Inflation levels suggest ‘there could be some stumbles coming down the road’: Strategist

1879 Advisors Vice Chairman James Bruderman and Melissa Brown, Qontigo Managing Director of Applied Research, join Yahoo Finance Live to talk about the latest round of CPI data, global events like China's shutdown and the Russian-Ukraine war impacting economic outlooks, and the risks from crypto and digital asset losses.

Video transcript

- And here is your closing bell.

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- And there you have it. That is the closing bell this Thursday, May 12th, markets closing mixed. We see the NASDAQ composite holding on to narrow gains this afternoon. The S&P 500 and the Dow, however, closing in the red. So still seeing certainly quite the roller coaster market throughout the past couple of weeks.

But let's discuss the day's market action with our panel today. James Bruderman is 1879 Advisors vice chairman and Melissa Brown is Qontigo managing director of applied research. James, I'll start with you for this one. When or under what conditions do you expect to see this volatility start to let up here in these markets?

JAMES BRUDERMAN: Well, I think that when markets and market participants become accustomed with a little bit more certainty, especially on the inflationary front. We've had some signs that inflation is easing, or at least has capped, topped out a little bit, anyway. But if we can get some-- if we can get some stability, say, for example, in Ukraine and that helps bring-- that helps bring energy prices down, and if we can get some stability in China and their-- and their lockdowns around COVID, then that kind of clarity, I think, lets investors know-- well, it takes away some of the uncertainty. And I think things-- I think things can start moving in a positive direction again.

- Melissa, the CPI yesterday, 8.3. Producer number bad today. You know, Wall Street sees volatility, Main Street sees sheer panic. 30,000 foot level, is this a healthy economy?

MELISSA BROWN: I don't think-- it may be healthy now, and some of the metrics we look at certainly remain healthy, but I think this very high level of inflation and the hyperfocus on it suggests that there could be some stumbles coming down the road.

- And James, I want to bring you in here because, obviously, you said that contraction that we saw in first quarter GDP, not so surprising, and that economic fundamentals remain intact. But in terms of what you envision for the Fed, because they're saying, look, the economic fundamentals support us not going into recession, do you agree?

JAMES BRUDERMAN: I do agree. I think that the consumer and business spending is very strong. The big thing that pushed Q1 GDP into the negative zone was, more than anything else, a strong dollar. And that's certainly going to be on Jerome Powell's his mind. If we raise interest rates aggressively, we're going to continue to support a strong dollar, and that's going to continue to support currency outflows and work against GDP a little bit.

You know, but with-- like I said, with the strong consumer and strong business spending and, you know, and bottlenecks in the economy starting to take care of themselves, I think that the economy is very well poised that, again, once the uncertainty around China lockdowns and Ukraine start working themselves out, I think that we'll be in pretty good shape. And we're in the camp that the market is overpricing in the risk of a recession. And we don't think that recession is going to materialize. We don't see any need-- any-- I mean, let's call it 25%, but we don't see a compelling reason why the economy can't have a soft landing and continue off to the races.

- Melissa, given the hotter than expected consumer price index and producer price index that we got out this week, do you think 75 basis points is potentially on the table from the Federal Reserve?

MELISSA BROWN: Well, you know, they said it wasn't, but it certainly seems like it is a possibility, and possibly necessary. If inflation is going to stay this high, they're really-- they are going to have to do something because it is, I think, as I said, currently the economy still looks healthy, but it really could lead to a deterioration of the health of the economy if the consumer is frozen, and really doesn't want to spend again.

- Yeah, we discussed this yesterday with James Bullard from the St. Louis Fed, and he seemed to rule out 75, which is fascinating, James, because he was the exact opposite a month ago, and things arguably are worse. Would you like, does the market need a 75-point hike?

JAMES BRUDERMAN: No. Absolutely not. Look, if the Fed was super concerned, if the Fed was as concerned as everybody thinks they are with inflation, why wouldn't they have done a one and done, you know, put rates back at the base rate of 2.5%, and then say, OK, let's take it from here to see how inflation is concerned. The fact that they've projected 50 basis points this meeting, next meeting, and so forth suggests to me that they think the data is going to start supporting a little bit more transient nature in inflation.

- And Melissa, we heard him talk about some of these external factors that aren't within the Fed's control, obviously the lockdowns that we're seeing in China due to its zero COVID policy there, as well as what we're seeing with the Ukraine-Russia fallout, which continues to affect things like the commodity markets. So in terms of some of these external things that perhaps do have a role on inflation going down naturally, without the Fed having to do anything, how would you rate what the Fed needs to do versus some of these other external issues?

MELISSA BROWN: Well, I wish I could go back in six months and say the Fed needs to act now because it might have been-- we might not have been in this situation, at least with inflation. These other issues, obviously, would still be there. But you know, I think that the Fed still plays an extremely important role.

We know for the past-- basically since the financial crisis, the liquidity, the quantitative easing kept markets strong, kept confidence up. And we're kind of in the opposite situation now. So we know the Fed has a lot of power in driving the economy and in driving sentiment. And we certainly have seen sentiment come down recently, after it had started to recover a little bit. The way we look at sentiment, we're seeing deterioration, particularly in the US.

- James, what do you think the bond market is telling investors right now? Because we have the benchmark 10-year T-note yield back down below 2.9%. It had been over 3% just earlier this week. What do you think this is saying?

JAMES BRUDERMAN: Well, I think the bond market kind of-- I'd like to say it agrees with our outlook, but quite honestly, it flavors our outlook. If you look at the five-year [INAUDIBLE] and the 10-year-- and the 10-year notes, quite frankly, it's suggesting that inflation certainly is tertiary. If the expectation for the bond market was that inflation was going to be a lot worse a lot longer, then I think bond vigilantes would be pushing both rates up a bit higher than generally the 2 and 3/4, 3% they are today.

- Melissa, I know it's not your particular space, but what do you make of the massive losses in crypto? 200 billion wiped out in 24 hours. And it appears that Bitcoin is basically being traded as a general tech stock. Is there risk here for the broader markets, as well?

MELISSA BROWN: Well, there always-- I mean, crypto has always been a risky asset class. But I think when you have people losing that amount of money in aggregate, I don't think it's good for markets, for equity markets, in particular. They're just-- liquidity is not there to reinvest, let's say, in equities. So I don't think it's particularly good news. It's maybe not entirely surprising because we know that crypto is quite volatile, but still not good news.

- And so James, for the average person who's sort of watching this and saying, look, with the selloff that we're seeing, perhaps this is a good time for me to get into the market, how would you advise that they move strategically when you have a market this volatile, and to really distinguish the cheap stocks versus the ones that are still a good investment?

JAMES BRUDERMAN: Look, our advice on markets and our advice on stocks doesn't change a whole lot based on the type of market. Sure, there are some markets, especially when there's a ton of liquidity, that you can throw darts and get away with anything, but that's never been our approach. Our approach is quality earnings, great companies with strong management, strong market share and the ability to-- and the ability to increase margins over time.

So companies with quality earnings right now are especially fantastic place to be. In fact, the valuations of a lot of them provide a lot of downside support in case we are wrong and we do slide deeper into a recession. So great companies, you know, Fortune 50, I think especially with strong earnings in-- you know, is kind of the way to go.

Now, we know for fact-- well, we don't know for fact, we never know, but we can say with certain-- with a certain amount of confidence that, for intermediate to long-term investors, anybody with over a five-year time frame, investing in the market when the markets have given up 20% is generally a great time to do it. Right now, with sent-- with investor sentiment so weak also, if you look at the [INAUDIBLE] ratio, when investor sentiment gets this weak, it's usually-- it's usually very bullish, even for the short term. Our advice is, if you are an investor and you're investing for the long term, it's a great time to be in the market. And if you're a trader, at least you've got the wind at your back as we look forward.

- Indeed. We'll have to leave it there, but a big thank you to our markets panel there, James Bruderman, 1879 Advisors vice chairman, and Melissa Brown, Qontigo managing director of applied research. Thank you both.