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Market strategist: Investors will need to diversify their approach to inflation

J.P. Morgan Asset Management Global Market Strategist Jordan Jackson joins Yahoo Finance Live to discuss how investors can hedge against or outpace inflation.

Video transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets now and welcome in Jordan Jackson to the show, JP Morgan Asset Management global market strategist. Jordan, good to have you here. There is a report out actually from Charles Schwab that showed nearly 9 out of 10 traders are concerned about inflation. Many of them are taking actions to hedge against it. So they're going into things like real estate, crypto, and gold. How concerned are you about inflation? And how are you hedging against it?

JORDAN JACKSON: Well, I'm still fairly concerned. You know, obviously, we've got the red hot print this morning. We may not be out of the woods yet. We could be looking at the peak inflation period coming potentially in February, potentially in March. I think it is going to be concentrated in the first quarter of this year. But then I think prices begin to moderate thereafter.

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When I look at what markets are expecting, they are expecting inflation to come down to roughly about a 5% level over the middle of the year, and then roughly end the year at around 3% to 3 and 1/2%, so still some moderating inflation. I think investors have to ask themselves, do I want to hedge against inflation? Or do I want to beat inflation?

And so, you know, I think things like gold, you know, are where you can hedge. But I think there are other areas where you can sort of continue to outpace and see outsized gains relative to inflation. I think that's things like equities. I do think commodity markets are relatively well-supported here as well. And so I think investors will need to sort of, again, diversify how they think about hedging and outpacing inflation at the current juncture.

ALEXIS CHRISTOFOROUS: Yeah, I'm intrigued because I like the idea of beating inflation, not necessarily hedging against it. So tell me more about how you are planning to do that, Jordan, and ways that, you know, investors, retail investors hearing this interview can do that.

JORDAN JACKSON: Well, I think they certainly still maintain risk-on exposure. I think equities broadly can still perform and outpace the rate of inflation. I still think equities this year can deliver low double digit returns to the market. And so if you think inflation is going to end the year sort of between 3% and 5%, you're still looking at a positive real return.

I also think potentially areas like commodities, which, again, sort of serve as inflation hedges, but the supply demand picture that we're seeing across a host of commodities, things like oil, metals, which are sitting on low inventory balances, prices are likely to be relatively well-supported over the next couple of months here.

As the global economy continues to recover from Omicron and China comes back online more broadly, I think that commodity demand remains relatively robust. So I do think parts of the market, right, you think you want to do commodity producers. If you're not going to overweight the specific commodities themselves, commodity producers can be a way to do that in this type of market also.

ALEXIS CHRISTOFOROUS: Well, certainly, we've learned with all this volatility since the beginning of the year, this really is a stock picker's market. So you say equities in general are a way to perhaps beat inflation, but where within equities? That's a big pie, right, Jordan? So where within there are you seeing the most opportunity right now?

JORDAN JACKSON: So obviously with the pressure on rates that you're seeing, I think growth stocks are going to come under a bit of pressure here. Obviously, you see some of the high flying tech names coming under pressure. I think as real yields continue to move higher, the growth complex, which, again, continue to trade at higher valuations, can come under pressure.

So with that being said, I do think some of the more value orientated parts of the market can continue to perform well relative to growth, things like industrials, things like manufacturing and mining, which are likely going to benefit from the commodity demand that I talked about.

Obviously, you continue to see very, very strong demand for homes. Even in an environment with higher mortgage rates, I think low inventory and strong consumers have continued to drive demand for homes. And even a continued modest uptick in mortgage rates, I don't think, takes the wind out of the sails in housing demand.

So you think about commodities like lumber and timber and things like that are likely going to continue to be relatively well supported. Again, I think also real estate rates can hedge to a certain degree some of the underlying inflationary impacts. But again, this is a dividend-paying sector. And so higher rates suggest that folks may opt for bonds over a real estate investment trust. So something to be cautious of there.

ALEXIS CHRISTOFOROUS: We have seen a lot of money flowing into those dividend-paying stocks recently, Jordan. Just want to quickly get your thoughts on rates because we had Fed president of St Louis Bullard come out today, the president of the Fed in St. Louis, talking about a 1% jump in rates by July. He thinks we're going to get that 50 basis point hike at the March meeting. What are your expectations?

JORDAN JACKSON: I think that they deliver on 50 basis points in March. The reality is the Fed is very focused. They know that they should be tightening policy. Inflation's got a 7 handle. GDP's got a 7 handle. And the real effective federal funds rate is deeply negative. They've got to start tightening the policy.

But they are very concerned with making sure they don't jar markets, that markets don't react negatively. And in an environment in which markets are now expecting a higher probability of a 50 basis point increase, you know, this would suggest that it's relatively palatable for markets. And I think they effectively deliver on that 50 basis point rate hike.

Now we have to remember, right? In rate hikes today, in effect, inflation tomorrow. And so even if inflation sort of moderates, we're still expecting inflation to run potentially north of 3%. Through at least the first half of 2023, I think we're certainly-- it's appropriate for the Fed to begin hiking rates and also begin to start to reduce the size of its balloon balance sheet as well.

ALEXIS CHRISTOFOROUS: All right, Jordan Jackson, global market strategist at JP Morgan Asset Management, thanks so much.