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Inflation: Falling energy prices ‘might be a sign of what’s more to come,’ strategist says

iCapital Chief Investment Strategist Anastasia Amoroso joins Yahoo Finance Live to discuss U.S. PPI data, how the energy market may foreshadow what's next, the crypto market outlook, and investor sentiment.

Video transcript

[MUSIC PLAYING]

- Producer Price Index data, which tracks the prices companies pay out this morning showcasing a decrease and adding to overall signs of cooling inflation we saw with yesterday's Consumer Price Index data. Calls to move into the upside are rising along that positive sentiment.

So helping us break this all down and joining us now with her take on where to find those investments, we've got Anastasia Amoroso, who is the iCapital Chief Investment Strategist. Always a great pleasure to get some of your time and your insights and perspective. First and foremost, this reading on PPI, combined with yesterday's CPI reading, are we out of the woods yet or is it still too early to tell?

- Well, I think, Brian, the good news continues for now. And the markets are certainly welcoming to that. I mean, when was the last time that we saw a downside surprise on any sort of inflation number? It's really been a while. So I think that's why the markets are cheering that.

Now, of course, if you look through the PPI number, you find out that something like 80% of the decline, the month of a month decline, has been due to energy. But my take on that is you've got to start somewhere. And energy is such an important input in a variety of intermediate and final goods. So I think the fact that we're starting to see energy prices come down, that might be a sign of what's more to come for other inflation indicators. So I think we're starting to chip away at this inflation issue, and that's a big catalyst for the markets, right? This is what we've been waiting for, really, the last six months. So I take it as a big positive.

- Anastasia, a lot of average investors, they've been hammered this year, really just hammered because of various sell-offs in various sectors, notably tech stocks. But we're seeing a rally here, and this now looks to be getting pretty convincing. Is now the time they open their retirement savings accounts or they're trading accounts and take action? Go out there and, perhaps, start nibbling on stocks that have been really hammered?

- Well, very tactically speaking, I would probably say now is not the exact moment when you want to be adding to the market, but I do think that as stocks rally and they probably get a little bit overextended here, I suspect we're going to have some sort of pullback. And that might be the pullback that you want to buy. And the reason I say that, Brian, is because we've got a much cleaner technical positioning now and we got some better catalysts ahead.

So speaking of technical positioning, would really change this year. Finally, everybody who needed to sell seems to have sold. So we don't have the same selling pressure that had to work through the markets earlier in the year. So that's one thing. Then, you've got some buyers that are starting to step in, whether it's the corporate buyers that are executing those buybacks, whether it's the commodity trading advisors and some of the higher frequency money that's coming back into it.

But near-term, that's what's been driving the upside. But probably to the extent that we started to get a little bit stretched, especially we approached 4,300. But having said that, any sort of pullback that we have off of that 4,300, I would say is a viable pullback because we're finally seem to be approaching the point where the Fed is getting ready to maybe not pivot, but slow down the pace of increases.

And that means that the pressure on valuations is not going to be the same in the next six months as it was in the last six months. So I would say for investors who can take that one year plus time horizon, any sort of pullbacks that we get off of these levels do become viable in our view.

- Anastasia, I believe last time we spoke, crypto and Bitcoin specifically was just entering into some of its early summer malaise, if you will. Right now, it's up 30% from some of those levels. Is it too early to get back into some of the most speculative assets that are out there?

- No, Brian. One of our taglines has been that you want to buy things when it feels terrible to do so. And, by the way, this is why I answered the previous question saying maybe now is not the moment because things feel a little bit less terrible. But having said that, it's still pretty low conviction when it comes to the crypto ecosystem, but I do think that some of the same headwinds that we've had in the last three months are going to be a little bit less for crypto in the next six months as well.

The Fed is not going to be catching up quite as much as they were before. So that does give crypto and Bitcoin, in particular, a chance. What I would say too is that if you think about crypto, it is really treated very closely with unprofitable tech. And whether it's crypto, whether it's some profitable tech, it has rebounded in the case of the unprofitable tech basket by 18% month to date.

And, again, if you believe that we're heading in the environment where the Fed is not going to be clamping down on valuations as they have in the last six months, then I think there's more breathing room and a better opportunity to step into things like unprofitable tech and like crypto as well.

- Anastasia, I know you can't talk specific stocks, but I look at a name like Apple. It's up 30% from the June lows. And is not alone. We've seen a lot of big moves recently in big cap tech stocks, but is the outlook does it warrant it? Are things that good out there to warrant some of these rallies we're seeing in many sectors? Households, the way I think about it, are still getting hammered and they're under a lot of pressure with inflation. You name it, it's not a rosy scenario.

- No, things are not that good, perhaps, but things are not that bad either. And I think that's what this relief rally has been due to is that the probabilities of us having a soft landing, they're not 100% certainly, but they have risen over the last month. And the Fed has really kind of clarified what do they mean by achieving the soft landing, they mean they want to run GDP below potential so the demand comes down while supply catches up.

Now, GDP below potential does not have to mean a recession. Historically, it hasn't. And then if you look at the labor market, it is still strong enough to create more than 500,000 jobs in the last month. And it means that we might be able to bring down the number of job openings without having mass layoffs. And that's what gives us this higher probability of a soft landing.

So if we have that and if inflation eases up a little bit, then consumers can breathe a little bit better. And I think we still slow down the spending. I think corporates are still going to be a little bit cautious, but it just probably means we don't pull the reins in on every type of spending. So I think, Brian, that's why you've seen the rebound in some of the names. And I think it's warranted.

I'll also say, by the way, that a lot of the earnings revisions, maybe they're not obvious on the big market cap weighted level, but if you look at the number of upgrades versus the number of downgrades, we have had a pretty swift downgrade cycle on an individual company by company basis. So maybe, just maybe, we have actually done a sufficient reset on earnings already.

- Anastasia, just lastly while we have here as well. Just last week, we had actually had a former Fed member on with us who I had asked how do I explain to my family what we should be preparing for. And they said to brace for a recession. It sounds like you don't believe that that's necessarily the case.

- Well, I think it's a prudent piece of advice. And one of my themes for the second half of the year has been that, prudence. Is consumers being more prudent in how they spend their dollars. And it's not about the revenge spending anymore, it's not about travel at all costs anymore. So I do suspect that we're going to see a slowdown in that spending.

I think it's prudent for corporations, it's reining in the type of hiring that you do, the type of wages that you pay. So I do think that's still going to be the case in the second half of the year into 2023, but my big point here is that maybe that doesn't need to result in a massive recession and a massive retrenchment because consumers may pull back, but overall consumers are not in a bad shape.

If you look at debt service levels today relative to where we were during the financial crisis, they're much, much better, they're at half those levels. If you look at the banking sector, the capital ratio is much stronger than they were. So I think a pullback in activity, yes, but for it to be a full blown hurtful recession, I think you have to have leverage that either corrects sharply or valuations that are correct sharply. And I don't think that's what we have right now.

- Definitely didn't see any signs of recession in that Disney quarter last night. Wow, that parks business is strong. We'll leave it there. Anastasia Omarosa, iCapital Chief Investment Strategist, always good to see you. Talk to you soon.