Jack Ablin, chief investment officer at Cresset Capital, talks about the stock and bond market reactions to FOMC minutes released earlier this week, and anticipation of the monthly jobs report.
– How to figure out how to strategize, you know, going forward, what do we do? How do we make some money here? What do we do with our portfolios. Jack Ablin, Cresset Capital chief investment officer, is here to give us some insight that perhaps we’re not considering. And it’s good to have you here. Just want to, you know, as I’m looking off to my other computer, I got the 10 year almost at 1 and 3/4.
I’ve got oil about to go, WTI futures about to cross over 80 bucks a barrel. As an investor, I’m getting a little nervous, because of inflation. Where do I run for protection?
JACK ABLIN: Sure, actually, we think inflation was likely peaking now. We think the natural path of inflation is going to trend lower. Of course, we’re going to have the Fed’s help. They’ve come out and said they’re going to tighten aggressively. Bond market thinks three rate hikes this year. Perhaps now the Fed will accelerate to sometime in the first quarter rather than the second quarter.
But either way, it looks like inflation will likely trend back to 2 and 1/4, 2 and 1/2, by the end of the year. So I wouldn’t worry so much about the inflation trend. It’s really going to be the tighter financial conditions, that, I think, investors really need to pay attention to.
– Jack, just looking at the market reaction to the Fed, the S&P 500 closed on December 15th after the last FOMC meeting and press conference at 4710. Yesterday, after that sell off, it closed just over 4700, so right back where we were after that last Fed meeting.
What do you make about that price action in response to those minutes yesterday? And what do you think it says about what markets are pricing in in terms of Fed actions this year?
JACK ABLIN: Sure, so, you know, my view has always been to kind of rely on the bond market, just because, one is I have a bond background. You know, I was a mortgage-backed securities trader in my early career. But also it’s roughly twice the size of the equity market. It’s generally dominated by institutional investors.
And so I tend to look at the bond market as a clue of where I think things are going to go, either inflation-wise, growth-wise, and otherwise. And even the bond market, in response to yesterday and a few days before, seemed to be caught off balance. And I think that really not only upset bond assumptions, but clearly upset equity market assumptions as well.
– Jack, a lot of us want to pick your brain, because of your expertise in the bond market. So help all of us understand something as we look forward. If we have the 10-year about to, eventually this year, let’s say it doesn’t break two, but it gets up there. But short-term, short duration bonds, are they going up? Are they flat-lining?
Is the spread between those two widening, and if it doesn’t widen, what does that mean for all of us as we have to deploy capital?
JACK ABLIN: Yeah, that’s really one of the things I’m focused on. And that is the narrowing of yields between the overnight, or the one-year rate, and the intermediate term, say 10-year rate. And what it looks like, according to projections that we have, but also the bond market, too, that all maturities are going to converge at around the 2% rate in a couple of years, suggesting that the Fed, sure, go ahead and tighten.
But they really don’t have that much wiggle room. They’re going to eventually have to decide, do they want to be so aggressive to turn the yield curve into an inversion, essentially sending the economy into recession in an effort to fight inflation. I think the good news is they’re going to start to tighten, talk tough. But I think from a natural course of action, I think inflation is trending lower. And I don’t think that they need to be as aggressive as perhaps they’re talking tough right now.
– Well, as you mentioned, the Fed does seem to be moving more towards the hawkish tilt here. But as investors, are there ways that they could actually capitalize on discrepancies in monetary policy coming out and telegraphed by the Fed, versus what other major global central banks are telegraphing right now for the year?
JACK ABLIN: Sure, so, you know, one of the ways that we’re calling it is to say, look, we can’t rely on valuation expansion anymore. In fact, we had, because we had earnings up 65% last year, and the market was only up 28%, we did have valuation compression. But in the 10 years previous, most of the return that we’ve enjoyed over the previous decade was valuation expansion, more than earnings, more than dividends, more than everything else.
That’s pretty much off the table now. And so, for that reason, we want to focus on sectors where the earnings yield or the PEs are very low, the earnings yield is high, and just try to clip as much of the earnings and dividends as we can. That will tend to be the value, and the cyclical, if you will, parts of the economy will be the industrials, the health care, and so forth.
Now, one exception to that, and that’s commodities. We think, because of the tighter financial conditions, that’s going to put pressure on industrial commodities. So that would be the basic materials. But it’s also going to put pressure on energy.
And we think that energy shares, while they’re certainly attractive and they’re running right now, eventually will get clipped as we move through 2022. So we want to focus on, you know, I would say industrials, health care, financials, and avoid the high PE company areas, like communications and tech, and then also the commodity sectors as well, for right now.
– Jack, we look forward to future discussions with you, not only with the FOMC meeting later this month, but also as we get closer to the big one with the SEP, the summary of economic projections, in March, because your insight on bonds is truly valuable. Thank you for joining us, Jack Ablin, Cresset Capital chief investment officer.