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Fed will be 'comfortable' in 2-3% inflation range: Strategist

Hennion & Walsh President and CIO Kevin Mahn joins Yahoo Finance Live to comment on the influence of Nvidia (NVDA) earnings and AI trends on markets, in addition to the Federal Reserve's interest rate strategy for the latter half of 2024.

"If they're going to start cutting interest rates before inflation gets back to 2%, that tells me they're more concerned about that slowdown entering a recessionary period than they are with inflation staying above 2%," Mahn says. "Now above 3%, all of a sudden that gets their attention. But between 2 to 3%, I think the Fed's comfortable there."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video transcript

JOSH LIPTON: Now for more on the market action joining us now is Kevin Mahn, Hennion and Walsh President and Chief Investment Officer. Kevin, always good to see you.

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- It's good to be back, Josh. Thank you.

JOSH LIPTON: So let's start with Nvidia. Big earnings after the bell, right? As a strategist, Kevin, how do you think about this report, just its effect, its impact on the tech sector and the broader market?

KEVIN MAHN: Well, regardless of what Nvidia reports shortly, I'm here to give some breaking news. And that's the AI boom hasn't run out of steam just yet. I would argue that it's just starting and, in fact, will provide investment opportunities for a year to come.

But Nvidia, the poster child for the AI boom, I think got a little bit ahead of itself. And their current valuation doesn't justify where it should be trading that. With that said, I do think they're going to impress once again on revenues. I don't know if they're going to beat on earnings. But any slight hint at negative forward-looking guidance gives the Street the excuse to take some profits and redeploy those assets into other areas that may not be as excessively valued.

JULIE HYMAN: How important is Nvidia and the AI boom more broadly to the market rally here? I mean, we talked to a strategist earlier in the program who said things are finally starting to broaden out a little bit. And maybe that is going to be at least part of the story going into the rest of the year.

KEVIN MAHN: It certainly contributed to the 60% of the S&P 500 return last year, the Magnificent Seven, right? But as we look at 2024, what we're finding is that there's other investment opportunities as well once we hit the end of this rate hike cycle, which we have reached. The question then becomes, when does the Fed start cutting?

I believe that July is the earliest point that the Fed will consider cutting interest rates, because they're fearful that we may get a repeat of what happened in the mid '70s, early 1980s, again, when they started to cut interest rates prior to hitting their inflation target of 2%. What happened? Inflation came back. It hit double digit levels. Paul Volcker had to step in, raise short-term interest rates to as high as 20% on the Fed funds target rate and create a recessionary period.

The Fed is trying to balance that act right now. Investors are trying to figure that out. But once they do start cutting interest rates later this year, that's when you can see the broader rally start in both stocks and bonds.

JOSH LIPTON: Let me ask you, because some of the recent economic data we got, you look at those the CPI, PPI higher than expected, retail sales were weak. I know maybe that spooked some folks. And you started hearing some people getting a little worried about stagflation.

KEVIN MAHN: Right.

JOSH LIPTON: How concerned are you about the US economy in 2024? Or are you in that soft landing camp?

KEVIN MAHN: My biggest concern is that the Fed stays too high for too long. Now what is too high, and what is too long? Well, let's look at where they are right now. The Fed funds target rate at 5 and 1/4%, the highest it's been in 22 years. Even if they cut three times this year by a total of 75 basis points, it's still at the highest level. It's been in 17 years. So rates may come down, but they're going to stay high.

Then we look at their forecast for economic growth for this year, 1.4% and staying below 2% all the way through the end of 2026. If they're going to start cutting interest rates before inflation gets back to 2%, that tells me they're more concerned about that slowdown entering a recessionary period than they are with inflation staying above 2%. Now above 3% all of a sudden, that gets their attention. But between 2% to 3%, I think the Fed's comfortable there.

JULIE HYMAN: So what do you do with all of this? Where do you put your money right now?

KEVIN MAHN: There are certain sectors historically that have performed relatively well during periods of economic slowdown. They include staples, consumer staples, no surprise there. Industrials, notably, aerospace and defense, you have health care names, notably Biotech. We're seeing a pickup in M&A activity there.

And then finally, information technology. And I'm not talking about the Mag Seven, I'm not talking to Nvidia, but perhaps other technology names that really haven't participated in the rally just yet. Lean into those companies with strong balance sheets, those companies that pay a dividend are in a more quality oriented and can help ride out this economic slowdown.

JOSH LIPTON: What about fixed income, Kevin, are there opportunities there?

KEVIN MAHN: There absolutely are.

JOSH LIPTON: Will we see value?

KEVIN MAHN: Yeah. I think you've got to stay in quality there as well that's defined by investment grade in the fixed income world. We like municipal bonds notably because of the supply demand imbalance, corporate bonds, government bonds, extending duration. And then one other area is that most don't even talk about in the fixed income world, and that's preferred stocks, because they have stocks in the name. Right now preferreds are trading at a very significant double-digit discount and offer high levels of current income-- a great area for investors to consider to play that rebound.

JULIE HYMAN: All right. Thanks, Kevin. Good to see you. Thanks for coming in.

JOSH LIPTON: Thank you, Kevin.