Inflation: Long duration assets may 'be under some pressure for quite some time,' strategist says

Upholdings Founder and Portfolio Manager Robert Cantwell and Martin Schulz, Federated Hermes Head of International Equity Group, sit down to talk about market rallies amid inflation, global recession worries, and tech stocks.

Video Transcript

- Here's the closing bell.

[BELL RINGING]

- All right. Well, that enthusiasm there, let's see how that also matched how the day ended for the major indices. All three ending solidly in positive territory. You see the Dow up there almost 550 points about 1.8%. The S&P up almost 2% there, up 71 points. And the tech-heavy NASDAQ there also up over 2% on the day.

Well, let's take a closer look at the broader markets by bringing in our market panel. We have Martin Schulz, Federated Hermes' head of international equity group, and Robert Cantwell, Upholding's founder and portfolio manager. Sir Robert, we'll start with you. Interesting we're seeing the markets really rallying today. The VIX, though, above 30. What is your characterization of what the markets are doing right now?

ROBERT CANTWELL: Well, the entire market has been traded around the 10-year now for the past couple of months. And it's been a real whipsaw for investors. As you noted, the 25-bit drop in the 10-year today is what drove a lot of the rallying. Now, what's great about a market environment like this is it brings everything down, and then you get to sift through it and say, well, what are the things that are going to come out stronger on the other side of this?

And the biggest thing we're seeing right now is this separation between companies selling digital goods, enterprise software ads, versus those selling physical goods-- cars, iPhones. And a lot of the dispersion in the rally that you saw today was a lot of those digital goods stocks performing quite a bit better than even the Ford CEO you had on here a few moments ago that was having a really hard time predicting what he's going to see for the next few months.

- And Martin, your read on this rally and how long it can last?

MARTIN SCHULZ: Yeah, that's always the big question. Obviously, the world is in a tough place right now. And I think we can definitely see-- I mean, usually, this time of the year, seasonally, you do see a period in which October does pretty well. And obviously, we've got midterms coming up. There are other things on the calendar that are going to be important.

But I'd really highlight the fact that we still have a lot of issues at play, whether they relate to the US dollars, obviously, interest rates around the world. And I would agree with the idea that digital and some of the more technology-oriented parts of the economy are going to continue to do well. But because of the continued higher inflation rates, higher interest rate scenario, they may, obviously, long-duration assets, be under some pressure for quite some time. So I think we've got maybe a few days or weeks of this.

But I'd say the real rally probably won't happen until the Fed pivots and we see a return to some type of different interest rate policy.

- Martin, what do you make-- we just heard some comments from Stanley Druckenmiller earlier today, saying the possible deeper recession that many people see-- saying that 10 years from now, he doesn't think the Dow is going to be substantially higher from where it is today. Do you disagree?

MARTIN SCHULZ: Yeah, I think I would disagree with that, Seana. I think at the end of the day, we have all those things in play that will, for the long term-- now, if he's arguing that we're going to be Japan, which is obviously a market that hit its high in the late '80s or early '90s, and then for the last 25, 30 years, a generation or more, has been below those highs, I think we have a different scenario.

It doesn't mean that we aren't going to be under some pressures-- obviously, demographic, obviously, debt. I think the biggest concern that I currently have is that we have some type of-- usually when you see-- and right now, really, the biggest story within the international global marketplace for currencies-- because you're seeing a massive move, parabolic, by the dollar. Haven't seen that since 2000, previous to that, '85. And we don't have probably an international coordination effort underway to potentially turn that around.

But at the end of the day, I think technology, innovation, and the ability to manage this is going to allow us to get through this. So I don't think it's a 10-year thing, but it's definitely a short-term event.

- So then Robert, between now and if and when the Fed does finally pivot, then, how should people be positioning their portfolios to really prepare themselves for this period?

ROBERT CANTWELL: Well, it's interesting you brought up the midterms, because regardless of which side you're fighting for, contentious political battles is really good for digital advertising companies. So you get to sit on the sidelines as a neutral party, knowing that you've got assets that can benefit from heated seasons like that. So we look at the market and see exceptional prices.

And this is a Fed now that moved too quickly down in 2019, moved too quickly up in 2020, and is potentially moving too far in the same direction again. And so investors have had to deal with a more volatile market than we've been accustomed to over the past couple of decades. But that doesn't make today's prices any less attractive.

So we're certainly putting our fund very heavily into Meta, very heavily into ServiceNow, and taking more risk. Even Europe, with the dollar being so strong, is presenting some really attractive assets in companies like Adyen that are so disruptive. So those are the key places that we're putting our money right now.

- And Robert, prior to this rally, it looked like the Apple story could be the story of the day before rallying a bit down, just 1% on the day, on this reported weakening demand for the iPhone 14. Is this a much ado about nothing story?

ROBERT CANTWELL: Well, the reviews for this phone didn't come in that strong. So Apple-- regardless of the state of the economy, Apple didn't do a particularly good job of giving users reasons to upgrade to this phone. So this could be a weak cycle for Apple. Back when Buffett bought in 2016, that was a weak cycle on their phones at the time.

So Apple is such a big, competitive player. Their market position is so strong. They're beginning to flex it in new ways. That company has got a lot of ways to work itself out of bad situations. So we certainly never bet against Apple, but at the same time, we're not just going to sit here dreaming that they keep selling infinitely more iPhones in the future.

- Indeed. Robert Cantwell, Martin Schulz, appreciate you both. Thanks so much.