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Fed Chair Powell's 'definition of "transitory" has changed,' analyst says

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Principal at Homrich Berg Ross Bramwell joins Yahoo Finance Live to give an outlook of what’s to come for roads and bridges, public transportation, passenger and freight rail, as well as electrical vehicles once President Biden signs the infrastructure plan on Monday.

Video Transcript

KARINA MITCHELL: I want to stay on the markets and this massive infrastructure bill and bring in our next guest. Ross Bramwell is principal at Homrich Berg. Sir, thank you so much for being here. This is the most prolific investment in our country's infrastructure in decades-- EV, roads, railroad, clean water, broadband. What are the sectors that you see lifting off on this bill passing?

ROSS BRAMWELL: Well, I think a lot of it is would want to stick with, as you mentioned, where the biggest bucket of dollars is going to be spent. And the largest there is on the rails or on the roads, the highways, and on the bridges, so a lot of the construction material companies. I think rails is the next largest, right? So those two is where you're going to have a lot of dollars spent.

But it's interesting, as you kind of talk about how the markets are reacting, a lot of these names have run up in the last couple of weeks. And they've been up-- over the last month, they've probably been up mid-double digits, where the broader market's been only up mid-single digits. So this could have been a case where, hey, you know, they're kind of buying the rumor and sell the news, and that's why we've seen a little bit of softness, because if you look at the bill, it is expansive, right? It's a large dollar amount, as you said, you know, one of the largest ever.

But it's interesting. As you get down into the details, a lot of this money, a lot of these projects may not be started for two, three, or four years. A lot of the dollars actually don't ramp up until 2024. And you kind of peak out in the really heavy years on the spending in 2025 and 2026. So you're kind of getting a short-term bump. But really, I think as you're looking at, hey, what's going to impact these companies' earnings over the next 12 months, infrastructure may not have as much impact in the short-term as many would hope.

ALEXIS CHRISTOFOROUS: So, then, what is an investor to do, Ross, if a lot of this money is really going to be felt for everyday Americans perhaps years down the road? Where is the opportunity in the short-term for investors?

ROSS BRAMWELL: Yeah, I think a lot of it is the infrastructure bill probably isn't one of my top three factors of what's driving the market right now. You know, I still think corporate earnings. I think inflation and then the Fed are probably still greater forces that are moving the markets, and really, more of a positive tailwind, especially when you're coming to the Fed. Interest rates, I still believe, are going to be lower for longer, maybe much lower. You know, they're starting to move up a little bit here lately, but again, I think that's just a sign of indicating a more positive environment for the company.

And when it comes with inflation, looking back, you know, since the Great Depression, if you kind of look at all the factors and kind of the sectors, you know, what does well in an inflationary environment, small cap value has actually outbeat it over every decade, has outbeat-- or outpaced inflation. Small cap growth as well, but it missed in one or two decades.

So I think if you're looking for, hey, inflation, it's going to be more persistent. It is no longer just transitory. I don't think it's going to derail the economy, but it's definitely not transitory. I think small cap value may be something to play over the next two or three quarters because I think they're going to have the ability, that's where you're going to have some value. And they're going to be able to outpace the inflation.

KARINA MITCHELL: And sir, I want to bring your attention to this Washington Post ABC poll, where 55% of Americans disagree with the way Biden has been handling the economy. Has the Fed handled inflation appropriately? And do you think there will be or needs to be a change at the top?

ROSS BRAMWELL: Well, from everything I'm seeing, it doesn't look like there is going to be a change at the top. So I mean, Jerome Powell, he has staked his flag, you know, in the ground, saying inflation is transitory. But it's interesting. I think his definition of transitory probably has changed over the last nine months. I mean, I think at first, when he was using the term transitory, he was saying, you know, this is only going to last maybe one or two quarters. And then we'll get through it. We'll start seeing the pressures decrease.

I think now when he's saying inflation is transitory, he's really saying inflation is not going to derail the economy. And whether that takes another three, six, or nine months, we are going to stay accommodative. We're going to get to the other side of this. So I don't really see a change in policy happening at the top. I think it's most likely that Jerome Powell will stay in place.

And honestly, if you look at it, what he's trying to do, he's breaking it into two pieces. He knows that he has to get through the tapering. And he probably wants to do that by the spring. And that is really just reducing the bond purchases. You know, raising Fed rates and actually tightening is probably still the second half of next year, maybe even a year off. He has been more focused on employment than inflation. He has stated that many, many times. You know, he wants to see the employment level come down. He does not think that this inflation is being driven by a labor shortage. He thinks it is more on the supply side.

So over the next three to six to nine months, you know, I think him staying accommodative, that really is going to be a positive drop-- a backstop for the markets. Yes, I think we need to get through tapering. I think interest rates need to move up. I think the economy and stocks can handle interest rates moving up. But I don't really see a change in policy over the next six to nine months.

ALEXIS CHRISTOFOROUS: You may not see a change in policy, but Ross, do you think there should be a change in policy? I mean, we had the Treasury Secretary Pete Buttigieg on Yahoo Finance earlier today, talking about the supply chain disruptions, which are a big reason why we're seeing such a jump in prices. And he says they're probably going to stick around for a long time, these supply chain issues. If that's the case and if inflation is not going to be transitory, should the Fed get a little more aggressive when it comes to the timing of raising interest rates?

ROSS BRAMWELL: I think it will. An interesting chart that I've been following, especially over the last few months, is looking at real personal incomes. And for the first time since the beginning of the pandemic, you've actually seen personal income, you know, dip below pre-pandemic levels. If you look at all the unemployment assistance, all the money that was put into the system, people had extra money in their pockets, many people, than pre-pandemic, looking on average. This is the first time that people are actually seeing negative income in the last year, year and a half.

So the question is, what does that do? You know, that could actually force people back into the workforce, right? I'm making less money. I'm no longer getting the assistance. I'm having inflation. I have to get back to work. It also could hit demand a little bit, you know? People may not be willing to spend. They maybe are going to save a little bit more. So if you have some people coming back into the workforce, if you have a little bit less demand, maybe that can help the inflation picture.

So I think, you know-- and I'm still watching it-- over the next three to six months, I think we have some time to let this play out. I don't think we need an immediate change because one thing that the markets really couldn't handle is an abrupt change or-- in direction. Jerome Powell has been over communicating what his plan is. And I think the markets have handled it very well. If we were to make an immediate change, I think the markets-- you'd see a lot more volatility. So I think Jerome Powell I think has kind of the right path. Let this play out over the next three to six months and then see where we are looking next spring.

KARINA MITCHELL: And sir, I want to ask you, how optimistic are you that this bull market continues? Because we've seen from Q3 earnings, they have been pretty strong, and those that weathered supply chain issues came out on top. Those that didn't were punished. But what happens in Q4 and beyond? Do you see any dark clouds on the horizon? I know you say that any dip is a good buying opportunity.

ROSS BRAMWELL: Yeah, I think it is. At the beginning of the year, we were kind of looking at five metrics. They were all kind of flashing green at that point, right? It was the economic recovery, really do the vaccination rollout. We're kind of past the delta surge. So we're still looking for a little bit of a reopening play there. The Fed is still very accommodative. You know, fiscal spending, we now have the infrastructure bill. It's not going to be an immediate bump, but it is more dollars going into the system.

The consumer, the health of the consumer is still very strong. You still have over a trillion dollars in money market accounts. Any time there is a dip, people are looking to, to buy the market. And fifth is corporate earnings. Yes, we've had six straight, I think, quarters of double digit, you know, beating of expectations. They have moderated this quarter, right? That has come down. I think in the fourth quarter, it still moderates as well. But we are still on the path of higher corporate earnings, even in 2022, even if expectations come down a little bit.

So I think corporate earnings, they really drive the markets over the longer term. I think that is going to be the story at the end of the day that the investors follow. I think the risk there is historically, you know, right now, operating margins are pretty close to all-time highs, even though they've come off the peak a little bit. And the question is, can companies continue to defend their margins?

So far, they've been able to do that. I think they'll be able to do that through Q4 and probably even into Q1. I think the question is, once you get to Q2, spring of next year, if we're still in this 5 and 1/2%, 6%, 6 and 1/2%, you know, inflation. I think it's going to be much harder for companies to defend their margins. But for right now, over the next quarter, I think the story still is intact.

KARINA MITCHELL: All right, well, we will have to wait and see. Ross Bramwell, principal at Homrich Berg, thank you so much for your perspective today.