Fed Chair Powell 'has to walk a very thin line' on monetary policy: Portfolio manager
Portfolio Manager at F.L.Putnam Ellen Hazen joins Yahoo Finance Live to discuss how investors should approach market after Fed chairman Jerome Powell's comments on January 26.
Video Transcript
- Let's bring in our next guest for even more context on what's happening in the markets. Ellen Hazen is Portfolio Manager at F.L. Putnam. Ellen, thanks so much for being here. Just want to start off by getting your reaction to that really blockbuster GDP number that we got earlier today, 6.9% year over year in the fourth quarter.
What do you see happening with growth this year and then do you think it gives the Fed license to act more aggressively, more hawkish when it comes to rate hikes? And then separately, just want to get your overall take away from Powell's comments yesterday. I was surprised by how much we learned, despite how little guidance we actually got.
ELLEN HAZEN: Thanks very much. So first of all, looking at the GDP numbers for the fourth quarter, you can see that a lot of that was driven by the inventory build. And I guess on the one hand that's good news. Because if companies were able to build inventories, it meant that they were actually able to get the chips and other materials that they needed to build inventories.
But that's going to be a one time item. And as we look at the first quarter, you're going to see the inventories build probably not as much. And in addition to that, if you look at the high frequency indicators like OpenTable reservations and TSA checks, et cetera, you can see that first quarter is already going to look a bit slower. So as you mentioned a minute ago, the fourth quarter GDP is backward looking, and looking at the first quarter, it Looks. A little bit softer.
So then turning to the Fed and to Jay Powell and his comments yesterday, he has to walk a very thin line, a very thin tightrope between not choking off the economic recovery, which does appear as though it's happening pretty well, but at the same time, fighting off inflation. And I think the key words that I took away from his comments, and particularly the Q&A session yesterday, was that the Fed will remain humble and nimble. He really didn't want to give any color on the balance sheet whatsoever.
But it does look as though they're going to raise interest rates in March and the Fed has priced-- Sorry, the market has priced in five hikes this year, up from only pricing in four yesterday. So I think the market heard that loud and clear. And we don't know what's going to happen with the balance sheet or the long end of the curve. But I think that he is very aware of financial conditions and does not want financial conditions to get too tight.
And so even though we saw this strong GDP this morning, I don't think that gives him license to move very aggressively. I think that the message I heard was that there going to be data driven and methodical and responsive to what happens in the overall market. And we expect that GDP is going to slow this year in the first quarter, but also in the full year.
- OK Ellen, thanks for that. But then I want to push back a little bit. Because if the Fed is that concerned about inflation and Powell says it is going to stick around, then why has the Fed been so slow to act? Why didn't it do anything yesterday?
ELLEN HAZEN: I think that the Fed wants to remain very transparent and have its words interpreted in a non-surprising way to the market. So if inflation had been much, much higher and much hotter and if we hadn't seen these slowdowns in the first quarter that we are already seeing and hearing companies talk about, quite frankly, as we move through the earnings calls as well, then he might have felt licensed to do that. But we have to remember that monetary policy has a slow and lagging effect on the economy. And so you can't do it too quickly or to aggressively.
You need to be slow and measured. And he doesn't want there to be surprises, he doesn't want there to be a taper tantrum. He doesn't want the market to be shocked by anything he says and so I think the hurdle would have been extremely high for him to actually announce a hike yesterday.
- So you said growth will slow this year. So the Fed is hiking into that and that surely means more volatility. What does that mean for earnings from here on in, because so far they've been less than stellar?
ELLEN HAZEN: You're exactly right about that. Earnings surprises have been positive. More than half of the companies have surprised at 70% or so of the 25% of companies that have reported so far. But that's lower than any of the last five quarters. And as you look at forward guidance, that's also pretty modest as we look forward.
So it's clear that things are slowing this year. That's going to lead to more volatility in the markets. And we may end up the year with low to mid, maybe high single digit equity market returns, but with a lot of volatility in between now and then. And what that means is that you need to be tactical and very nimble in your equity allocations and take advantage of the opportunity that volatility offers.
There's no question that volatility is going to be higher and we're already seeing it not only by the VIX, which is on the closing of every day. But also, if you look at the intraday volatility, it's even higher than that. So the VIX in some sense is understating the volatility that we're actually seeing. In addition, higher rates and slower growth will mean that this rotation from growth to value is likely to continue as long duration growth assets have a higher discount rate applied to them.
- OK. And we're just seeing all markets now in the red at the moment. So there is a turn there. Have to get your take on how you position the portfolio and have to touch on tech as well. Obviously, with rising rates, tech is going to be challenged. So how do you pick which are the areas in tech that you look at and then what else are you looking at as far as maybe value, commodities?
ELLEN HAZEN: Within tech, I think it's been clear for a few months now that the air is coming out of those companies that were very expensive and one could argue irrationally valued looking at conventional valuation metrics like price to earnings, price to sales, price to cash flow, et cetera. So tech is a big sector, right? It's over 25% of the S&P. So it's not homogeneous.
The large, high growth, very expensive stocks, the air is coming out of those. But there are still a lot of areas within tech that are not that expensive. And I would point, first of all, to semiconductors as one area, and particularly semiconductor capital equipment.
We all know about the chip shortage and we all know that companies are going to have to ramp up manufacturing, ramp up capacity, and they're still trying very hard to get chips in the supply chain. So to us, that looks like a pretty good value inside of tech. As we're looking outside of tech, one of the things we're looking at right now are companies whose estimates have actually gone up during the course of earnings season, but whose stocks are down this year. So one example is Costco.
Stock's down 15% this year and estimates are actually up. It's still not a super cheap stock, although it's premium to the market has collapsed, back to its historical average. So that looks like a pretty interesting one.
And another one we're looking at is Morgan Stanley. That's a company where estimates are still increasing and you can get the stock for 12 times earnings, which is pretty inexpensive. That's a very high quality, solid value stock with high ROE and growing market share.
- And definitely, valuations have come down across the board. OK, we will have to leave it there. Ellen Hazen, Portfolio Manager at F.L. Putnam. Thanks so much for your insight today.
