Market ‘essentially forecasting stagflation’: strategist

Nancy Tegler, CEO of Laffer Tengler Investments, comments on recent Fed policy comments and actions and market reaction.

Video transcript

RACHELLE AKUFFO: Alright, now let’s go to our markets guest for more analysis. Let’s call on Nancy Tengler, CEO of Laffer Tengler Investment and Chief Investment Officer. So, Nancy, as we try to figure out what happened between the Fed’s announcement and its continued selloff that we’re seeing to what extent these are signals that investors are actually looking at versus the noise in the market ?

NANCY TENGLER: Well, thank you so much for inviting me, Rachelle. I think the Fed presser was disappointing. It lacked urgency. It lacked the credibility of a Fed Chairman who would do something about inflation. We’ve heard him say he’s going to be nimble and humble. And yet, he was quick to rule out a 75 basis point hike, which might just be what is needed. This is how the bond market took over. In fact, we’ve only seen 75 basis points up so far, but if you look at the two-year and the 10-year, the movement has been quite dramatic, as well as the three-month.

But the market is essentially forecasting stagflation. In the long term, returns increase. And that tells you that the market thinks growth is going to be slow or that this Fed is going to make a mistake and push us into recession. So I was disappointed. I thought the rally was premature, of course. And I think we still have a little work to do here with stocks before we can declare a bottom.

SEANA SMITH: And Nancy, I wanted to ask you about this. You say we still have a little work to do until we get to the bottom. How long I guess when you take a look – is that going to happen in the next two weeks? Are we talking about the next few months? How do you see this timeline?

NANCY TENGLER: So there are historical guides, Seana. I mean, you can go back to other years of midterm elections, and we’re kind of on the right track. I mean, they’re used to it – the market typically sells off in the first three quarters of the year and then recovers in the second half. But now you have all these other factors to consider. We have high inflation. And you can only go as far as the Atlanta Fed and look at the sticky inflation numbers at around 4 and 1/2%. So it will take some time to go through the system.

The other side of that argument, though, is that corporate earnings, the companies that we own, actually had a pretty good quarter. I hear a lot of analysts talking about poor first quarter results. But they increased by 10%. Companies have actually raised their directions. And for us, a really important indicator is, are managements increasing dividends? And they are, and they raise them quite a bit. So, generally, leaders won’t do this unless they think long-term sustainable earnings power is sustainable.

So I’m thinking of watching for earnings revisions. We will get them because the PMIs have reversed. And so we know that… we already knew that we were slowing down in terms of growth. So you want to own reliable producers, businesses that are not tied to the cyclical nature of the economy. You want to own dividend producers. And I think you’ll do just fine. And then you will look great coming out the other side.

RACHELLE AKUFFO: So for the winnings that have already been released, which do you prefer? And how should people think about this in terms of strategy?

NANCY TENGLER: So I think you’re hearing that tech stocks are directly tied to interest rates. So if rates go up, tech stocks go down. But it’s true of companies that don’t earn, that have a lot of debt on their balance sheet. But you look at a report like the one that came out of Microsoft. They beat on every metric. They raised tips. The company is in the right place where our economy is going, the fourth industrial revolution, if you will. The cloud is driving that, and they’re a major cloud player. And they grew very quickly.

So I think you used that technique at all levels to choose a name like Microsoft. ServiceNow is also a cloud data director on the cloud. And this company beat on all levels. And the CFO made the call saying our product is deflationary. I mean, if we have a labor shortage–and it looks like we do–the turnout numbers were pretty pathetic this morning. If we do have that, companies will do more with less by investing in technology investments. And indeed, we have seen that. Investments in technology now exceed investments in the old economy. It is well above 50%. So I think you want to be clearheaded and have a reasonable time horizon of three to five years and use that as an opportunity to buy companies like that.

SEANA SMITH: Nancy, we know at a time like this that the consumer is so important. The consumer has been the driving force behind the economic growth we have seen in recent times. But if you look at the fundamentals right now, are the consumer fundamentals still strong?

NANCY TENGLER: You know, they kind of are. I mean, definitely, real disposable income is negative. I mean, we’ve had increases, but the prices are going up. But there’s still $2 trillion in excess savings over pre-pandemic levels that the consumer has to work with. I mean, I’m in Scottsdale. You can’t get a restaurant reservation without booking a month in advance at one of the reasonably upscale or nice types of restaurants. And it’s busy and bouncy. And I think there’s a lot of activity outside of the Beltway and outside of Wall Street that investors don’t necessarily pay attention to.

Travel and entertainment – it’s hard to get a hotel room. I had to change to a hotel room in New York, and they overcharged me because they didn’t have many rooms. So I think people are going to be fine. They will spend. It will just be different expenses. And I think they’re moving away from goods and more into services. And that’s good too, because it’s an important segment of the economy.

RACHELLE AKUFFO: And I want to talk about the layoffs here because you noted that we’ve seen with the mortgage companies and Netflix and Robinhood, we’re also seeing now that Facebook is going to have a hiring freeze. What impact do you think this will have?

NANCY TENGLER: I think eventually, Rachelle, that could be problematic, because right now what we could say with confidence is that there is no recession without weakness in the labor market. We have these 11 and 1/2 million JOLTS jobs on hold. We have 6 million people looking for work. But we are starting to see the incipient signs of layoffs, slowdowns and hiring. And that will accelerate as confidence, small business confidence declines.

I mean, yesterday’s numbers were troubling, the productivity numbers and the unit labor cost numbers. That bothered me more than anything I’ve seen in the last two weeks, because it tells us that small businesses aren’t getting – and no businesses for that matter – are getting the productivity they need need to get out of their workers. Now they are volatile in the short term, but ULCs up about 8% are a problem.

SEANA SMITH: Nancy, very quickly, what do you think of the bond market? Because a lot of talk about 10-year moves recently, obviously, above 3%. He said well above 3% today. How much do you see yields increasing?

NANCY TENGLER: That’s the question, Seana. We said in August 2020 that bonds were riskier than stocks. And since that time, the TLT, which is the 20-year ETF, is down 31%. And even with the road we had yesterday, stocks are up 29. So from an investment perspective, I think it’s still too early to start looking into bonds. We searched and kind of licked our lips.

But I think you want to let it settle. And even if you get – miss a few ticks on the way down, it will still be a much better entry point than at the start of this year or in August, when the 10-year was at 50 basis points. I wouldn’t rush, because at the end of the day you’ll only get your coupon payment, if you hold the maturity, whereas at least with stocks you get a growing stream of income that pays you for wait while the market settles and gathers for the next rally.

SEANA SMITH: Nancy Tengler, always happy to hear from you. CEO and CIO of Laffer Tengler Investments.

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