Research Affiliates CEO & CIO Chris Brightman joins Yahoo Finance Live to discuss U.S. retail sales, how the U.S. consumer’s mixed signals are impacting the economy, rising inflation, the probability of a recession, and Fed policy.
- --where we are not in the great moderation, the very low, stable interest rates, and low and stable inflation. To remind you, poor policy choices caused the ongoing inflation crisis. National protectionism, xenophobic restrictions on immigration, and heavy-handed pandemic lockdowns reduced aggregate demand, while extraordinary fiscal stimulus stoked-- I'm sorry, those all reduced aggregate supply. Extraordinary fiscal stimulus stoked demand.
And we had reactionary average inflation targeting by the Fed all combining to create the inflation that's soaring to levels we hadn't seen since 1980s. And that's not over. Today inflation remains elevated, with core CPI running at 5%, median CPI at 6%, and sticky CPI at 6 and 1/2%. Thus, with the unemployment rate running at 3.5%, the Fed seems likely to keep raising interest rates to 5% or above in the months ahead unless and until the recession arrives.
- OK. And so yes, all right, so with that in mind, I mean, we've all been tracking the Fed. Of course, going into this earnings season, this is not going to be a Fed that has another round of employment data to lean on. It's just going to be the last report. So in this near-term period of time, it seems like the Fed might be more of a muted part of this equation, given what the markets are going to be digesting in the wave of earnings that are going to be coming through prior to the Fed's May meeting. And so what type of positioning could investors even enact in that period of time or even trade on earnings, knowing that there might be a more kind of volatile period that we're set for?
CHRIS BRIGHTMAN: Well, I think looking longer term, the US stock market remains very expensive, with a cyclically adjusted PE of 29. And that's relative to 18 in Europe and 13 in emerging markets. Also, the valuation of growth stocks remains extreme versus value stocks. We've seen this dispersion of pricing of growth versus value really beyond anything that we've ever seen in history, except for the peak of the craziness during the pandemic, with SPACs and meme stocks, et cetera, and the very extreme of the tech bubble in the very end of the last millennium.
So strategically, again, I think investors ought to favor value over growth in the US market, given the inflation problem that we have. And it looks like the US dollar has peaked international over US equities, tips over nominal bonds. The problem with all of that-- and I tend to, as a value investor, be early and look too far ahead.
The problem with all of that is, of course, we're going to have a recession more likely than not. I want to have some humility. None of us have seen exactly this kind of an economy before. But I still think, given all of the cracks we're seeing in the financial system, that recession is even more likely than it was a couple of months ago. Thus, the trade for a short horizon, for a period of months instead of long-term positioning is to underweight stocks and probably buy longer-maturity, higher-quality bonds.
- Chris, just given your view on that recession right there, how bad do you think the correction will be in the markets?
CHRIS BRIGHTMAN: Well, recessions are a normal part of market economies. And stock market crashes are a normal part of capital markets. Stock market crashes can be mild-- 25%, 30%. They can be more severe. They can be 40% or 50%.
The ability to forecast precisely when and how much the market's going to crash is a fool's errand. But what--
- Chris, do you--
CHRIS BRIGHTMAN: --you can say is the environment--
- Real quick, Chris, do you--
CHRIS BRIGHTMAN: --that we're in, the sort of--
- Chris, do you see a crash happening?
CHRIS BRIGHTMAN: --situation-- excuse me?
- Do you see a crash happening?
CHRIS BRIGHTMAN: I think that the environment that we're in today, what we're seeing with elevated inflation, high and volatile inflation and rising interest rates and cracks appearing in the financial system are the sort of environment that make a crash in the stock market much more likely than normal. Is it greater than 50%? Hard to say. But this is the sort of environment where these problems emerge.
- Research Affiliates CEO and CIO Chris Brightman. Chris, thanks for taking some time this morning.
CHRIS BRIGHTMAN: You're welcome.