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'The labor market is increasingly tight,' strategist explains

Principal Global Investors Chief Strategist Seema Shah joins Yahoo Finance Live to discuss current employment conditions in the U.S. and the strong demand for workers.

Video Transcript

- Welcome back to Yahoo Finance. Investors tapping the brakes today after a three-day rally that was really spurred by ebbing fears over the Omicron severity variant. Joining us to discuss market sentiment and her outlook for 2022 is Seema Shah, Chief Strategist Principal Global Investors. Seema, thank you so much for being here. What a treat to have you on. And I know you've provided a very detailed outlook for next year. And we're going to get into that.

But I want to just start off by asking you about US labor market conditions at the moment, because we just got some unemployment data that was pretty significant, a 52 year low. And we also learned that there are 11 million job openings at the moment. What do you see that's happening in this space?

SEEMA SHAH: Yeah, thanks Karina. Thanks for having me join you guys today. Well, look, the labor market data, I think what we've learned from the jobless claims, it's just another affirmation that actually the labor market is increasingly tight. We can see that there's clearly-- there's very strong demand for employment.

The area which is holding back the full recovery is from the supply side. And you can see that clearly from the job openings, it's just a struggle to fill in some of those jobs. And, you know, this is the thing that's interesting about this, is we're not just seeing this in the US, but actually we're seeing this in many parts of the world. Which does lead us to believe it's not just a kind of a cyclical thing, but it's actually a structural post-pandemic feature of a lot of labor markets.

- So Seema, what's the way out of that? I'm wondering if it means businesses are going to be forced to raise wages more. And when I hear that, I think perhaps that's going to raise overall inflation. Do you think that's going to be on the table in 2022?

SEEMA SHAH: Well, I think that's a possibility. You know, what typically the Fed would have wanted is you keep monetary conditions really, really tight. You have a strong labor market, people start drifting back into-- back into jobs. It looks like employers need to do more. And, of course, wage increases might be one of the things.

We may be seeing a more structural side, where people are just reconsidering all of their life choices with regards to employment. And that's something that the Fed, or even economic conditions, are not able to affect. But I do think that wage increases is probably on the agenda for next year. That's part of the broadening of inflation pressures that we've already started to see come through in some of that CPI data.

But I have to say, we're not so worried. Because we see other parts of the inflation picture starting to fade. So actually, at the end of next year-- 12 months from now-- we're not anticipating the kind of 6%, 7% numbers that we may even see tomorrow. We're thinking more of the 3% level for 12 months time. So it should be somewhat easier conditions next year.

- Yeah, if we see 7% tomorrow, that will definitely be some sticker shock. But next week, of course, the Fed holds its final two-day policy meeting of the year. And if it does indeed, as expected, sort of double the pace of tightening, and many expect it sort of is hinting at possibly bringing forward rate hikes and possibly having a couple, what does that do? Does that mean it's sort of the end of the party? Or do financial conditions remain easy?

SEEMA SHAH: It's such a key question right now. So as you said, we are anticipating that the Fed is going to accelerate tapering. If it's not next week, it will be next month. And we see the first rate hikes coming through at the middle of next year. And then followed by a couple more rate hikes through 2022 and 2023.

So the key question is really, can the economy deal with that kind of level of tightening? And certainly, can equity markets continue to perform well even as you have got financial conditions tightening? And I think key to this point is although the Fed is going to be bringing forward, so they're acting a little bit quicker, it doesn't necessarily mean a very aggressive tightening schedule. And we do think that the key part of this is that we need to have a solid economic backdrop.

We need to see positive earnings growth. And when we take a big look at the overall macro picture for next year, things are getting more challenging. But it's still positive growth that we see. And that should, as long as we're not seeing very, very disruptive interest rate moves-- which is not we're anticipating, so the baseline scenario-- is that we can continue to see risk markets, equity markets still deliver positive returns through 2022.

- Seema, I want to get your take on big tech for a moment. Because we keep talking about how, oh, they're going to get hit. They're going to get hit by higher taxes, by inflation, by regulation. Yet the NASDAQ continues to hit record high after record high. We have Apple closing in on $3 trillion market cap. So what is your outlook for big tech right now? And what do you like in the space?

SEEMA SHAH: Yeah, you know, we have been big supporters of that big tech trade through the whole of this year. You know, we recognize that valuations are undoubtedly very expensive. They're actually expensive across a lot of sectors, but clearly the big tech space is where it stands out more.

But I think we have to be key. Like, we have to continue to see strong earnings delivery from them. We do anticipate that, because just the fundamental trend for economies with a focus on tech obviously supports these firms. But on top of that, we are facing a slightly more challenging conditions next year.

We've just seen from the threat from Omicron that there is no guarantee that things are going to be very, very smooth sailing. And in those conditions, that's when investors really want the companies who have got the big balance sheets, the positive cash flow, the pricing power, the deep pockets.

And as we think about even inflation pressures, these are actually the type of inflation pressures that we're expecting to see, is stuff where actually big tech can be your point of quality within your asset allocation. So we still do like those firms, but we recognize that they definitely need to have earnings delivery through 2022.

- And Seema, I want to turn your attention. You talk in your note about enflation, the idea of heightened inflation in environmentally conscious economies. And that may, in turn, lead to higher energy prices. Can you explain that to us?

SEEMA SHAH: Yeah. So one of the things that we're seeing-- and we have seen this start to come through in the last couple of months in terms of the energy inflation-- is that green transition as companies, as countries are trying to deal with the infrastructure that they need, that unfortunately, that does mean a lead to almost a supply shortage. And then you start to see the energy inflation.

But there are other parts of it, which is you need increasingly-- companies are going to need to have the kind of talent that is able to work with that, that green transition. We think there might be more penalties as there's a more focus-- a greater focus on companies adhering to some of these environmental targets. So there's a number of different things.

And actually, the inflation discussion is really key when you're looking at your 5 to 10 year inflation forecast. It's one of the reasons that we don't see inflation going back down to the 2% level. We're seeing it being higher than what we've had over the last decade. So your 2 and 1/2, 3% level over the next 10 years. And enflation, this transition to green energy, is of the reasons that we do see structurally higher inflation over the coming years over the future.

- Well, I guess we've got to get used to it. Seema Shah, Chief Strategist at Principal Global Investors, always a pleasure to have you here. Thank you.