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Inflation is 'a risk, but I don’t know if it’s a threat': Strategist

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Hennion & Walsh CIO Kevin Mahn joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

SEANA SMITH: How big of a risk is some of this uncertainty out of Washington? How big of a risk does that pose to the markets right now?

KEVIN MAHN: Sure. I think it's a risk. And I think investors are closely monitoring what's happening in Washington. What we believe at this point in time and that all likelihood, that debt limit will be temporarily suspended at least until the beginning of December to allow lawmakers to debate the final negotiations about the infrastructure spending bill and that larger budget resolution bill. But what investors are most concerned with, and this is what we continue to hear each day at Hennion & Walsh, is inflation. Surging amounts of inflation.

And I believe that Chair Powell even acknowledged recently that perhaps it's going to surge longer than he originally anticipated due to some supply chain related issues around areas such as semiconductors. The fed in fact believes that inflation will end this year at roughly 4.2% but come back down to 2.2% next year. I think that outlook is a little bit optimistic. And in all likelihood, we'll be in a high inflationary environment for the foreseeable future.

- Kevin, first I got to say we missed you. It's great to have you back in the 3 to 5 o'clock hour. But when you talk about inflation, what's an investor to do? We know there's, what is it, almost $2 trillion sitting on the sidelines in cash. Well, that cash is right now not doing anything. But if inflation is really a threat, it's at risk. So how do you deploy it?

KEVIN MAHN: It's a risk but I don't know if it's a threat, Adam. Consider that right now the fed is still trying to reflate the US economy from the depths that it realized during the initial stages of the COVID-19 pandemic. As a result, we've seen this rapid expansion of the US economy coupled with a very accommodative Federal Reserve and continued stimulus from the federal government. All of those point to positive tailwinds for US stocks. And there are certain areas where investors can look if they want to hedge some of those inflationary pressures.

One area is stocks. Although we know that the US large cap stocks have now closed at a record high 56 different times this year, and are still trading at elevated levels. So you may need to look beyond US large cap stocks into smaller cap stocks, perhaps value oriented stocks, or even pick up on the strength of the US consumer looking at companies that stand to benefit from the growth of e-commerce, Adam.

SEANA SMITH: Kevin, there's been more and more attention pointed to the supply, the bottlenecks that we're seeing, the supply chain worries, what that could potentially mean for the economic recovery. Just in terms of how the market is looking at some of these issues, we saw it with Nike last week with the stock selling off after they announced some problems that they're having as a result of their manufacturers over in Vietnam. I guess, how are you looking at that as an investor and trying to mitigate some of those challenges that are out there?

KEVIN MAHN: Yeah, I think it's those supply chain issues that are not transitory. Certainly there were areas of the surge in inflation that we saw between April and July that were transitory, rising airfare pricing, rising lodging prices. That was all related to the reopening trade, if you will. But these other supply chain issues are persisting. And it's not just semiconductors. That's also related to how we actually transport goods and services, and the relative lack of trucking and drivers with commercial driver's license.

So this isn't going away anytime in the near future. But we do believe that it will be worked out over time. However, and the Federal Reserve did acknowledge this as well, as they lowered their GDP forecast from 7% this year down to 5.9%. 5.9% is still pretty good, but lower than they anticipated earlier in the year.

- So Kevin, all things being considered, there are a lot of investors who are very nervous and risk averse. And one of the things you've pointed out is for the especially risk averse investor, bonds are at least-- there are bonds and bond funds you might want to consider despite the less than appetizing yields. Can you elaborate on that? Because there are people who are nervous.

KEVIN MAHN: Happy to. And I believe that investors, and I know we say this time and time again, Adam, but they should always remain true to their risk tolerance, regardless of if the market's in a bubble environment or in a bear environment. For those income oriented investors, bonds can provide for a predictable stream of income and principal protection when held to maturity.

One area that we like right now are municipal bonds, our municipal bond closed end funds because of the supply demand imbalance that currently exists with all the demand for tax free income that's likely to increase if in fact taxes go up as well, which we anticipate by the end of the year, and the relative limited supply of municipal bonds.

Preferred securities are another area where income oriented investors can look. But bonds or bond funds can also be used within a growth portfolio to offer diversification as well. Diversification is key. And if investors are true to their risk tolerance and work with experienced professionals, they can build a diversified portfolio to help them achieve their financial goals, whether they be growth, income, or some combination of both.