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‘The market is believing the Fed narrative’: Portfolio Manager

Ellen Hazen, Portfolio Manager at F.L.Putnam, joins Yahoo Finance’s Julia La Roche to discuss the market’s reaction amid the latest PCE data.

Video Transcript

KRISTIN MYERS: We're joined now by Ellen Hazen. She's a portfolio manager at F.L.Putnam. So Ellen, I'm actually going to start with a question here on inflation. We had [? Gus ?] [? Foshay ?] from PNC joining us in the last hour, who really said that a lot of these inflation fears were really overstated. Curious to know if you share his sentiments and his beliefs.

ELLEN HAZEN: Thanks. I think it's hard to know whether or not inflation is going to prove to be transitory, as the Federal Reserve has indicated that they expect it to be. There are some indications that it will be transitory. For example, in the PCE numbers that came out today, you saw that goods inflation was higher than services. And to the extent that goods inflation is really being driven by some of these commodities inflation that have already started to decline over the last month or so, then you could see it fall back. Services, we will wait to wait to see what happens with the labor market going into the fall when the reopening really begins to happen in earnest.

I think right now, the jury's out as to whether or not the inflation will prove to be transient. I think the signals are mixed. And I think the signals are continued-- are going to continue to be mixed for at least a couple more months.

ALEXIS CHRISTOFOROUS: Ellen, how are you viewing infrastructure plays right now, the day after Biden held that press conference saying they're getting close on a $1.2 trillion infrastructure deal, albeit a lot less than what he had initially put forth? But as he said in that presser yesterday, not everybody is getting everything they want. Are you-- are there particular sectors within infrastructure that you're looking at right now? Or do you think that that sector has topped out?

ELLEN HAZEN: I think that because the infrastructure deal is so much smaller than what was originally proposed, I think that a lot of that information is already in the price. Certainly the bias in the package that was announced is to the heavy infrastructure. So companies like URI, companies like Caterpillar looking at the heavy industrials and the construction and engineering is where we're looking.

And there might be a little bit more upside there. But the other thing to watch is the cadence of the spending. And it looks as though the real bulk of the spending won't be for at least two or three years. It looks as though maybe it could add 1% to GDP, but not till 2025 or 2026. So the stocks have done very, very well this year.

And at this point, although there might be a little bit left, I think we're more inclined to take profits. I think that the real question, though, is going to be what about this soft infrastructure with respect to child care, with respect to health care, with respect to climate change. And really very little of that was included in this bill. And that's going to be the more interesting piece, to see what could be negotiated through Congress.

KRISTIN MYERS: Now, Ellen, of course, with that infrastructure deal there, of course, are concerns that it could cause some of those inflationary figures to rise even higher. How should investors really start hedging against that?

ELLEN HAZEN: So looking at the inflation, it's clear that the market is believing the Fed narrative at the moment. The inflation yield curve is actually inverted. And so the market is pricing in that inflation is likely to be higher in the short term, but then ease off. And if that's the case, then we don't need to worry so much about it. We're a little bit more concerned with that. We think inflation's likely to last a little bit longer than people expect.

And the way that we're positioning our clients is by looking at Treasury inflation-protected securities by looking at corporates within the fixed income market and by looking at equities that have pricing power. In other words, where they can pass through that cost of goods inflation, whether that inflation is coming from the commodities and from the hard goods, as well as inflation that might be coming from wages as we continue to have a limited labor pool.