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Fed walking ‘tightrope’ between hawkishness and peak inflation: Girard CIO

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Girard CIO Timothy Chubb joins Yahoo Finance Live to discuss Fed policy, what to expect from Thursday's CPI report, U.S. inflation, and the outlook for markets.

Video Transcript

BRIAN CHEUNG: You know, those heads that we just got from the Federal Reserve, the Cleveland Fed president saying the task before us is to remove accommodation at the pace necessary. I mean, you've talked about the tightrope that's really the Fed trying to engineer a soft landing without really inducing another recession because of perhaps too aggressive of a rate hike. I'm reading those comments as more hawkish than dovish. What do you see as the downside, upside tilts to Fed policy this year?

TIMOTHY CHUBB: Yeah, it's really I think the question of the year ultimately. And, you know, the wildest comments today are definitely on the hawkish side. And we've had some more hawkish comments ever since Chairman Jerome Powell had started taking some truth pills, I suppose, going back the last couple of months. We also had some dovish comments from Bostic earlier today saying that we could be likely seeing peak inflation ahead of the CPI report.

And so like you said, it really is a tightrope. We're trying to understand if we're in the middle of this wage price spiral that may be needing to be broken by the Federal Reserve to prevent financial conditions from getting away from themselves and combat some of this inflation issue. And so much of this really is hinging on, you know, what the labor market dynamics are like and how are we going to see potential wage pressure make its way into not just the economy, but into the financial markets, as well as potentially makes it difficult for companies to support record high profit margins.

AKIKO FUJITA: Certainly a lot of investors reassessing their portfolio on the back of that expectation of the rate hikes, also after seeing the choppiness in January. How have you kind of readjusted some of your allocations? What do you like?

TIMOTHY CHUBB: Yep. Yeah, I think really the most important thing as we enter this new environment where the markets really aren't being supportive or nearly supported by the substantial accommodative monetary policy, not just here in the United States, but really across other developed economies and global central banks. And so, you know, as that happens, it becomes much more important to focus on some of the idiosyncratic differences between companies, what their growth profile look like.

And if you look at last year, despite us having a wonderful year and a number of all-time highs met by most of the US indices, really, it came from profit growth and as opposed to multiple expansion. And I think a lot of investors, you know, if you look at the data, would be surprised by hearing that. And so I think it's a very similar situation this year. Definitely with the Fed tightening, you know, the lower multiple's likely to be warranted by broad indices.

And so growth is going to become very important as the year goes on, especially as we come off of the really eye popping numbers we've seen from an inflation perspective, and some of the base effects start to come in. And so our firm is really taking advantage of this pullback that we've especially seen within software.

We think there's a lot of opportunities for companies that have-- basically, that we would consider an enabler and more of a picks and shovels approach that build on top of some of the legacy enterprise software vendors like Oracle and SAP, which, for full disclosure, in particular, those two companies, we're not recommending to clients, nor do I own them. But really as businesses try to get around a lot of the issues that they're having with third party data, there's been a lot to discuss about IDFA, going back to the earnings reports that were announced last week.

And so companies trying to aggregate this third party data have a 360 view of their customer, have that cohesive experience across multiple platforms. There's a lot of businesses there that we're pretty attracted to, given the sell-off that we think will long-term will take advantage of quite a bit of disruption, you know, that's taking place, especially for businesses that are trying to market to their customers in an effective way.

BRIAN CHEUNG: Timothy, last question here, I posed this question to Dan Niles earlier in the program. Quarterly earnings that we're seeing, margin expansion has been the story, and inflation has been good, maybe not for software companies, but maybe for some of those more consumer goods facing companies. They've been able to expand their margins. And as the Fed tightens, do those margins get compressed? And if that is the case, does it mean stay away from stocks as we get towards Q1?

TIMOTHY CHUBB: It's hard to say stay away from stocks generally. You know, as we've seen through earnings season so far, you know, managements definitely have been very vocal about worker shortages. We've seen a lot of consternation over especially low service job availability and seeing that segment of the population come back to the workforce and pricing pressure on wages ultimately being a headwind for earnings and profit margins. But, you know, I think we've seen a lot of pricing in rate hikes and tightening monetary policy very quickly here in the markets.

And I think, you know, from our perspective, we're looking back and thinking, how likely is it the Fed, you know, again, to make a policy misstep, but how likely is it to be possible for them to even raise rates five to seven times here in the next 12 months with the shape of the yield curve the way it is? And so I think investors need to take a step back and really think about just how much the Fed will be able to tighten, regardless of how much they want to.

And if we start to see some positive data related to inflation, the Fed is going to have a stronger argument to not be nearly as aggressive in tightening and perhaps be a bit more accommodative for a little longer. And if that's the case, I think it bodes well for stocks throughout the rest of the year, assuming you're buying companies with some decent profit growth that are able to insulate themselves from some of those pricing pressures from wages a bit.

AKIKO FUJITA: Yeah, a lot of investors hoping things move a little higher after the January that they saw. Timothy Chubb, Girard CIO, good to talk to you today.