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Wage inflation could be higher next year than investors are forecasting: Analyst

John Traynor, People’s United Advisors CIO, discusses the current earnings season and his economic outlook for next year.

Video Transcript

SEANA SMITH: To get a better sense of the recent market action that we're seeing, what we could expect going forward. And for that, we want to bring in John Traynor, he's People's United Advisors' Chief Investment Officer. John, thanks so much for joining us. I guess as we wrap up the week, again, it's been a record-setting week with the Dow and S&P both hitting all-time highs. How are we set up as we look ahead to the final two months of the year?

JOHN TRAYNOR: You know, we think we're actually very well set up. We've been paying very close attention to what companies have been talking about in their earnings reports. We've been focused on the Fed, what-- you know, are there any changes in their interest rate strategy? We think we'll see the beginning of tapering in November. So we'll see that. So with that backdrop we're overweight equities, we reaffirmed that this morning on our investment call. And we're pleased with how we're ending the year and how we believe we'll be beginning next year.

ADAM SHAPIRO: John, I'm trying to pull up on the Yahoo chart right now where the S&P stands year to date. And I believe it's up quite dramatically, the S&P 500. I've got it, I've got the numbers incorrectly calculated here. So I'll just say roughly about 16% year to date. Next year though not going to be as strong and yet you're still positive with equities. What should investors expect if you're using the S&P 500 as a benchmark?

JOHN TRAYNOR: You know, that's a great question because one of the things we look at is the S&P and then we look at the equally-weighted S&P 500. And the equally-weighted S&P 500, which gives more credibility to the mid-cap and the small-cap stocks, has outperformed the S&P 500 this year. So you know, again, I would agree with you, we don't think we're going to be up like we are this year in the S&P 500 but investors could actually do very well, outperform the S&P 500 if they broaden their exposure outside of the large mega-cap stocks and look to small-cap, look to mid-cap, look to some of the more value-oriented stocks, they could do very well next year.

SEANA SMITH: John, more specifically, when you're looking at the stock-specific selection, what are you looking for in some of these plays?

JOHN TRAYNOR: You know, it's-- we talked about our equity strategy, and we were very overweight growth stocks for the three years ending last year. And we went to a neutral strategy in the fall of last year and we maintain that. So we're pretty neutral between growth, core and value and what we're looking for whether you're-- whatever sector you're in, what we want to see number one is good revenue growth.

And that's one of the reasons why we're really focused on the earnings calls right now, what's taking place in the underlying revenue? Are they growing units or is it because of price, is price pushing up the revenues? So I think no matter what sector you're in, growth, core, or value, large, mid, or small, next year, you really want to focus on those companies that are growing the top line, that are doing well in this environment.

ADAM SHAPIRO: I mean, everybody always looks at what's going on with sales but one thing when you talk about big tech that we hear some analysts say is take a look at the 10-year and I don't want to get into the metrics because the yield right now is at 1.65 but they always say use that as a gauge as to what to do with big tech. What are investors missing if they follow that strategy or not?

JOHN TRAYNOR: You know, we almost differentiate between big tech and small tech. We'd rather do it old tech and new tech. And some of the big companies I mean, look at the problems that Intel is having right now. That's certainly a big tech company but they really-- they lost their momentum, they fell behind. So what I think investors should do rather than focus on big and small, focus on those companies that are really in the emerging areas, the social networking areas, the networking areas, you know, the sectors of technology that are growing a little more rapidly than some of the older tech sectors. So think old and new versus big and small.

SEANA SMITH: John, as we take a step back, we know that worries over inflation, worries over supply chain issues, those have really been some of the driving factors, at least, when it comes to some fears that investors are feeling over the next couple of months. Do you think that's largely been priced into the market, or could we still see some volatility as a result?

JOHN TRAYNOR: Well, what's interesting is yes, we think it's priced into the market. And right now if you look at the forecasts, investors are still buying into the inflation is transitory. We saw some comments from Chairman Powell today that gee, maybe he's getting a little bit nervous about inflation. So our real question is once we get to that point, let's say it's mid-year next year, the Fed has stopped tapering, and they're considering starting to raise rates and it's factored in, they'll start at the end of next year, is the economy going to be too hot or too cold?

Our feeling is it could actually be a little hot. So what we believe we'll see is that perhaps inflation-- and the key metric we're looking at is not commodity inflation, it's wage inflation but perhaps wage inflation could be a little bit higher than what investors are forecasting. And that may force the Fed's hand a little bit. So you know, in that environment you could still be very positive for stocks but that'll put a little more pressure on growth stocks. So you want to err on the side of owning cyclical stocks.

ADAM SHAPIRO: One bit of pressure that appears to be off the table is an increase in the corporate tax rate. Don't see stocks really moving on that little bit of news but there are the two big spending bills, which could emerge before the end of the year. Would you expect them to have a positive, negative, whatever kind of impact next year when we're looking at equities?

JOHN TRAYNOR: You know, we were on a call this morning with a political strategist and the race, the political news that we're looking for right now is how the Virginia race goes. If the Republican candidate were to win that, that's going to put a lot of pressure on Washington to basically get something done, perhaps move away from some of the agenda that a lot of the progressive representatives have, and move back toward the middle, which would be interpreted as being very, very positive. So the first thing you want to watch out of Washington is what happens in Virginia.

After that, with regard to the tax increases, we're glad to see that they're being moderated. We'll see what happens on the individual side. I know there was some positive news on the corporate side. But we want to see what happens on the individual side because those are our clients, those are the people that will be impacted. And you know, that could have a dampening effect on the market. So it's that individual tax that we're focused on right now.

ADAM SHAPIRO: John Traynor is People's United Advisors' Chief Investment Officer. Thank you for joining us here on "Yahoo Finance Live." Have a wonderful weekend.