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Fed’s ‘most likely scenario is a soft landing,’ strategist says

BMO Wealth Management Chief Investment Strategist Yung-Yu Ma joins Yahoo Finance live to discuss the expectations for Fed Chair Powell’s Jackson Hole speech, inflation, economic uncertainty, and the outlook for markets.

Video Transcript

[AUDIO LOGO]

BRAD SMITH: Who of you fears the Fed? Investors loading up on stocks and bonds to the tune of $7.9 billion in global equity funds, according to Bank of America. All this as markets largely expect the Fed to continue aggressively reducing inflation ahead of closely-watched comments from Fed Chair Jay Powell.

Joining us with more, we've got Yung-Yu Ma, who is the BMO Wealth Management Chief Investment Strategist Thanks so much for joining us here this morning. First and foremost, what are you going to be listening for coming out of Jay Powell in Jackson Hole to really kind of give the markets some indication or another as to how hawkish or perhaps dovish the Fed may be, even though we probably can assume it's going to be hawkish?

YUNG-YU MA: Yeah, I think the market's really going to try to assess what the risk is of the Fed overtightening and how much the Fed is willing to sort of lean toward or err on the side of bringing the US economy into recession if that's what it takes to bring inflation down. But today's inflation data actually really supports the case otherwise. So I do think that the importance of Jay Powell's speech is still very high, but it's a little bit less high now that we've seen these very positive inflation numbers come out today.

JULIE HYMAN: One month, though. Yes, I'm encouraged also, Yung-Yu, but of course, it's just one month here. Do you think that we are going to continue to see moderation in those numbers and that's going to allow the Fed to maybe only raise by 50 basis points at its next meeting, for example?

YUNG-YU MA: That's a great point. It is only-- it is only one month. And if we think back to the May inflation numbers that were through the roof that the markets really reacted very negatively to, those were also just one month. But I think in the near term, the market is really going to key off of these recent numbers. And a lot of things do point to inflation continuing to come down.

So if you look at PMI-- PMI data, for example, prices that survey measures are pointing to going forward, those also look like they're coming down. I think the big question is going to be-- it's easy to get-- or easier to get from 5% to 3% inflation. The question or the difficulty comes in trying to get from 3% to 2% inflation when you have unemployment as low as it is. That's probably still several months out in terms of the market trying to assess that next leg down for inflation. But right now, the data looks positive.

BRIAN SOZZI: In this still confusing environment, Yung-Yu, what are some of the top strategies the average investor could be using to grow their wealth?

YUNG-YU MA: Yeah, I think right now, there's just a lot of uncertainty in the world and the market still, and you want to take a balanced approach. You don't want to lean too much into risk in any one area, whether that's with interest rates, whether that's with technology, whether that's with value stocks. We do think that many areas of the market still have a lot of runway to them. We think that value is a long-term trend that's going to stay with us for quite some time. So we do like value stocks, and that is something that we do recommend here.

BRAD SMITH: You say that recent economic data has indicated a stable economy here, but there's still so much work to be done to really have the economy stabilize, at least it seems, especially if the Fed continues on its pathway. We don't know what employment or unemployment is going to look like in that case. We don't know what consumer spending is going to look like even.

YUNG-YU MA: Yeah, there's still a lot of uncertainty. We don't want to minimize that at all in terms of the path of economic development as the Fed tightens interest rates. But I do think the market is starting to realize that historically, there have been some long periods where interest rates were much higher than they are today, say in the mid and late 1990s, where the economy did just well-- just fine. And as long as profit margins can hold up, and as long as we don't have a negative feedback loop where companies really have to tighten their belts and have mass layoffs and unemployment shoots up and leads to further tightening, as long as that cycle doesn't come into play, it looks like we can achieve this soft landing scenario even with higher interest rates.

JULIE HYMAN: So put all of this together for us. What should investors do going into the end of the year as they are poised for higher interest rates, whether they're going much higher or moderately higher?

YUNG-YU MA: Well, I think investors one, want to stick to a long-term plan that they've had. That's still very important, and we have been messaging that the most likely scenario is a soft landing. And if a soft landing is the most likely scenario, you might make some modest portfolio shifts, but you don't want to go too aggressive in one direction or another.

So we do think that staying invested is probably the best course here because inflation is coming down, and growth does look like it's going to stabilize. Now, as Brad pointed out, there's a lot of uncertainty and how that uncertainty plays out could change that course. But right now, we do think that still taking a balanced approach, having equity exposure, having fixed income exposure but not being further out on the risk spectrum than you're comfortable with in typical times is probably the most appropriate course here.