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Inflation: We're in a 'goldilocks sweet spot,' strategist explains

Unlimited Funds Co-Founder, CEO & CIO Bob Elliott joins Yahoo Finance Live to discuss inflation, supply chain shocks, investor sentiment, layoffs across the tech sector, and the outlook for the Fed.

Video transcript

BRAD SMITH: Falling inflation could help lead to a soft landing for the Fed, but our first guest this morning says that might just be an illusion to investors. We're joined now by Unlimited Funds Co-Founder and CEO and CIO Bob Elliott. Bob, break that down for us. You're calling it illusionary. Why so?

BOB ELLIOTT: I think the big thing to recognize is a lot of the decline that we've seen in inflation over the last couple of months has been a result of the amelioration of the supply-chain shocks that we had previously seen that had created elevated prices. And as those supply-chain shocks have reverted, we've got some disinflationary pressure through the economy.

But we're already starting to see signs that that's going to end. Things like used cars, which were important disinflationary impulses, have actually started to stabilize in price, and we're starting to see inputs start to rise again with oil prices rising, which will flow through to gas prices, prices at the pump, and overall inflation.

So we're in a bit of a sweet spot here, a Goldilocks sweet spot. But the time for falling inflation is likely behind us rather than ahead of us from this point.

BRIAN SOZZI: Bob, investors awake today to see Spotify laying off 6% of its workforce. Other big-cap tech companies laying people off. Do you think this is a sign of these companies sitting on a lot of data suggesting a major downturn in the economy that's not priced into stocks here?

BOB ELLIOTT: I think a lot of these companies hired rigorously and significantly during the tech boom cycle. If you think about it, that tech boom cycle, really it peaked in February 2021, and only now are we starting to see these companies lay off employees. And so really what we're seeing is the slow grind of a tech-sector slowdown that is eventually leading to employment cuts.

If you look at the broader economy, what you see is that, by and large, employment is very, very strong, and tech, particularly tech in New York and San Francisco, is the outlier rather than the reality when it comes to employment broadly in the US.

JULIE HYMAN: So, Bob, put it all together for us when it comes to the economic growth or slowdown that we're looking at and where we are with inflation. What's the Fed going to have to do, right? If inflation is not going to get much better than this in terms of deceleration, does that mean that the market is too optimistic on where the Fed's going to go with rates?

BOB ELLIOTT: Right now, what's priced into the interest-rate markets is cuts beginning in the second half of the year and continuing into 2024. That seems like a low probability given the type of strength that we're seeing in the economy and the tightness of the labor market, which continues to drive reasonably healthy nominal wage growth and nominal spending. Odds are the Fed is going to have to be higher with their policy for longer than many people expect, and that is likely to have an effect both on the bond market as interest-rate cuts will start to get priced out, but it will also have an effect on the stock market as interest rates are higher and the possibility of a harder landing starts to come into focus for people late in '23 or early '24.

BRAD SMITH: So with the Fed higher with that policy for longer, Bob, does that mean that the same high-growth internet names that had led the previous bull-market rally, that there's going to be a different type of play or that they're not as reliable?

BOB ELLIOTT: Well, I think if you look at some of the names just broadly in terms of where pricing remains elevated and there's a sensitivity to a macroeconomic down cycle, really the tech names look particularly sensitive. And so actually when we look at the most sophisticated investors in the world who-- in terms of hedge-fund positioning, they see tech as one of the most attractive short positions in the market and instead are shifting capital towards going long more traditional, countercyclical sectors like, you know, consumer staples and things like that, recognizing that there's still room to run in the high-beta-stock declines that we've already seen a little bit of so far in the last year.

BRIAN SOZZI: Unlimited Funds co-founder, CEO, and CIO Bob Elliott, good to see you. Have a great rest of the week.

BOB ELLIOTT: Thank you.