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The market is ‘basically forecasting stagflation’: Strategist

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Laffer Tengler Investments CEO Nancy Tegler weighs in on the Fed's recent comments and policy actions and how the market is responding.

Video transcript

RACHELLE AKUFFO: All right, well, let's head over to our markets guest now for more analysis. Let's bring in Nancy Tengler, Laffer Tengler Investment CEO and chief investment officer. So, Nancy, as we try and make sense of what happened between the Fed's announcement and its continued sell-off that we're seeing, how much of this are signals that investors are actually looking at versus noise in the market?

NANCY TENGLER: Well, thank you so much for having me, Rachelle. I think the Fed's presser was disappointing. It lacked urgency. It lacked the credibility of a Fed chair who's going to do something about inflation. We've heard him say he's going to be nimble and humble. And yet, he very quickly ruled out a 75 basis point hike, which may, indeed, be what's needed. And so the bond market has taken over. In fact, we've only seen 75 basis points in hike so far, but if you look at the two-year and the 10-year, the movement has been pretty dramatic, as well as in the three-month.

But the market is basically forecasting stagflation. The long end is yields are rising. 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 topple us into recession. So I was disappointed. I thought the rally was premature, to be sure. And I think we have a little more work to do here with stocks before we can declare a bottom.

SEANA SMITH: And Nancy, I wanted to ask you about that. You're saying that we have a little bit more work to do until we get to that bottom. How long, I guess, when you take a look out-- is this going to be something that occurs over the next couple of weeks? Are we talking the next couple of months? How do you see that timeline?

NANCY TENGLER: So there are some historical guides, Seana. I mean, you can look back at other midterm election years, and we're kind of right on track. I mean, they usually-- the market usually sells off into the first three quarters of the year and then rallies in the back half. But now you've got all these other factors to take into account. We've got high inflation. And you can only go as far as the Atlanta Fed and look at the sticky inflation numbers at about 4 and 1/2%. So that's going to take some time to work through the system.

The other side of that argument, however, is that corporate earnings, the companies that we own have actually had quite a good quarter. I'm hearing a lot of analysts talk about bad earnings in the first quarter. But they were up 10%. Companies actually raised their guidance. And for us, a really important indicator is, are managements raising the dividends? And they are, and they're raising them quite a bit. So usually, managements won't do that unless they think long-term sustainable earnings power is sustainable.

So I think watch for earnings revisions. We will get them because the purchasing manager indexes have rolled over. And so we know that-- we already knew we were slowing in terms of growth. So you want to own the reliable growers, companies that aren't tied to the cyclicality of the economy. You want to own dividend growers. And I think you'll get through this just fine. And then you'll look great coming out the other side.

RACHELLE AKUFFO: So for the earnings that have already come out, which ones do you like? And how should people be thinking about this in terms of a strategy?

NANCY TENGLER: So I think you hear that technology stocks are tied directly to interest rates. So if rates go up, technology stocks go down. But that is true of the 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 from Microsoft. They beat on every metric. They raised guidance. The company is in the sweet spot of where our economy is going, the fourth Industrial Revolution, if you will. Cloud drives that, and they are a big player in the cloud. And they've been growing very quickly.

So I think you used that across the board pummeling of tech to pick off a name like Microsoft. ServiceNow is also a cloud data director on the cloud. And that company beat on every level. And the CFO started the call by saying our product is deflationary. I mean, if we have a labor shortage-- and it appears we do-- the participation numbers were pretty pathetic this morning. If we do, indeed, have that, companies are going to do more with less by investing in tech capex. And indeed, we've seen that. Tech Capex is now exceeding old economy capex. It's well above 50%. So I think you want to be clear-eyed and have a reasonable time horizon of three to five years and use this 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 powering the economic growth that we had been seeing most recently. But when you take a look at the fundamentals right now, are the fundamentals for the consumer still strong?

NANCY TENGLER: You know, they kind of are. I mean, certainly, real disposable income is negative. I mean, we've been getting raises, but 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 ahead of time in any of the sort of reasonably high end or nice restaurants. And it's busy and hopping. And I think there is a lot of activity outside of the Beltway and outside of Wall Street that investors aren't necessarily paying attention to.

Travel and entertainment-- it's hard to get a hotel room. I had to make a change on a hotel room in New York, and they upcharged me because they didn't have a lot of rooms. So I do think that individuals are going to get out. They're going to spend. It's just going to be different spending. And I think they're moving away from goods and more towards services. And that's OK, too, because that's an important segment of the economy.

RACHELLE AKUFFO: And I want to talk layoffs here because you noted that we saw with mortgage companies and Netflix and Robinhood, we also see now that Facebook is going to have a hiring freeze. What impact do you expect that to have?

NANCY TENGLER: I think eventually, Rachelle, that could be problematic, because right now, what we could say with confidence is, you don't get a recession without weakness in the labor market. We've got those 11 and 1/2 million JOLTS jobs outstanding. We've got 6 million people looking for work. But we are starting to see the nascent signs of layoffs of slowdowns and hiring. And that will accelerate as confidence, small business confidence goes down.

I mean, the numbers yesterday were troubling, the productivity and unit labor cost numbers. Those bothered me more than anything that I've seen in the last couple of weeks, because that tells us that small businesses are not getting-- and any business for that matter-- are not getting the productivity that they need to get out of their workers. Now they're volatile in the short-term, but ULCs up around 8% a problem.

SEANA SMITH: Nancy, real quick, what do you make of the bond market? Because lots of talk about the 10-year's moves recently, obviously, above 3%. It said well above 3% today. How much higher do you see yields going?

NANCY TENGLER: That's the question, Seana. We said last in August of 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 route we had yesterday, stocks are up 29. So I think from an investing standpoint, I think it's still too early to start nudging into bonds. We've been looking and kind of licking our chops.

But I think you want to let this settle out. And even if you get-- miss a few ticks on the way down, that's still going to be a much better entry point than earlier 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're just going to get your coupon payment, if you hold the maturity, whereas at least with stocks, you're getting a growing income stream paying you to wait while the market settles down and gathers itself up for the next rally.

SEANA SMITH: Nancy Tengler, always great to get your perspective. Laffer Tengler Investments CEO and CIO.

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