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Markets are 'taking back' stock losses as a reaction to July CPI data: Strategist

SEI Chief Investment Officer Jim Smigiel joins Yahoo Finance Live to discuss market reactions to the latest economic data and Fed rate hikes, the inflation outlook, and how certain sectors are pricing in the economic environment.

Video transcript

- All right, we're going to break down some of that market action with our guest. So here to discuss the latest market action is Jim Smigiel, SEI's chief investment officer. Good to have you back on the show, Jim. So what do you make of how the markets are digesting this data between the CPI and PPI data?

JIM SMIGIEL: Thanks, Rochelle. Good to be back. Yeah, I think the market is reacting, despite today's kind of mixed performance, as Brian just pointed out, they're taking it pretty much in stride.

Pretty positive. I think we've been dealing throughout the summer with this kind of view of market participants, that the Fed's not going to be able to hike too much, that they're going to need to pull back. And the PPI and the CPI, it feels like the market really took solace in the fact that the level came off quite a bit. We're obviously still at very high levels year over year, but we are seeing a little bit of that get priced into Fed fund futures, the next meeting looking closer to a 50 basis point expectation than a 75 basis point, which it was prior to these numbers. So I think long story short here is the market, again, despite today's mixed move, very, very positive on what we saw with PPI and CPI. And maybe this gives the Fed a little bit of room to tap the brakes a little bit and pull back on their hiking cycle.

- Jim, you know, it's interesting because in equity markets, it seems like a bit of a nothing burger across the board. But at the same time, you see the 10 year in fixed income actually moving quite a lot on the backs of that PPI report this morning. 10 year yield up 10 basis points in one day. Does that tell you anything about how they're reading it in tandem with the CPI report we got yesterday and the movement after that?

JIM SMIGIEL: Yeah, it's good to focus on that too. I mean, yesterday was very interesting. Big rally yesterday.

So a lot of what we're seeing today is really just taking back what we saw earlier in the week from CPI. Found that to be very, very strange, interestingly enough, that we're looking at 8 and 1/2% year over year CPI and the 10 year rallies on that. Our take on that, looking at it in total and just ignoring the day's move and maybe looking at them in tandem, we still think the 10 year is a little bit too low.

Looking at anything below 3% when inflation is still running at 8 and 1/2 to 9, depending if we're looking at CPI or PPI, we're really not in the camp that the Fed is thinking about pausing at this point in time. We think that they have room to go, that they're well behind the curve, and they really need to make up for quite a bit of stimulus that was pumped into the system around COVID times. And we're going to see the 10 year, in our estimation, moving a bit higher from here.

- And we did see Fed president from San Francisco Mary Daly saying, look, it's too early to declare a victory on this inflation fight. Where do you think we are right now?

JIM SMIGIEL: Well, I think that's exactly right. We are in the early stages. I think our view is that we waited too long, that the Fed was kind of too forgiving, sitting on the sidelines for longer than they should have before stepping into the game and trying to get the economy under control. So I think short term, we're still in the early stages.

But there are some other kind of bigger factors as well at play here which we think are very significant for the market and, quite frankly, are inflationary for the market. This idea of globalization is really one that is behind us, I think. COVID has really pointed out some of the structural flaws of an over-optimized supply chain environment.

We think we're going to be unwinding on that. That's going to keep added pressures on prices. And of course, the working age population, even in China, is shrinking, which is going to keep an upward pressure on wages.

So I would say in the short term and in the medium term, we still think inflation is going to be with us. It's going to be a topic we're going to be talking about, not at 8% or 9%. But we are not going back to fighting to get to 2% inflation any time soon.

- Jim, the overall picture so far has been, at least in the NASDAQ, a bull market in a bear market. Now, of course, that has renewed optimism that maybe we've reached the bottom here. Do you think so?

JIM SMIGIEL: I don't think so. I think volatility, even though the VIX has come off quite a bit-- it actually crested below 20 earlier today. We think volatility is going to be with us for quite some time. If our view is that we see interest rates heading higher even from here, and it wouldn't surprise us to have the 10 year a bit above 3%, that's going to be a struggle for the NASDAQ to outperform in an environment like that.

These are more growth-oriented names. They're going to trade on kind of that discounted cash flow, and those long term yields are what we typically see investors using to discount those cash flows. And that'll keep their valuations somewhat subdued. So this is a bit of a relief rally in our view. We're not calling for a major bear market, but we do think the headwinds in the equity market, they will be focused on more of the NASDAQ than on other areas of the market, which is why we're still big fans of value equities at this stage of the game for how they do in inflationary environments.

- So then in terms of balancing a portfolio, value versus growth in this sort of cycle, how would you structure your portfolio based on the current environment?

JIM SMIGIEL: Our view is one that is decidedly in the value camp. So we think relative to growth, it is undervalued, if I could use that term. But then relative to the economic environment, again, if we have a view that we are in kind of more of a secular higher inflationary environment, that is a better environment for value stocks than growth stocks.

So from our perspective and what we are recommending to our clients is to stay decidedly in the value camp as opposed to growth. And there are other areas where you can add to your portfolio. We don't think it's too late, interesting, to even make sure that you have inflation--sensitive exposure, like commodities in your portfolio. If you haven't added that on a broad asset allocation perspective, we don't think it's too late to include that asset class in your holdings.

- All right, Jim Smigiel, chief investment officer over at SEI. Thank you so much for spending time with us on this Thursday afternoon. Have a good one.