It makes sense that financial stocks move higher along with interest rates, said Latif, as the Fed stands ready to do what it can to promote faster growth.
The move up in economically-sensitive stocks is sure to come at the expense of high-flying tech names, Latif added, as he expects investors to take profits from tech and put them to work in the sectors that will benefit from the Fed's continued attempt to grow the economy.
CONWAY GITTENS: This is the day the Dow could likely go positive for the year. The S&P 500 once again hitting record highs. But the NASDAQ is a laggard. Let's find out what's going on with the markets today with Wasif Latif. He is the head of investments at Victory Capital Solutions.
So Wasif, let's start first with the Federal Reserve. Everyone's been waiting for this all week long. Jerome Powell, Jackson Hole, came out. They're switching to an average inflation target of 2%. What exactly-- what signal does that send to the market?
WASIF LATIF: Well, thank you for having me, first. Yeah, it was-- it's been a pretty important day for the markets, I would say. This is an announcement that's been coming. They've been prepping for that. Other folks at the Fed have been talking about it. And it basically means that the 2% target for inflation is not a ceiling and it is more of a longer-term average, which means that the Fed will allow inflation to actually run well above 2% for quite a while in order to achieve that average, since we've been below that number for some time now.
What that means is-- as you said, noticed in the market, the bond market is reacting that interest inflation will increase in the longer term. That's why you're seeing the longer end of the curve rise and you're seeing a steepening of the curve. And as a result of that, you're seeing financials perform the best in the market right now as a sector because financials benefit from a steepening yield curve.
So it's been a different type of a market today, even though at the whole level, the market is higher-- when I mean the market, I'm talking about the S&P 500-- it is higher. However, inside of what's going on when you look at it, the sector breakdown, it is kind of different, where you're seeing the financials lead the way, which is not the case for the past few years.
CONWAY GITTENS: So I'm wondering, is the message that the Fed sent out today-- is the message keep buying risky assets because we're here, we're going to backstop you?
WASIF LATIF: I think the message is that for the overall economy to be on a stronger path and to create sustainable jobs, we need a healthy level of inflation. And I think the message from the Fed is we're going to do what it takes to get that level of inflation. Now, if it's a healthy level of inflation, that means that interest rates are going to be low for quite some time. They're not going to raise rates anytime soon. It could be years.
And as a result of that, yes, the cost of borrowing is low. The discounting mechanism that goes into factoring the price of assets is low. And when interest rates are so low, risky assets will rise because of the discounting that you do to calculate the price of such a risky asset.
So if you have companies or assets that are growing and delivering good cash flows, they will continue to rise because the interest rates are now projected to be lower for a lot longer. So it's not a direct decision by the Fed to say we're going to support the market. It's an indirect impact from their inflation targeting.
CONWAY GITTENS: And I'm wondering, given your investment strategy, how does what the Fed said today-- and I guess it's a confirmation of what many on Wall Street was already expecting-- how does that impact at all your investment strategy, especially as we're heading into the end of the year and we've got this wild card of the election hanging over Wall Street's head?
WASIF LATIF: Yeah, so the way we invest in our portfolios is to continue to look at the longer-term picture of securities, their valuations, their earnings quality. And our portfolios are generally more diversified than focusing on a narrow pocket of the market, for example, the growth tech stocks, for example. And so our portfolio is very much diversified, and, indeed, allocated to companies and sectors that would benefit in this type of a market. As I mentioned earlier, some of the cyclicals have been rising in this market today because of this anticipation that if we do get that healthy recovery in inflation and there is a healthy improvement in overall economic activity, then it'll broaden out and support the rest of the cyclical parts of the market that haven't done as well. And so our portfolios will most definitely benefit from that type of an approach.
Within fixed income, earlier in the year, we actually reduced our duration to go a little bit shorter duration in our portfolio exposure in the fixed income side. And a market like this supports our portfolio from that standpoint as well, because the longer end of the curve, again, is rising, so longer duration assets in fixed income aren't doing as well as shorter duration assets are. So that's helping our portfolio as well.
CONWAY GITTENS: So before I let you go, I just want to go back and tie this together with the Fed again-- so when we look at the fact that financials are moving higher today, we've got bond yields moving up-- so is the statement from the Fed or the changes from the Fed a buy signal for the economically sensitive sectors, especially given the fact that they have lagged so far behind this tech craze?
WASIF LATIF: Yes, indeed. I think the answer is that from what the market's reaction is today based on the Fed's indication of lower for longer on interest rates, and the target is to get economic activity going, that is indeed very helpful for cyclical assets going forward.
CONWAY GITTENS: All right, great. Thank you. That is Wasif Latif. He is the head of investments at Victory Capital Solutions. I'm Conway G. Gittens. And this is Reuters.