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Pricing pressures are 'going to be with us a bit': Global Markets Strategist

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Brian Levitt, Invesco Global Market Strategist discusses supply-chain pressures and other things he expectes to impact the stock market in the next few months.

Video Transcript

SEANA SMITH: In fact, now back in positive territory. We started the day in negative territory. The Dow, though, still off just around 70 points right now in terms of what is leading us to the upside when it comes to the S&P and the NASDAQ. Sector wise, we're looking at gains from consumer discretionary, technology, and communication services. Let's get over to Brian Levitt because he knows what he's talking about. We want to get his take on what we expect to see here going forward. He's Invesco globals market strategist.

Brian, it's good to see you. So we're coming off a very strong week. If you take a look at the action today, at least in the major averages, you would say that it's not really too much action that we are seeing. But in terms of some of the worry that investors were caught up on when it comes to inflation, when it comes to supply chain bottlenecks, is some of that worry behind us now, or how are you looking at that?

BRIAN LEVITT: I think those worries will still play out over time. They're not necessarily behind us, but I always implore investors to ask themselves, is this the moment that's going to end this new business cycle? I know that's the fear, that inflation is going to be elevated, and the Fed is going to have to raise rates meaningfully, and the cycle is going to end sooner than expected. I suggest that that's not the case.

We're dealing with supply chain challenges because of the unique situation that we're in right now, where we've unleashed a lot of demand before businesses were really ready for it. So that may persist for some time. It could drive some volatility, raise some concerns, but ultimately, I think the supply-demand imbalances will moderate, enabling this cycle to move on further.

ADAM SHAPIRO: But prices never seem to get cut when you're talking about inflation, even if inflation itself is temporary. And you look at crude-- I'm checking another monitor here-- but over $82 a barrel. We've got the airlines reporting this week. Last week, Delta said the reason we may not be profitable in Q4-- jet fuel prices. So you expect the oil price to moderate, but the damage is done. When do we get the relief?

BRIAN LEVITT: Well, so we're not talking about the level with regards to markets. We're talking about the rate of change. And so when I'm looking at it from a policy perspective, I expect the rate of change of inflation to moderate, enabling the Federal Reserve to keep policy accommodative for the foreseeable future, which creates a good backdrop for risk assets. But to your point, there's going to be winners and losers.

And so, in the near term, it really becomes about those businesses that have an opportunity-- that have pricing power, that have an opportunity to price on some of those costs to investors. It's why, quite frankly, you see things like technology doing well. I know people tend to think of tech as speculative and parts of the market that don't do well in an inflationary environment, but quite frankly, a lot of our tech businesses are cash cows. And they are able to pass on higher costs. So I think you just need to be a little bit more selective. Things like airlines are going to be under pressure, as should energy costs stay elevated.

SEANA SMITH: And Brian, when we take a look at where we stand right now, so we're, what, just about a week into earnings. We heard from a lot of the big banks last week, really showing that the consumer is very healthy right now. As we look out over the next couple of weeks, what do you think is going to be the key thing, at least that you're looking for, in these earnings reports when you're trying to pick out some of those winners and losers that you were just talking about?

BRIAN LEVITT: Well, I think you're going to hear a lot of demand being robust, but input costs weighing on margins. And so what you want to hear from businesses are those that continue to believe that demand is going to be strong and continue to believe that they have some ability to work their way through some of the supply challenges and pass on some of those costs to consumers. So, you know, it's not a rising tide that lifts all boats type of an environment. It's an economy that's likely to slow some in here. And pricing pressures are going to be with us a bit.

I don't think investors should run for the hills in that type of environment, but should try to navigate it. You know, those businesses that can pass on these costs are going to be the winners. And you're starting to see it a bit in the market, whether it's the discretionary names that have some ability to do so, technology names. You saw with some of the communication names today, companies that are advantaged and consumers that are less apt to be concerned about rising costs for their products or services.

ADAM SHAPIRO: Do you have any concern-- we realize the company is going to address their supply chain issues, and they'll probably talk about what's going on in Asia. But the fact that the Chinese economy is slowing down so dramatically, what might that pose for companies here, which do business in China or export to China?

BRIAN LEVITT: Yeah, the Chinese economy is slowing, and I think it's indicative of a larger trend, which is that the world is becoming less-- there's less growth drivers in the world. You know, we've seen it over time, the Western world moderate to a lower trend level of growth. And we're seeing that in China. So we've expected that over time, that Chinese growth will moderate. To me, what it means as an investor is that you need structurally advantaged businesses. There's not going to be this robust structural growth environment that's going to lead all of these deeper value or really cyclically reliant businesses to ever new levels.

For investors, it's all about structural advantage. Which are the companies that can grow in what is still a slow growth environment? You think about China, and the aggregate growth is slowing down, what all that that means for cyclical parts of the market or energy or materials or industrials or housing in China, these types of things. But there's a lot of trends in China that are growing at very rapid rates, similar to what you see in the United States. Aggregate growth is modest. But there's a lot of trends that are growing at very strong rates. And as investors over the next three, five years, those are the types of businesses that we need to be looking for.

SEANA SMITH: And Brian, from an investor's perspective, I guess, now I know you were saying equities is a great place to be. Is it just US equities, or are you still seeing investment opportunity overseas right now?

BRIAN LEVITT: Well, valuations are more attractive overseas, but I don't think you want to go out and just necessarily buy, you know, everything we just talked about. You know, there's some parts of international markets that are going to slow as Chinese growth moderates. But when you're talking about structurally advantaged businesses, you want to scour the world, looking for them. A lot of them are in the United States. But many also exist all around the world.

The challenge that international investors have will be around the currency. You know, if there's an inflationary environment, but the Federal Reserve is going to maintain its policy stance, then the dollar should not accelerate meaningfully. And that's a good backdrop for international. The risk investing internationally is if the Fed's got to raise rates earlier than people suspect.

If they do, that will be strong dollar, and capital will flow back to the United States. But I would say, yes, look internationally, look around the world. And what's going to ultimately be a slow growth world, investors are going to need to scour the world, looking for true growth businesses. Again, some are in the United States. A lot are outside the United States.