Larry Adam, Raymond James CIO Larry Adam and Jim Caron, Morgan Stanley Investment Management Fixed Income Portfolio Manager, join Yahoo Finance Live to talk about the market outlook ahead of the summer months, the Fed’s interest rate hikes, inflation, wages, and unemployment data.
Video Transcript[BELL] [MUSIC PLAYING]
SEANA SMITH: All right, and that wraps up May, as we close out the final trading day of the month. All three of the major averages in the red right now, the Dow closing off today 220 points. The NASDAQ and S&P also moving to the downside. The NASDAQ looked like it was about to break into positive territory with just about 30 minutes to go, but again, taking a leg lower in the final couple of minutes.
We want to bring in Jim Caron. He’s Morgan Stanley Investment Management’s fixed income portfolio manager, and Larry Adam, Raymond James chief investment officer. Larry, let me start with you. When we take a look at the very volatile month of May, lots of questions about what the next couple of weeks are going to look like. What’s your expectation?
LARRY ADAM: Everybody talks about sell in May and go away. And I keep telling people to be careful when you watch that because over the last six years, we’ve been positive during the summer months. If you look back eight out of the last 10 years, we’ve been positive during the summer months. So I would expect to have increased volatility, but I still think that we can see the markers go positive between– and during the summer and much more higher between now and the end of the year.
DAVE BRIGGS: Oh, that is some refreshing optimism there. Jim, can you follow up on that?
JIM CARON: Well, look, I think one of the things that has taken place is that the risks have become a bit more balanced. So something that we’re seeing right now is that the markets were expecting the Fed to continuously hike interest rates up towards and above even 3 and 1/2%. I think that is now much more up for debate at this point. And we’re even seeing it within the FOMC, where some of the voting members are suggesting that they get to neutral, which we think they will do, which is a 2 and 1/2% policy rate, but then they might think about pausing now.
Look, you know, I think the Fed is going to go up towards around 3%, but that’s a far cry better than thinking that they’re going to excessively overshoot. So what we saw in the fixed income markets last week was a pretty sharp rally. We saw high yield spreads coming tighter, investment grade spreads coming tighter. But that’s all coming at the expense of slower growth expectations. So that’s what we’re concerned about. We’re concerned about seeing that going forward. I know valuations are kind of reflecting that, to some degree. So it’s really just a question of the difference that we see in terms of expectations– relative to expectations, I should say.
SEANA SMITH: Larry, with all this talk about inflation, there’s been a spotlight placed on the consumer, just in terms of how well the consumer is going to be able to hold up. So far, it’s been pretty resilient. From your perspective, though, how strong is the consumer at this point in the economic cycle?
LARRY ADAM: So I think the consumer is still strong. Maybe not as strong as they were six to nine months ago, but I still think when you look at how much money they still have in excess savings, which is still north of $2 trillion, when you look at household balance sheets, they’re still pretty healthy. You look at job creation, and we’re still looking for north of 300,000 jobs to be created, so while the average consumer may be struggling because of the increased costs, the consumer in aggregate still has more money to spend. So I think the consumer is going to be pretty– still remain fairly strong. I think that we’re in a transition where they’ll be spending less on goods, more on services and experiences throughout the summer. But I still think they’ll hang in there pretty well.
DAVE BRIGGS: Yeah, if the weekend is any indication, plenty of money to still spend on travel, no doubt about that. Jim, any indication that the Fed is successful at all in bringing down inflation at this point?
JIM CARON: Well, the inflation that the Fed is targeting at this point is wage inflation. So, on the supply side of things, certainly, there’s a supply shock. We know that good prices have come up. Goods prices are coming down right now. In many ways, the Fed still thinks that’s very transitory. But the more durable form of inflation that the Fed is worried about is wage inflation. So we had a supply shock. Prices went up in goods. That lasted for longer than anybody expected. It ended up infecting the wages and the labor market. And what the Fed believes is that they need to control wage inflation and get that down in order to control inflation expectations.
So, you know, I think the Fed is starting to make some progress. Some of the latest data points that came out, core PCE is now running at about a 4.9% year over year rate. Remember that the Fed is expecting it to fall towards 4.24, 4.23 by the end of this year. So we’re making progress towards at least their targets for this year, which takes some of the, I guess, momentum of hiking rates too much, too fast out of the markets. And I think that’s some of the pause that we’re seeing in the decline in risk assets right now.
SEANA SMITH: Larry, we’re going to be talking to Brian Deese in just a couple of minutes. And one of the topics we’re going to ask him is obviously inflation, but specifically what was put forward by President Biden. And his op-ed in the “Wall Street Journal” today just talking about how he’s planning to address inflation. From your perspective, we know what the Fed has to do. Do you think the Biden administration– do you think the markets think that the Biden administration should be doing more to address inflation? I guess, what would that look like?
LARRY ADAM: I think it’s a great question. I don’t really think there’s much that they can do. From my perspective, what’s driving inflation are things that they really can’t control, right? It’s energy prices. It’s food prices. And what’s driving those? It’s the Ukraine-Russia war. It’s droughts when it comes to agricultural types of commodities. It’s supply chain issues. Those are all things that they really can’t control. And I just think it’s going to just need some time for a lot of this stuff to roll over. And I think we’re at the early stages of that.
One thing I would mention with Jim with wage pressure is one thing I would look for is that when you start to think about the two biggest employers in the United States, right, Amazon and Walmart, if they’re overstaffed, they’re starting to limit some of their hiring, those are some of the higher wage providers, if you will, when it comes to hourly wages. If they’re not hiring as much and you start going a little bit lower at some of the other leisure and hospitality employers, that might start to bring down an average price of what people are getting paid. So that wage pressure could be coming off as we start to go further into the summer.
DAVE BRIGGS: Yeah, what do you think about that, Jim? That notion?
JIM CARON: I think Larry is correct. I think that’s the silver lining right now. This is all by design in terms of what the Fed is trying to achieve. Some of the bigger technology components of the markets are starting to lay people off. And we’re seeing that. Now, the labor market is coming from a very, very strong place, so this doesn’t mean that we’re going to have a very weak labor market or very high unemployment rates or anything like that. So the consumer should stay relatively strong.
And I think the Fed views this as a little bit of a success at this point. This is what they’re trying to do. It’s not very popular for them to come out and say, hey, we think the bubble is in the labor market, and we specifically think it’s in wages, and we need to prick that bubble. But that’s effectively what they’re saying, and that’s effectively what they’re trying to do. And I think this does slow, at least, the anticipation that many people may have that interest rates may continue to rise and create a significant tightening of financial conditions.
So what it starts to say is that we’re taking a step towards the possibility of a soft landing. And that would be very good for risky assets. But we still have to see how things play out over the summer. Fuel prices, food prices, all of these various things are going to play a role.
DAVE BRIGGS: And Larry, as for the options that the administration does have, they’re trying to sell the case that they could cancel those tariffs on China. That deficit reduction will help bring down inflation. Or the third bullet in their chamber, they say, is increased taxes at least on the wealthy, on billionaires. Any of those, would that help the job of Jerome Powell?
LARRY ADAM: I think very minimally. I mean, first of all, it would take some time to get those things implemented. I don’t think that would help. I’d be very careful. You start talking about increasing taxes, that could dampen some of the spending out there for consumers and ultimately could lead to more of that. As Jim was talking about, that soft landing, that could put that more on the edge, if you will.
So I think it’s really, they’re in a really tough spot. I think they need to just have patience, allow some time to unfold. And that ultimately will help bring inflation down. But again, let’s be honest. A lot of this is political. Much of that was maybe more of an optics to show that it does have a focus, like we all do. But I think any type of specific policies would have a real hard direct impact in bringing inflation down today.