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Inflation could create a ‘freak out moment’ in the market: Strategist

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Brian Levitt, Invesco Global Market Strategist, joins Yahoo Finance Live to discuss the outlook on cryptocurrency, big tech, and inflation concerns.

Video Transcript

But I want to turn now to look at the broader markets. We're joined by Brian Levitt, Invesco Global market strategist. Brian, always great to have you here with us. I'm going to start with where we ended off before, you know, looking over at some of the broader markets. Which is this conversation that we're having on crypto. I feel like I talk more about crypto than I ever expected or anticipated ever before.

We just saw Dogecoin to the moon, I guess, both literally and figuratively is what they're trying to do. How should investors really be approaching the cryptocurrency space? Not necessarily, just Dogecoin but Ethereum. As we mentioned, over 4,000 or at least broke that 4,000 level. How do we look at Bitcoin? How should investors start approaching them in their portfolios? Is this now something that you have to take seriously and you definitely should add?

BRIAN LEVITT: Well, it's certainly something that the market is causing us to look at closer than I think we otherwise suspected that we would have. You know, I think that investors that are moving into this space should recognize that there's a lot of volatility in this space. And you've seen large drawdowns in the past. So it is certainly not a straight line up. Although on certain days, it may feel like it.

And so for investors that are thinking about it, I would say think about small positions in your portfolios. Think about ways of maybe creating some diversification. Although, on many days it does look a little bit more equity like. But, you know, don't-- you know, it's still something where we're all trying to figure out what the value is to it, how do you value it. Do you really need alternative currencies in order to transact in a future world? And so I would just be mindful about the volatility you may be bringing into your portfolio and the potential for drawdowns, given how excited people are right now about crypto.

- Right. And I want to talk about what we've been seeing in big tech. You know, so many people, institutional investors as well as individual investors dumping these high growth big tech names. We keep talking about inflation being behind the reasoning for dumping these stocks. That as inflation heats up this year, it can really hurt the bottom lines of some of these big tech companies. But are we overdoing it a bit right now in the market? And do you see these dips as buying opportunities?

BRIAN LEVITT: Yeah, I think we're overdoing it. I mean, it doesn't mean that tech has to be the near-term outperformer. But I think that you handicap that correctly. The reality is these were the big winners in a slow growth benign inflation world. Now, we have an accelerating growth environment with the prospects of some inflation.

And for investors, when they think about inflation, they tend to move away from tech stocks because they think of tech stocks as longer duration assets in which you're not going to be paid well into the future. And they'd instead rather own parts of the market that are more highly correlated with nominal GDP. And so that'll take them to other parts of the market.

But we have to remember that what we're going through right now is a reversion back to where we likely otherwise would have been had it not been for the coronavirus outbreak. And in that reversion, you'll see more economically sensitive names outperform. But it doesn't change the long term structural story. The long term structural stories of all the ships that are taking place in society, they don't change. And those tech stocks are on the cutting edge of it.

So, you know, they were bound for some type of volatility or some type of correction, particularly, if inflation concerns increased. I expect that some point, we'll be back in a very similar environment to which we were in from mid 2011 through 2019. And investors will be back bidding up those structural growth names.

- Curious to know on this point of inflation and, you know, also interest rates, Brian, how much you view them as headwinds right now to the markets going forward?

BRIAN LEVITT: Well, I think, they may be headwinds a bit to what we just said to things like technology. But, you know, the parts of the market that benefit from improving environment, improving inflation expectations, things like financials, energy, materials, industrials, they're all doing just fine. And should continue to do just fine. I think what we're talking about is-- and what we're all debating is, is there a moment where inflation seems a bit out of hand and the market brings forward expectations of policy tightening?

We've seen what that looks like before, where five year rate goes up, the dollar strengthens, stocks sell off some. And ultimately, we assess from there, whether the Fed's going to go ahead with a tightening plan. Continue to go ahead with a tightening plan and at some point end the cycle. Or is it just a matter of the market does the Fed's work. We get a little bit of a pause, maybe we get a correction. And that creates a buying opportunity.

I'm still very much of the mind that we're in the early stages of this cycle. This cycle is going to play out over a long period of time. Fed's not going to be raising rates and inverting the yield curve for years to come. And so inflation, which is likely to emerge in the summer could create what we call a so-called freak out moment in the market. But would represent a buying opportunity. Because ultimately, I think inflationary pressures will fade.

- All right, Brian Levitt, Global Market strategist at Invesco Thanks so much for joining us.