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Inflation: 'Largest concern now is... what happens with the labor supply shortage,' analyst says

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Hennion & Walsh CIO Kevin Mahn reacts to the Fed's ultimate tapering decision, worries of the supply chain and labor force shortages, and is big tech investments.

Video Transcript

[MUSIC PLAYING]

BRIAN SOZZI: The market appears to be OK with the start of the Fed's tapering program later this month. But should it be? Kevin Mahn is the CIO at Hennion & Walsh, joins us now. Kevin, always nice to see you. Yesterday afternoon after the Fed announced its decision, I put out a poll to my Twitter followers asking them, do they think the taper means the market will plunge or go up. 22% say the market will plunge. 55% say no, the market won't plunge. What camp are you in?

KEVIN MAHN: I think it's just part of their overall TNT program, Brian, of course with TNT standing for taper, narrow, and tightening. We do know now that the Fed does intend to finally start their initial stages of their tapering plan later this month by buying $15 billion less of US Treasuries and $10 billion less of mortgage-backed securities per month. But they're still going to be buying $105 billion of securities every month.

With respect to narrowing or shrinking the size of their $8 trillion balance sheet, Chair Powell told investors that they will talk about that down the road once they get tapering started. And then of course, what everyone cares about right now, Brian, is what about interest rates? When will the Fed raise the Fed funds target rate?

And we tend to agree with their dot plot chart which suggests one rate hike of 25 basis points next year and three additional rate hikes of 25 basis points in 2023. So in all likelihood, rates are going to stay at historic lows for longer. And that should be supportive of upside potential for stocks.

EMILY MCCORMICK: Kevin, one area of stocks that you mentioned could see some upside here because of the Fed's stance and of course, the federal government's additional support of the economy as well with their packages, you mentioned smaller cap companies providing revolutionary forms of technology, including AI, robotics, 5G, cybersecurity, and blockchain could be beneficiaries here. What's your justification for that? And how long do you expect this kind of upside to last for these stocks?

KEVIN MAHN: Great question, Emily. So we are seeing momentum right now in both small cap stocks-- you look at recent strength of the Russell 2000 index-- and technology stocks. And we believe that, as we start to move further and further away from the COVID-19 pandemic and more of the economy starts to open, technology we will become an even more critical component of that reopening in areas such, as you mentioned, Emily, artificial intelligence, robotics, blockchain, the internet of things, fintech, and even 5G as we try and expand our country's broadband access, which we believe will be part of the infrastructure bill, ultimately when it's passed.

So we see more upside potential for small cap stocks as the economy continues to expand. And as credit conditions remain accommodative, but particularly in those areas of revolutionary technologies.

BRIAN SOZZI: Kevin, don't you find it mildly alarming that we have a Federal Reserve that appears to be OK with very high levels of inflation for the foreseeable future? Doesn't that set the stage for them having to be more aggressive on interest rate hikes maybe later next year? And clearly, the market is not going to like that stuff.

KEVIN MAHN: Yeah. What I found interesting yesterday, Brian, was that they redefined their definition of transitory, which I found quite amusing. No longer is it just temporary, but rather now it means persistently high levels of record inflation in certain areas. OK, so that resets the stage for what they mean by transitory.

But we do know from their own forecasts, they believe that the PC Deflator, their preferred gauge of inflation, will fall back to around 2.4% next year. I think that's a little overly optimistic. But if in fact that is the case, inflation pressure should become more moderate as the economy expands. And the Fed did indicate that they remain ready, willing, and able to tackle those inflationary pressures if needed. But as it stands right now, that doesn't look like that's going to be needed until the second half of 2022.

EMILY MCCORMICK: And Kevin, of course, we're going to be getting the latest non-farm payrolls report out tomorrow morning. I'm wondering what your expectations are there in terms of what we'll be seeing on the labor market data side and how you've been thinking about this great resignation that we've been seeing across so many companies for the past couple of months.

KEVIN MAHN: Yes, good news today on the initial jobless claims front. I believe it came in at 269,000. That's a new pre-pandemic low and, in fact, marks the fourth consecutive week below 300,000. But that's my largest concern right now, outside of inflationary pressures, is ultimately what happens with this labor supply shortage because the labor supply shortage feeds into the supply chain issues we're seeing.

Everyone is forecasting a record holiday shopping season. But there will be delays in shipping. I'm not concerned with consumers' demand for products. I'm concerned with the merchants and the suppliers being able to supply and meet those goods and services and deliver those goods and services. So hopefully, tomorrow's new job creation report is a positive one, and we start to chip away at that roughly 9.3 million people that are still unemployed.