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Fed's tapering will be a 'non-event': Strategist

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Clearnomics Founder & CEO James Liu joins Yahoo Finance Live to discuss the latest market action.

Video Transcript

AKIKO FUJITA: And James, you heard Jared just kind of talking about Jackson Hole, of this being a bit of a non-event when we heard from Fed chair Jay Powell on Friday talking about the timeline for the tapering. We're looking at the 10-Year today, down just slightly here ahead of the jobs report on Friday. But how do you-- how did you interpret what we heard from the Fed chair, and does that change your positioning at all as you look ahead to potential pullback in the asset purchases?

JAMES LIU: Good morning, Akiko. Well, we do think that tapering, in general, will be a non-event, most likely because first, the market has had time to react throughout this year. The Fed has done a great job telegraphing all this. Whether it's September or November for the announcement of taper will really depend on the jobs report coming up and some more economic data. But regardless, the market seems to expect it at this point. This is very different from 2013, when the market had to adjust very abruptly to taper.

And the second point is that the path to policy normalization is a very long one. Back in the last cycle, the Fed started talking about tapering in 2013. They were raising rates up until and through 2019. And so this is a very long process. The market can adjust to that.

Overall, we think that this is a very normal part of the cycle. The economy is looking very strong. It justifies the taper process right now. That doesn't mean that the Fed will start to raise rates imminently. The chair basically drew a stark distinction between those two things. And so, overall, we would still be very much invested and very much pro-risk at this point in the market cycle, and we think that investors should stick to those long-term portfolios and not make any drastic adjustments, even if the Fed does start to pull back on its asset purchases.

ZACH GUZMAN: Yeah, when we talk about the underlying economy and teasing out what we heard from Fed Chair Jerome Powell last week, he was talking a lot about the jobs report. We're getting it this Friday, as Akiko was talking about the timeline there. I mean, how much added emphasis do you think is going to be on this one, particularly given kind of some of the shakiness around Delta and where exactly we are in this recovery, should we see things again start to pull back. The housing numbers out this morning a little bit surprising too.

JAMES LIU: We are, in fact, seeing some weakness in some economic data, Zach-- retail sales have slowed, consumer confidence, some parts of industrial activity and manufacturing. But they're still at very rapid and robust numbers. And so I think the overall question is, will Delta be a wild card on the economic side of the story? Obviously, there's the human element of it. But from a market perspective, if we don't see that impact in this jobs report, then it's probably full speed ahead in terms of announcing the taper in either September or November at the very latest.

So overall, we still think that the economic recovery and the now expansionary period, now that we're post pre-pandemic levels, is still very robust. And we think that, overall, this should not change how investors are positioned over the next six months.

AKIKO FUJITA: How have you positioned yourself, James? I mean, have you sort of repositioned things a bit as you look ahead to the year end, or do you sort of stay the course, given all the variables you pointed out?

JAMES LIU: Yeah, so Akiko, we still like the overall market quite a bit. You look at the earnings numbers that are being projected, and they might be a little bit lofty, but overall, folks expect, in terms of Wall Street estimates, that we see a 46% increase in earnings over the course of 2021, and that gets us to about $197 in terms of S&P 500 earnings, so incredibly robust. And then that trajectory, if the economy stays stable, should continue into 2022 and hopefully to 2023. When you look at the sector perspective, there are certain sectors that we think are better positioned as that recovery continues and as rates hopefully begin to rise from here and the yield curve steepens.

So financials, which you all spoke about earlier, we think that that is still in a great place as much lower valuations than average. You also have the technology sectors, which, albeit have done very well over the last three years, that's a long-term secular story that we think will play out further into the future. So we think sector positioning here with these-- both procyclical and also secular trends-- being positioned for those is very important. But overall, we do like the broader market, as well, given that valuations should come down and moderate as earnings continue to increase.

ZACH GUZMAN: We've kind of already seen valuations, I suppose, come down a bit, just as earnings have grown beyond expectations. But I do wonder-- I mean, as kind of analysts start to figure all this out-- because again, it's hard to model, and we're thinking about the big slowdown we had last year and the recovery since-- I mean, are there signs, maybe, that you would be starting to look at here, even kind of just how this is one of a kind rebound risk when you have a health pandemic on one front, and now, potentially, the resurgence of that pandemic again? I mean, what are those factors or indicators you think deserve the most emphasis here, should we see another bout of volatility?

JAMES LIU: Yeah, well, we do expect more volatility from here simply because volatility has been so muted. I know investors feel like this has been kind of a rocky year, but the biggest pull-down so far this year in the market has only been about 4%, which is incredibly unusual. And so you have this rockiness week to week, but it's really gone away very quickly. And now, even today, we're near all-time highs.

And so, you look at what investors typically use to evaluate the markets. You have these long-term secular trends that you want to play for in your portfolio. You have these cyclical trends, where you want to be a little bit more tactical. But I think what's really thrown a monkey wrench in here over the last year is that you've had this quick rebound that we typically do not see in most cycles.

And so how we would view the markets is that let's put the initial recovery and rebound behind us. We're kind of past that phase now. And now it is about the long-term growth from here and the rest of the cycle.

And cycles last a long time. The last cycle was over a decade. And so that's how we would position our portfolios, not for the next few months. Maybe there's a bit of a slowdown because of Delta, maybe there's not. It's really about the next several years that we're planning for for positioning.