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‘Inflation may be here a lot longer than we want’: WealthSource CFA

Patrick Brewer, CFA, CPA and President of WealthSource, joins Yahoo Finance to discuss the market reaction following remarks from Fed Chair Jerome Powell, positioning investing portfolios amid inflation concerns, and outlook on earnings.

Video Transcript

ALEXIS CHRISTOFOUROS: Want to continue the market conversation now with Patrick Brewer, CFA and CPA and president of WealthSource. Patrick, good to see you again. So tell me what investors heard today from Fed Chair Powell that's making the market go so much higher.

PATRICK BREWER: Yeah. I mean, I feel like the market is interpreting and has already priced in the fact that we're going to need to taper a bit here. Frankly, I think it's a little bit overdue. I mean, we've been in crisis mode with QE for a long time. Markets are at all-time highs. Interest rates are at all-time lows. So I think we're going to see a move to a more normal environment, hopefully, with the tapering begin beginning sometime in the coming months.

ALEXIS CHRISTOFOUROS: Now, during his speech, Powell addressed why reducing stimulus too early might be harmful. And he said, we need to not react too quickly or aggressively to rising inflation. Take a listen to what he had to say.

JEROME POWELL: The main influence of monetary policy on inflation can come after a lag of a year or more. If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed. The ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired.

Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.

ALEXIS CHRISTOFOUROS: So Patrick, in light of the fact that we got information today on that core inflation number, that PCE number showing inflate the inflation rate at a 30-year high, some are worried that the Fed might actually be behind the curve when it comes to inflation. Would you agree with what Fed Chair Powell had to say today?

PATRICK BREWER: I think I agree with most of it. I mean, the Fed has taken the position that inflation is largely transitory. And I think, as long as wages continue to increase and the labor market continues to stay strong, even if inflation is with us for a little bit longer than we had hoped, we're going to be OK.

I think if we see a spike in rent prices the tracks along with the increase we've seen in home prices, we see any more issues with supply chain pushing prices up on consumers, or if we see a slowdown in the labor market and wages getting compressed, inflation may be here a lot longer than we want and a lot more in a persistent way than we would want.

So I agree with it for the most part. But I am cautionary in the way that we're kind of positioning our portfolios relative to the prospects of inflation in the future.

ALEXIS CHRISTOFOUROS: Well, let's talk a little bit about how you are shaping portfolios right now to be defensive against higher inflation and inflation that could indeed be around for a little bit longer than we had first thought. What areas are you looking at? How are you doing that right now, Patrick?

PATRICK BREWER: Yeah, so we looked at Treasury Inflation Protected Securities earlier this summer. They tend to outperform if unexpected inflation outpaces expected inflation. So we've definitely tilted our portfolios towards TIPS.

We've also started to unload a little bit in the financial sector and start to allocate some of that weight over to technology. And then we've also started to trim our positions in emerging markets, considering the slow vaccine rollout in emerging markets countries. We feel that that's going to negatively impact their economy and markets. And we've taken some of that additional weight and put it towards international developed countries which have had a more successful vaccine rollout.

So those three things, I would say, have positioned us in a way where we're not overexposed if we don't get the inflation call absolutely correct. But we're going to benefit from the fact that unexpected inflation will most likely outpace expected inflation in the near to intermediate term.

ALEXIS CHRISTOFOUROS: Now, I know you believe the market feels a little manic right now. That's your word. Tell us why. And how should investors protect themselves from the mania?

PATRICK BREWER: Well, I mean, if you just look at this week, for example, I mean, when I was a kid, the biggest thing is that it makes me think of is the first time I went to Six Flags. And I get on a roller coaster with my dad. We're going up. It's dragging me up.

You've got this mix of uncertainty and exhilaration. And it just feels like you're going up this roller coaster forever. And then eventually, you go down. And then you're like, oh, wow. This thing really plunged me down quickly.

So I feel like that's kind of the sentiment that I'm feeling in the market right now. It's this idea that it just keeps going up, and it never comes back down. But obviously, history would tell us a different story. So in light of that, some of the manic activities that I've seen is boat prices, used boat prices are higher now than they were for new boats two to three years ago.

I've seen you know visa and other large corporate companies buy NFTs like CryptoPunks and things of that nature. I've also got a call from my dad the other day with his latest stock tip, which is usually a good leading indicator for when we're about to enter into a recessionary environment. So I just feel like there's this greed and just general sentiment around the markets that isn't really based on any of the economic fundamentals.

It just feels like there's this sense of momentum that people are kind of getting caught up in, which can be dangerous, especially if we're getting to the end of the cycle.

ALEXIS CHRISTOFOUROS: What about when you look at earnings going forward? I mean, this earnings season so many companies have beaten estimates and a lot of people are saying, look, the bar was just too low. What are you thinking about for coming quarters, especially since we still have to deal with this Delta variant? And it looks like these supply chain issues are not going to go away any time soon.

PATRICK BREWER: Yeah. I mean, earnings have been incredibly strong. I think it's being floated by a couple of things. The first is really low cost of capital in the debt market with interest rates being so low. So, companies can borrow to fund expansion.

We've also got a pretty strong labor market, which is helping earnings dramatically. And then the fact that consumers are not slowing down their purchases. So we've got pretty strong demand on the consumer side. So these three factors, I think, are really helping companies produce earnings reports that are beyond expectations.

The Delta variant, I feel like, is largely priced into markets. I'm not too concerned about that. Other future variants, I'm sure, could impact markets in certain ways. However, if we look back to March of 2020 after the initial downturn, the market has largely incorporated information about the coronavirus positively. We've just seen stock prices go up without any end in sight.

Every time we hear a negative piece of news about the coronavirus, markets just continue to charge forward unfazed. So I think that that trend is probably going to continue. We've seen a big reallocation of wealth from small to mid-sized business owners to large corporations, which frankly, I'd really like to see a return to more normal restrictions around how people can operate in the economy, given that we have a decent amount of vaccinations going around at this point, just so that we can stop kind of this whole process of wealth concentration for these large companies.

ALEXIS CHRISTOFOUROS: All right, Patrick Brewer, president of WealthSource, thanks for being with us today.