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Markets move higher with eye on the Fed meeting, earnings

Anwiti Bahuguna, Head of Multi-Asset Strategy at Columbia Threadneedle Investments, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Wednesday's opening bell.

Video Transcript

BRIAN SOZZI: Let's stay on the markets here with and bring in Anwiti Bahuguna. She is the Head of Multi-Asset Strategy at Columbia Threadneedle Investments. Anwiti, good to see you this morning. The market is clearly back in rally mode. Why do you think the market is now starting to just shrug off that sell off we saw about two weeks ago?

ANWITI BAHUGUNA: Hi, Brian. Thanks for having me on the show. Yes, it does seem like the sell off for the past two, three weeks is almost over now, and markets moved beyond that. I think a lot of that has got to do with reasonably good data, economic data that we have been seeing, and also something you just mentioned on the great earnings data that's coming out of the companies that have reported so far.

So generally, the sense is that we are faring much better than feared in the dark days of the first quarter, in terms of the rebound. We see that in unemployment data. We see that in slightly better inflation data also. And so the market has been able to shrug off the sell off.

ALEXIS CHRISTOFOROUS: Anwiti, how much of what we're seeing in the market right now is based on technicals, as opposed to more of this emotional trading that we saw a lot of, I guess, at the height of the pandemic and also as we move closer to the election?

ANWITI BAHUGUNA: Right, I think the sell off, Alexis, was probably technical, very extended in parts of the tech sector, and wasn't really broad based across all segments of the market. But with that behind us, I think the focus is back on fundamentals, the fact that the Fed remains accommodative, and the fact that we are seeing reopening and data coming in much better than feared.

BRIAN SOZZI: Have you been making any changes to portfolios in recent weeks?

ANWITI BAHUGUNA: Not a whole lot, Brian. I think we had pretty much early on been overweight credit in our multi-asset portfolios and over the last two months or so had upgraded equities also. And we're staying in that setup pretty much, with a slight lean towards US equities and favoring investment-grade credit.

BRIAN SOZZI: Within equities, what sectors are you allocated to the most?

ANWITI BAHUGUNA: So I think broadly, I can talk regional allocation, Brian, more than sort of sector allocation. From a multi-asset perspective, we're sticking with what has been enough for us for several years now. And we're staying in domestic equities. In other words, we continue to favor US growth over international equities.

But we do make a nuance in that we are underweight developed market equities and have a neutral holding. In other words, we do own emerging market equities, so sort of a barbell between owning US and emerging market, but staying underweight in the international developed arena.

ALEXIS CHRISTOFOROUS: Are there any emerging markets specifically that you could share with us where you see opportunities right now?

ANWITI BAHUGUNA: I think broadly the whole complex is likely to benefit from the fact that Chinese growth has been actually quite decent. That's helping the entire Asian complex. And also on top of that, we're seeing-- we are taking the stance that this is something you want to be involved in an unhedged fashion, Alexis. By that I mean that we expect EMFX to actually do better than US dollar over the near future.

ALEXIS CHRISTOFOROUS: And of course, we've got the Federal Reserve's meeting wrapping up in just a few hours here. Is the Fed really a catalyst for this market going forward? I mean, we know how accommodative they've been, and they're promising low interest rates for the foreseeable future. So is the Fed really at play here for investors?

ANWITI BAHUGUNA: I think you're right. From an equity market perspective, Fed is not really at play any more. I think what they did in the height of the crisis was enormous on several fronts. Not only did they stabilize the markets, but they also made it very clear that interest rates are not going to be a factor for equity markets to worry about for years to come.

So from that perspective, they're not really at play. But they have been talking a lot about this new inflation framework. And from other asset class perspectives broadly, there is a lot of curiosity about what exactly is average inflation targeting. And that could have implications down the road, Alexis, if we see economic data improve faster than what the Fed is projecting.

So Fed has rates to zero until 2023, but what if we do see a V-shaped recovery? What if we do see inflation spike up over 2%? Then I think there would be some pressure on the long end of the interest rate curve. And then at this point, it will be important for Fed to clarify what exactly do they mean by this new target.

BRIAN SOZZI: What would you need to see to downgrade your allocation or outlook on US stocks?

ANWITI BAHUGUNA: I think much faster international growth would make me sort of downgrade US and move international. On generally downgrading risk, I think I would like to see valuations stretch out a bit more if that happens. And really, I want to see if data stays as positive as it has.

So we saw a first hint of a wobble today in the retail sales data, where retail sales actually didn't meet expectations, and the control group that goes into GDP accounting was actually negative 0.1. So I think if the US data doesn't stay as positive, then I think we need to reconsider the bullish stance we have so far.

BRIAN SOZZI: All right, let's leave it there. Anwiti Bahuguna, Head of Multi-Asset Strategy at Columbia Threadneedle Investments. Good to see you.

ANWITI BAHUGUNA: Thank you.