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To not see inflation right now ‘would be much more problematic’: Portfolio Manger

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Kevin Simpson, Founder and Chief Investment Officer of Capital Wealth Planning, joins Yahoo Finance Live to discuss the outlook on inflation pressures, meme stock madness, and the bipartisan Senate group pitch for a $1.2 trillion infrastructure deal.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and bring in Kevin Simpson. He is founder and Chief Investment Officer at Capital Wealth Management. Kevin, welcome to the show.

I want to ask your thoughts on why the market reacted the way it did to that hotter than expected inflation report yesterday on consumer prices. The market has seemed to be just preoccupied with the idea of higher inflation begetting higher interest rates. Why was the S&P 500 able to rally to a record close yesterday?

KEVIN SIMPSON: Yeah, Alexis, I heard you and Kristin talking about it yesterday and it's fascinating because the market's just baked in these transitory, temporary higher inflation numbers because we're coming out of a global pandemic. I think I'd be more concerned if we weren't seeing some hot inflation. And to the extent that this is going to continue probably into the next quarter, perhaps into the rest of the year, I think the market's looking at that as a positive, not as a sign of things to come.

KRISTIN MYERS: And yet, Kevin, in the past, we haven't seen markets respond too positively to some of those inflation figures running hot. Are some of those risks, and even perhaps some of the conversations that we've had about the risk that inflation is going to have to equities moving forward, particularly once you start to get the Fed involved, were those a little bit overblown? Do you think that perhaps this inflation argument might be something that we're going to leave behind as we move forward?

KEVIN SIMPSON: So I'm in that camp. I think, Kristin, that we're probably not going to be looking at rampant heated inflation. I think it's overdone in terms of the arguments. The Fed has come out very clearly and said that they're going to let inflation run a little bit higher.

Again, coming off of a pandemic to not see inflation would be much more problematic than to see it. And as far as the economy is concerned, prices are going up, things are becoming more expensive, but I don't think anyone cares. I think people have money to spend. And I think they're going to continue to do so.

ALEXIS CHRISTOFOROUS: So what do you like right now when you're looking out there looking to spend in terms of buying up stocks. What are some sectors you're looking at in an environment where we will most likely see inflation run hot and the Fed's going to allow that to happen while keeping interest rates pretty steady?

KEVIN SIMPSON: Well, America is on the move. And I think we're seeing a vivaciousness that we haven't seen in some time and I'm looking to profit from that vivaciousness. Now I'm a little bit crazy, I drove with my family from Florida. We're here in New Jersey for a vacation. We did not fly, we drove up the I-95 corridor, and the roads were packed, the highways were packed, the gas stations were packed, and comparatively speaking from last year, gas prices were much, much higher.

Now I know that the price of WTI is up 40% on the year. We're over $70 a barrel, which we haven't seen since probably October of 2018 at last count, but we like the energy sector. We're adding to ConocoPhillips right here, we're adding to Chevron right here. These are stocks that we've owned off and on for a really long time. I know they've done incredibly well but from a yield perspective, you're getting a 5% dividend on Chevron, a 3% dividend on ConocoPhillips, and even though they've come up dramatically since the beginning of the pandemic, we think that great stocks that make new highs can continue to go higher. So we're looking at energy in here as a continued strong play for investors.

KRISTIN MYERS: Any other sectors, Kevin, that's catching your eye or other places of opportunity, especially as we end this year?

KEVIN SIMPSON: Yeah, I don't want you to laugh at me, Kristin, but in keeping with that theme of higher stocks going higher, we're adding to the financials in here. We've owned Goldman Sachs and J.P. Morgan forever. Their combined dividend is still greater than the 10-year Treasury.

Those companies, the bank stocks, the financials, have not been able to increase their dividends in 15 months, and they're going to. So those decent dividends are going to go higher. And if we're staying in a low-interest rate environment, which we are, don't feel too bad for the banks, they still make money on the spread. But if we get into a higher and rising interest rate environment, which is probably the next phase for interest rates, may not be tomorrow, may not be this year, but if we look at rates trending higher, financials are a natural beneficiary of rising rates.

So we're looking at financials. We're looking at energy. Strong companies, great balance sheets, increasing earnings, and rising dividends. To us, those are a theme for success. And with America on the move, we're excited about some great American companies.

ALEXIS CHRISTOFOROUS: Kevin, what I didn't hear you say there were the names of any of the meme stocks or anything in the crypto space. Do you have any exposure there at all? And is there a place in an individual's portfolio for a little bit of that risk?

KEVIN SIMPSON: Absolutely, Alexis. I mean, we're not traders, we're investors. So when you have me on, you're always going to hear stocks that are more high quality, more longer-term hold. We look at these meme stocks, the names you have on there, we looked at Emily's hot chart briefly, and even in the previous show, they were talking about crypto.

I think it's something you can have fun with, you can speculate with, especially the cryptocurrencies. I mean, we're paying close attention to it. The financials that we own, Goldman Sachs, J.P. Morgan, they're dedicating resources, analysts to the sector. So we've got to pay great attention to it.

As far as the meme stocks, I look at it as a wonderful opportunity for young investors to get interested in the stock market and whether or not you're going to profit and make money on every trade, we as professionals certainly don't make money on every trade but the idea of people getting interested in Wall Street, interested in the stock market, and interested in a big way, I think that can only benefit and help investments, can help Wall Street, and help all of us over time.

KRISTIN MYERS: So before we let you go, Kevin, I do want to ask you about the infrastructure deal, this bipartisan package that was cobbled together and in a surprise, it is not going to be paid for with tax hikes, which I think everyone was largely expecting and also a little bit nervous about. Obviously, it is a long way to go before we see any kind of infrastructure package signed as a bill. But what are you making of these early moves and how do you think equities are going to respond to this news that we could be getting a bit of an injection into the markets here without having these tax hikes on the back end?

KEVIN SIMPSON: Yeah, Kristin, any time you're not raising taxes it's a great thing. I was always a little skeptical that some of the higher tax proposals would be difficult to get through. But when you see a bipartisan committee doing anything in Washington I think it's a great sign. A trillion dollars or thereabouts is a palatable number. I mean, it's insane to say that, I get it. But from the perspective of where we were talking about, I think it's a palatable number.

The fact that it is really being discussed as true infrastructure, infrastructure is an investment into the country and if America is on the move and that's our thesis, I think we all stand to benefit from that. So if you've got people working together in Washington that's a great sign. If you can keep the number in around or slightly under a trillion dollars, I think that's a good number and if it's even possible to do it without hiking taxes in a big way, well I'm all for it, and I think Wall Street is as well.

ALEXIS CHRISTOFOROUS: I bet they are. All right, Kevin Simpson of Capital Wealth Management. Thanks so much. Enjoy the weekend.