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Inflation: 'Wage pressure is going to be the story for the entire year,’ strategist says

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Marci McGregor, Bank of America Private Bank senior investment strategist and chief investment officer for Merrill, joins Yahoo Finance Live to discuss bank earnings, financial and energy sector funds, and wage inflation.

Video transcript

ZACK GUZMAN: I want to turn our attention though, to what it means for the rest of the year and maybe how you should be trading off of some of the early headlines that we are getting. And for more on that, let's bring in Marci McGregor, Bank of America Merrill Lynch chief investment office senior investment strategist joins us now. And Marci, I mean, you know, I don't want to read too much into maybe what we're hearing out of the first earnings reports here. Keep in mind, JPMorgan actually beat on earnings and revenue, but the look ahead, I think is something that a lot of companies out there are probably going to be reiterating, a lot of the same points, unknowns, and inflationary pressures may be impacting results to come. So I mean, when you digest that macro theme what does it tell you about maybe how some of the pressure there is on the part of these companies to really beat expectations?

MARCI MCGREGOR: Yeah, the pressure is on but I would say if you look at the big picture for banks, many of the banks emerge from the pandemic stronger with stronger balance sheets. A good way to position for inflation because as rates rise, net interest margins are going to expand but it's also a way to position for the supply chain stress that's going on because as companies in different industries rebuild their inventories that means loan growth for the banks. So as we headed into this earnings season it was banks, semis, and energy that actually saw the most analyst upgrades. And I think ultimately, the cyclicals lead the way because they're going to likely report revenue growth above the average for the S&P but I think we got to look at the big picture and position for sticky inflation, and a strong economy.

AKIKO FUJITA: What we heard from the banks today certainly feels like something that we're likely to hear over and over throughout the earnings season and that is those rising expenses largely coming from higher wages. And I wonder how you're looking at that? Is that something that will continue well into the second half of the year? How do you think investors should be looking at that as companies continue to report their results?

MARCI MCGREGOR: Yeah, I think the reality is real wages have not kept up with inflation and real wages haven't kept up with profits either. So that's part of the story of why companies have been able to protect their margins so far in this. But I would expect upward price pressure on wages to continue. And I would say wages, and even rents, those stickier measures of inflation haven't even really worked their way into the headline data yet. So I think inflation is going to stay, wage pressure is going to be a story for the entire year. But it's companies that pass through price increases, so I think of it almost as quality companies in each sector that are going to be able to continue to exceed expectations on profits despite rising wages.

ZACK GUZMAN: Yeah, Marci, we just showed the 10-year there, you see it ending the year around 2%. We've been seeing it creep higher and higher. And obviously, you know, I think that prompted a lot of investors to kind of shift back into cyclicals because of what we saw in the tech sell-off but now I mean, if those are getting dented just as bad here, I mean, what's kind of the strategy I guess as we reset for maybe positioning around a 2% yield on the 10-year?

MARCI MCGREGOR: Yeah, I think we have to remember a 2% yield even though it's significantly higher than where we're coming from, especially in 2020, is still a historically low level. So I think it's more even about the speed at which rates increase. We saw a quick move at the beginning of the year but I think it gets steadier from here. And I think what we're looking at is especially a bond market that has accepted and not overreacted to what is a sharp pivot by the Fed.

It's going to be all about the Fed this year, especially as we head into FOMC meeting. So positioning-wise, I would say below benchmark duration, up in quality in fixed income because we do see rates rising from here. But not significantly higher, like I said, 2% at the end of this year, maybe 2.25% as we look ahead to 2023.

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