The Latest On Inflation, Omicron, and Fed Tapering

safely Wisconsin our radio studios. We do not have to trade this market, but somebody who does are more likely invests in this market is a professional by the name of Phil Orlando, chief equity market strategist ahead of client portfolio management at Federated Hermes of They've got a couple of shekels under management there. I can attest to that. So, Phil, when you see kind of this volatility here, and I guess it's understandable given all the macro cross winds out there,

what's your two view on let's just on these equity markets. So, you know, starting with the volatility issue over the last fortnite, I guess from thanks th week through you know last night, Uh, the S and P five was down about five and and other indicries like the NASDAC composit, you know, down even more and and to some degree, um the stock market has done really really well. You know, we're up a hundred and sixteen percent since the bottom of the

market March a year ago. And this omikron variant has really captured everyone's imagination over the last couple of weeks. But what I think is sparking the rally here is that, Okay, a macron has now been identified in seventeen states and

forty countries. It's moving or transmitting faster than Delta was, but the conditions appear to be more mild, and I think the market is taking some confidence in that that the you know, the mortality rates haven't materially increased, and maybe Fiser and Maderna we'll be able to figure out a tweak um that that will allow their existing vaccines to continue to be efficacious. So as we look out the calendar twenty two, I think we've got to start

with sort of that foundation. Where are we going with covid um and and our view. So let's let's say, phil Um, everything's taken care of that, oh macron, isn't. I mean, I know that there's a lot still to be discovered. But let's let's just say, oh, macron isn't more fatal than um other other variants, and um, we have useful vaccines. What about the Fed? Why our investors

piling in too treasuries? When Jerome Powell takes a hawkish pivot and we start to expect them to raise rates earlier, Well, there must be a concern that at the Fed is going to get a bit more aggressive, And that's certainly our view. We think they're going to double the pace of tapering starting in the first quarter and have the taper completed by the end of March, and then probably execute We think three quarter point rate hikes over the course of calendar two and then four more over the

course of calendar twenty three. And so I think investors are saying, well, if the Fed has found religion on inflation, and and you know, Powell's thrown in the towel on transitory, you know, which he announced last week, then then potentially that at the margin is going to slow economic growth, maybe corporate earnings growth, and therefore we ought to be buying treasuries rather than selling treasuries here to anticipate, you know, a weaker economic backdrop alright, Phil, I mean you talk

about those rate increases three potentially and then followed up by four, and that's an ironment that not many investors have experienced before. Where do you want to be in that type of rate environment from an equity perspective, Well, you want to be in stocks that are more attractively valued, number one. And that would suggest the value trade rather than the growth trade. Value stocks right now are trading in the mid teens. Growth stocks are trading in the

mid thirties. So that's a pretty significant difference. And then second, because of the issues that we're dealing with UH in terms of inflation and in terms of FED policy, question is which companies have the ability to execute some pricing power that that we know wages are going up, commodity costs going up, shipping costs are going up. Which companies are able to price those increases in and and actually continue to maintain healthy margins or maybe even expand margins.

And for the most part, what we saw in with the third order earnings is that it's the economically sensitive categories you know, financials, materials, energy, consumer discretionary industrials that that you know, by and large are able to do that. So from an asset allocation standpoint, I think the value trade rather than the growth trade, is still the way You've got to look at what's happening in or what we think is going to happen in kelendar twenty two. Hey, Phil,

thanks so much for joining us. We always appreciate getting your perspective and the benefit of your experience here. Uh. Phil Orlando, chief equity market strategist, and he's also ahead of the client portfolio management team at Federated Hermes six hundred billion dollars in assets on their management. I knew Federated was big. I didn't know they were that big. That's Federated Phil Orlando. We've got an equity outlook with Phil Orlando from Federated Hermes. Earlier lists turn around and

take a look at the fixed income biz. We do that with Kevin Nuckelson, Global Fixed Income co c i O and co head of Investment Committee at Riverfront Investment Group. Kevin, I'm looking at the ten year treasury yielding one point three eight five today, it's something about four basis points. But I've got a FED that's talking about tapering. I've got a FED that's talking about raising rates. What do I do in the fixing income market in two? Given again we're I think the FED is going to take

this market. Well, I think that when you think about um fixing income in two, you have to think about yields are actually going to move higher. Our our base case for two is that you're going to have the tenure in the year at UM. Now, when we think about investing in fixing income next year, we don't see that there's going to be a lot of price appreciation.

It's really going to come from income. So you're gonna be looking at place like high yale bank loans on things that that nature that are going to be able to give you a little bit more yield um and not extreme you out on the duration curb. We did see last week traders pull money from the I shares I box, high Yield Corporate Bond et F h y G as it's popularly known, for a third week in a row. The short interest on UM I shares, I box and investment grade corporate bond e t F is

also near an all time high. Why are investors right now at least souring on corporate debt? Well, I think the investors are staring on corporate debt right now because there is a risk off trade in the market. If you look at what happened in the bond market last week, you basically had an overreaction, in my opinion, to the FED talking about moving tapering up. Let's remember capery is not raising rates, and that's the big thing that I

think that is missing here. Um. We when you look at the Yok curve and what happened over the last a few days, the UH bond market would be arguing that, you know, the Fed is going to make a policy mistake. However, I believe that what the Fed has done is that they bought themselves more time. And in the sense that we know that Chairman Pal is very data dependent, and so by moving up the taper, what he's effectively done is he's given himself more time to look at the data,

the incoming data. And we believe that you know, interest rates are going or excuse me, inflation is going to peak after the you know, in the first half of next year, um and then you know start to moderate, and so I think that you won't see as many hypes um and and so I think that you know, you will see interest rates move higher, but not too

much higher. All right, Kevin, given that that interest rate outlook, given the inflation environment that we do see ourselves, and at least here for the short intermediate term in the corporate bond market. For two, what sectors are you guys looking at? When I turned to corporates, I'm you know, I'm going to continue to look at industrials, UH. Specifically you know, like we like machinery uh and anything that

has to do with any type of infrastructure. UM. We believe that you know, they're going to do pretty well, um if if you're getting down into the subsectors here um, But specifically when I'm thinking about fixed income um, you know, in the corporate investing I also like financials because as interest rates move up, you know, financial should do better

as they hopefully their loan growth improves. UM. And so I think that you'll be able to pick up some extra YEO in the investment grade space when you're focusing on financials. All right. So we saw Goldman Sachs uh cut us GDP forecast yesterday because of an Omicon drag need. A lot of other banks are saying, oh, Omicron isn't gonna be a big deal. How much does this how much taking a view on this um make a difference

in your strategy. Well, I think that the view that we're taking is that Omicron is not going to be any worse off than the delta variants. And what we're seeing so far coming out of South Africa, they're reporting that people are getting not getting as sick as they did with the other variants. So therefore, we're not changing our forecast for two at this point because we don't believe that, you know, it's going to have a huge effect.

We've come to the realization that we're going to have to live with these various variants, uh, you know, for the foreseeable future, and it may be the new norm. Hey, Kevin, thanks so much for joining us. Really appreciate getting your thoughts. Kevin Nicholson. He's Global fixed Income co c i O, CO head of Investment Committee at Riverfront Investment Group. I'm looking at the marketer. I'm going to quote the down Matt even though it's a John for oh no, no,

but he's not here. It's up six twenty points. That gets my attention. One eight percent here. I know NASAC is not following suit. There but it's interesting to see that kind of rebound in the marketplace, and that's a wall of worry that this market continues to successfully climb. Let's see if that's an issue for our next guest, Lisa Erickson, Senior vice president and co had a public

markets group at US Bank. Lisa, what's your outlook for two? Well, we are still positive on the outlook for two and the reason why is if you look at the underlying economic indicators, we see some really nice action. While there's been a slight slowdown in some of the macro variables, overall, if you just measure across the broad way indicators, what we see is definitely readings that still remain in the

expansion phase. And on top of that, you see companies being able to really translate that information into positive sales and earnings growth. And people are generally expecting that positive trend to continue because what we're seeing is the earning

system of revisions continue to go up. I think the final thing that really gives us some confidence going into the new year is the fact that while obviously there's moves to continue to look at tapering as well as when liftoff might occur, overall the level of interest rates and inflation are still at moderate or low levels, and so all of those kinds of things do give us

some confidence. That was just about to ask you about inflation, because we're looking for Bloomberg Intelligence forecasts a number for CPI at six point seven percent on Friday. That's the highest we've seen it since Olivia Newton, John charted with physical Um back back when we knew John mellencamp as John Cougar, when Et came out in the theaters. It's been a long time since. Are we gonna Are we

gonna come back down? Do you think, Um, this is I don't want to say transitory, but um, do you think that we're going to get over this and next year we're gonna start getting back to lower numbers? Yeah, that's a great question. So our hope in our base cases that we start to see some moderation in the inflation numbers next year, and there's a few reasons for that.

So the first really is that if you think about what's happened this year, obviously we have had a tougher time with price increases, but that honestly makes a year over year comparisons going into next year tougher. So in other words, it's going to be hard harder for prices to maintain that level of upward trajectory. And in addition to that, you know, if you just monitor the news flow that's been coming along here over the last few weeks, what we are starting to see is some signs that

the supply constraints are coming off. And we really did have a very nice November report, and while it's just one month, it was encouraging to see that labor participation rate go up, and so we are very hopeful. But you know, really to your point, that is going to be a key variable to continue the SS. We are going to have a more elevated reading this month, but hopefully again as we transverse into the new year, we get some readings that start to show some signs of deceleration. Lisa,

just real quick twenty seconds here. Are you comfortable with where the Fed is guiding this market in terms of rates? Well, certainly the Fed really has a tough road to ho here going forward. Um, certainly they need to be attended to what happens on the price side while still trying to be supportive of the economic recovery that's going Uh, forward, and so what they've done so far is a fairly nice job in terms of communication, in terms of yeah,

and that's and that's for this marketplace. All right, Lisa, thanks so much for joining us too short of a time. We're gonna get you back soon. Lisa Erickson, Senior Vice president and COHD of the Public Markets Group at US Bank. All right, So we have the omicron variant out there, and the question is how effective well the existing vaccines that we have in dealing with that. Let's bring in someone, I think as a thought or two them that Dave Herring,

chief operating officer of Adagio Therapeutics. Previously he led Fiser's vaccine program from North America. Dave, thanks so much for joining us. We we know your time is precious here. What do you know about the therapeutics, whether it's fightsers or moderners as it relates to this new omicron variant. Yeah, no, thanks for having me. Um. Uh, it's a it's an

interesting question, right, A lot to still be known. I've seen what has been said publicly, which is there's a lot of concern about whether the current vaccines will be effective against this variant. Uh, and really, to me, this is a wake up call both for the country in the world. We always suspected that there could be variants that would escape both the current vaccines as well as some of the bodies. And you know, so far knock on what it looks like. It's not as severe as

as people had feared. But we also know that this virus will continue to mutate. So this is my concern. Um, although I've heard opposing views, I was thinking, if this variant is more transmissible but less dangerous, that's still um, that's that's still leaves room to be cautious because what if it then mutates as it spreads to so many

people into something that is more fatal. I totally agree with you, right, And we don't know yet what's going to happen when even this variant reaches some of the more vulnerable populations, whether that's you know, older adults, people in nursing homes, et cetera. And uh, what we do know is every time people get infected, the virus has this opportunity to mutate. And we've said all along there's likely going to be more variants than there are group

letters in the alphabet. So I think your your fear is grounded. I mean that the opposing view I read and it was somebody on Wall Street this morning, So it wasn't a virologist who said this is great news, because it means that the variant is that the virus is mutating into something more like the flu, which is kind of like what happened with the Spanish flu. At

least that's what we all think. I don't know the history exactly, um that eventually this becomes sort of a common cold or something that everyone can get but very few people die from. Is that how viruses typically do mutate into less fatal diseases. Well, I mean, I think you're going a little bit outside of my comfort zone here, but I mean what we do see is is, of course, you know, as people get affected, you do start to

develop different immunities. Although I would argue influenza is still quite a deadly disease, you know, one that we haven't come up with a good solution to. Uh and it's certainly one that needs more attention, and people are continually worried about influenza, pandemics coming along and new ones that are you know there I think for for currently, for for COVID, we're not there yet, and even as an endemic, we're talking about a lot of people who are at risk,

haven't been vaccinated, don't have treatments. UM. And so from from our perspective, we really feel around the world United States in particular, we should be putting more effort to finding more products to make it so, as you say, UM, we could make it more like the common cold, and at least if we're going to have to live with it, make it h something we can do in a much

less deadly and impactful way. So, Davis, as these variants continue to come along, what can you tell us about the ability of folks like visor Moderna too tweak their existing vaccines to kind of meet the demand into these newer variants. How does that tongs that take? Can it be done? How hard is it to get done? Yeah? I mean the good news is uh, with the m R and A technology, it can be done. I did read recently though, the FDA thinks the soonest that those

products could be tweaked and available as April. Which is why you know, from from our perspective at Adagio and the product that that we're working on for an antibody, UM, we think we need more shots on goal. We need more products. We need you know, warp speed two point oh, if you will to make sure that if something like O Macron comes along and is more deadly, we're prepared and that we don't have to wait three or four months. Uh. You know, our our product was designed to be useful

against all the variants. We're waiting to see if that proves to be true. Um, and if that's the case, we want the governments around the world to be accelerating and expediting these these tools so that we have solutions to to this variant and future one. We only got a minute left. But are these um kinds of virus is going to pop up more and more often? I know you have worked at Novartists and Fightser, you've dealt

with H one and one and other pandemics. Is this is this kind of thing going to happen more and more often? I mean unfortunately, right? I mean I started working on pandemics and two thousand nine, I've worked on a bowl, I've worked on mirrors, Stars and a few

other ones. I mean, I sure hope not. I would like this to be the last pandemic than any of us see for a while, but I think probably the reality of the situation is we need to be more prepared UM and be ready for these things, whether it's something that mother Nature throws at us or or even the threat of some sort of bioterrorism and UH, and that to me is is what we should be we're working towards. Hey, Dave, thanks so much for joining us.

Really appreciate getting your UM perspective. Chief offerating officer for Adagio Therapeutics previously led Fiser's vaccine program for North America. UH, trying to get a better handle on how this omicron variant will stack up against the existing vaccine. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller.

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