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Inflation not to be seen ‘until unemployment claims drop precipitously’: strategist

Brian Belski, BMO Capital Markets chief investment strategist, joins Yahoo Finance to discuss investors concerns over the rise in interest rates.

Video Transcript

JULIE HYMAN: Let's talk more about what's going on in the markets now. As promised, Brian Belski is with us, BMO Capital Markets Chief Investment Strategist. Brian, good to see you. We were talking with, as I mentioned, Barry Bannister last hour, and he's in the camp of thinking that these higher interest rates are going to be problematic, inflation is going to be problematic.

You are, as I say, on the other side of that. Why are you not so worried about this bump up in bond yields that we've seen, which did seem to, at least temporarily, spook the market last week?

BRIAN BELSKI: Good morning, Julie. Thank you so much for having us. And thank you for the opportunity to kind of clarify. We are not headline type of strategists. We are process and disciplined strategists doing this now for 31 years. And looking back at perspective and history, we're not going to pander to short-term traders or momentum traders. We're going to look at how we're going to run money for our clients.

We have the very good fortune of running $5 billion in equities in Canada and $2 billion in the US. We are long-term fundamental thinkers. Through that, we have a time-tested process of how we look at things. And if you go back and look at how interest rate cycles work-- not just that they go up or not just the duration of how fast they go up, why interest rates actually go up or down, and it's all about the economy.

So there's a very simple equation with respect to investing. Stocks lead earnings, which leads the economy. Stocks lead earnings, which leads the economy. We continue to believe that the market's going to transition to more of an earnings-driven market. It's already bearing out. This back and forth that you did a wonderful job explaining in your preamble is going to continue.

We have proven through analysis, and deep analysis, by the way, that stocks can go up and interest rates go up, especially from these types of levels. Clearly, we've never had these types of levels before, but we've had periods in history where the economy has cratered, where interest rates go up when the economy begins to recover. Remember, the economy is recovering, Julie, because earnings are going up and fundamentals are improving.

So of course interest rates are going to go up. Lastly, on this whole notion of inflation, unfortunately, the majority of Wall Street strategists, economists, let alone money managers have become excessively quantitative, and economic, and macro the last 20 years because they haven't trusted fundamentals. They're too deep-rooted into academics and books relative to running money. And we're looking for inflation.

We've been looking for inflation since 1982. I want to be very, very clear-- we're not going to have inflation in this country until unemployment claims drop precipitously-- you saw the ADP numbers today. We're going to have an employment situation in this country for a while, especially given all the gains that we've seen in terms of technology and efficiencies. To get sub-4% unemployment in America is going to be several quarters, if not several years, away. So I think we all need to take a deep breath with respect to calling for inflation right now.

MYLES UDLAND: You know, Brian, as you're talking, it occurs to me that if we sat here-- when we sat here, you know, nine, 10 months ago, the conversation would have been, look, this has never happened before. We've never had a global pandemic. We don't really know what happens next, but history won't be the most useful guide. Are you surprised to the extent that folks are now reverting to, well, in the '90s, this happened. And it's happening again, and so the outcome will be x? I mean, I thought it was unprecedented. I thought we agreed on that. And now we're just running analogs on a couple market cycles.

BRIAN BELSKI: It's a wonderful point, Myles, and thank you so much for bringing it up. These are the same people that we were not arguing with, but kind of combating in our analysis, in our comments with clients around the world. Last year at this time, remember, we were supposed to be down 40% of GDP. We were supposed to be down 40% to 50% in stock prices. We were running for the hills. It was the fear trade, unprecedented price performance on the downside.

As we wrote in our piece in public-- in the public domain on March 23 of last year-- unprecedented downside is going to be met with unprecedented upside. The stock market would be up 50% from the lows. We were panned across every medium from media, to clients, to everything just being bullish all the time, Belski. And, no, it's not. It's common sense part of it, Myles. The other part of it is that I think we're so afraid to be wrong we don't want to be right in this business. We're still playing defense.

And that's why we are so bullish in our call with respect to the 20-year bull market, Myles, because we're investors. We're common sense. We do the analysis instead of hiding behind historical facts that, oh, by the way, haven't worked, and are not going to work going forward.

BRIAN SOZZI: Brian, have you made any changes to your S&P 500 target for this year since the start of the year?

BRIAN BELSKI: No, Brian, we don't. Thanks for asking that. We have not-- we're not among these strategists that change our opinions every other day or every other week. We have published our piece in November as we do all the time. This is our 23rd forecast in the S&P 500 as a senior strategist and our ninth on the TSX in Canada. Our target for the S&P is 4,200. It's staying 4,200.

We're at $175 earnings. We think, actually, both those numbers could be a little bit too low. But we always try to provide a situation in our analysis that we under-promise and over-deliver. And I think earnings especially, Brian, could come in well above $175 for 2021.

JULIE HYMAN: Brian, what kind of-- and I know you said you're not necessarily looking top-down here, but I'm curious what kind of economic backdrop would mean we're seeing $175-- or to ask it another way, what would $175 in earnings mean for GDP? And what areas are going to be strongest? What sectors do you think are going to benefit the most from this? Is it sort of conventional wisdom-- airlines, travel, reopening trade, et cetera?

BRIAN BELSKI: Well, you got to think about the impact-- it's a great question, Julie-- you got to think about the impact with respect to the economy that airlines have with respect to everything in terms of the economy in general. And you have to be really careful about jumping on the airlines, because I think that there are certain airlines that are better positioned than not. From a GDP perspective, we think the grind is going to be a little bit slower than everybody else thinks.

But earnings are really going to lead the way. And I think we're going to have 35% to 40% earnings growth. In terms of GDP, you know, the consensus estimates I think is where everyone should set it. But I think the bigger question is, Julie, in terms of this whole notion of the fears of the taper tantrum, I think people are getting way too ahead of them-- over their skis here a little bit. I think the Fed-- and we're in line with DMO economics, clearly-- that we're not going to see an interest rate change or posture from the Fed change until well into 2022.

JULIE HYMAN: Well, we are going to hear from Jay Powell tomorrow. He's going to be making his public comments. He's probably going to say what he has been saying-- probably not talk about 2022 quite yet in any direction, though. Brian Belski, always great to get your perspective here-- BMO Capital Markets Chief Investment Strategist. Thanks so much, Brian. Appreciate it.