Auria, Envestnet Co-Chief Investment Officer-- thank you so much.