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‘I think the market is extremely pleased’: Wells Fargo Asset Management on Fed maintaining asset buys

Wells Fargo Asset Management Kirk Hatman joined Yahoo Finance Live to break down what investors should look for as the Fed decided to maintain asset buys until the economic recovery has seen progress.

Video Transcript

SEANA SMITH: For more on how the market is reacting to what we heard from the Fed today we want to bring in Kirk Hartman. He's a President and Global Chief Investment Officer at Wells Fargo Asset Management. And Kirk let's just start with what we did hear from the Fed, Brian just breaking that down for us saying that the Fed pledging to keep rates low, asset purchases there until the economy makes quote, substantial future progress on the labor market and also in relation to its inflation goals. How is the market, how are investors viewing or how should they view what we just heard from the Fed?

KIRK HARTMAN: Well, I think the market is extremely pleased. I mean the Fed purchase announcement that they would continue to purchase $120 billion a month to me is significant. The concern is that the markets seem to be absolutely priced for perfection. The markets clearly expect next year that the S&P is going to hit 4,000 and that would be another up 10%. The market is clearly anticipating that the rollout of the vaccine will go smoothly and the market is clearly anticipating that earnings surprises from corporations will continue to be maintained. And I hope all those things continue but you do have to have a little bit of concern about risk given where these markets are.

ADAM SHAPIRO: And when you hear Jay Powell say, as Brian was just pointing out, the next four to six months will be dark, are investors making a mistake right now dismissing that warning as they pour into this market?

KIRK HARTMAN: I don't think they're missing a warning but I do think you have to be concerned. And to me what you have to distinguish as a professional investor is always worried about risk. So as good as these markets are I think you have to have one eye on the risk factor. My recommendation would be given all the stimulus, the bond purchase, the maintenance of rates at 0, I think you are going to get a boost in the markets at the beginning of the year. And my recommendation would be once you get that boost then I would look to pare it back. But it's hard to argue with these fundamentals here, there's so much money in the system and clearly, the Fed indicated today that it was going to continue.

SEANA SMITH: With all that in mind then, Kirk, you're saying market's priced to perfection, although we could see a boost here at least at the start of next year. How should investors be positioned, meaning what do you see I guess leading us higher here at least in the short term and then how should investors hedge some of that risk?

KIRK HARTMAN: Well, I think what you want to look for is a rotation to the cyclicals. So I don't think you want to sell your technology stocks but I certainly wouldn't look to overweight them any more. I do think you have to look at things in the beginning of the year when the markets run of raising more cash or maybe doing something like after the markets start to run look at out of the money puts on the S&P, those kind of mechanisms.

I think you need to diversify and the thing that I worry about the biggest risk in my mind in everybody's portfolio is duration. Everybody is long duration tech stocks and everybody has a lot of bonds, which are long duration. So to me the wild card here could be a surprise in terms of a rising inflation. Health care costs are going up, housing costs are going up and the other thing that gave me a little bit concern today in the comments was I think entitlement spending will continue to go up, especially if unemployment, high levels of unemployment are persistent. So something's got to give but so far it looks pretty good.

ADAM SHAPIRO: When you say diversify, can you help us understand what that would look like in today's terms? Should we be looking as part of that maybe corporate debt that would yield higher than say, Treasuries, what does that look like?

KIRK HARTMAN: Well I think you want to look at short dated corporates. I think you want to look at other areas, for instance, I think I would anticipate a weaker dollar. So I think that interestingly areas outside of the US are going to look pretty good. And I think what I think is a key measure to me, are the 494 stocks other than the big five and now Tesla going to continue to catch up. So that's the area I would probably, I would overweight the 494 and probably underweight the big six which has really been the ones that are powering the market.