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The inflation outlook for the rest of the year ‘will be very tame,’ strategist says

In this article:
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  • Omar Aguilar
    Athletics competitor
  • Alexis Christoforous
    American journalist

Schwab Asset Management CEO and CIO Omar Aguilar joins Yahoo Finance Live to discuss inflation, earnings season, how Omicron is weighing on markets, the U.S. dollar, and global economic growth.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets, bring in Omar Aguilar, Schwab Asset Management CEO and CIO. Omar, it's good to see you again. I just want to get your take on market behavior today. You know, we had a pretty decent rally early on and then stocks did this about-face. Anything in particular that you think investors had a change of heart about?

OMAR AGUILAR: Well, I probably say the behavior today is very consistent what we have seen since the beginning of the year-- lots of uncertainty, a lot of speculation on behalf of investors about what the implications of data means for the future. And I will probably, say as we were discussing earlier in your show, you know, the inflation picture, obviously, it's something that people are trying to understand-- the concept of PPI and the fact that we're getting to peak inflation on numbers that we haven't seen in quite some time inflation wise as well as labor market.

Labor market seems to continue to be very tight and very strong. And I think investors are trying to understand what the implications might be for the reaction of the central bank. And when you think about the sensitivity of the Fed actions down the road, that seems to be driving not only volatility in the market, but also dispersion within stocks in the market, as energy and financials tend to be preferable when you have highly economic sensitive, more cyclical type activities.

And then technology and more of the high, you know, expensive sectors tend to be less attractive because of the discount rates. So all those things are happening all at the same time, where liquidity in the market seems to be starting to dry up a little bit.

- All right, and then I want to ask you-- you know, we've seen so much volatility. It's really been a rocky road to start off the year. Does that remove a lot of the froth and the excess liquidity that is in the market? And how does that affect valuations at this point?

OMAR AGUILAR: Well, the valuations going into this year within equity markets, obviously, vary by sector. And this is not very different of what we see in any regular economic cycle. And what is interesting is the speed of this economic cycle is quite quick-- going from back to 2020 recession, to recovery, to expansion.

And we're in this mid-cycle section where their rotation toward cyclicals, it's sort of faster than what we saw. And probably the move in the 10-year bond, it is a consequence of that delinking of the pandemic-driven market to a more economically-sensitive market. And to that, valuation within equities depends on where the sectors are.

Obviously, that favors, again, cyclical sectors and defensive sectors relative to technology and relative to other more high momentum sectors. But when you think about relative to other asset classes-- equity relative to fixed income, equity relative to cash-- given where we are in these particular cycles, the equity market seems to be still fairly valued, and maybe just above average long-term valuation, but not necessarily in the overvaluation camp as many people may think.

ALEXIS CHRISTOFOROUS: Well, it looks like inflation is going to get a little competition for the attention of investors, Omar, because we've got earnings season kicking off tomorrow with the big banks coming in with their results. We're going to hear from JP Morgan, Wells Fargo, Bank of America tomorrow.

What are your expectations for Q4 earnings? Because that's the quarter we started to see Omicron become a real problem here in the US. And also, what do you think you're going to be hearing about companies look ahead?

OMAR AGUILAR: Well, our expectation is that we're going to have a very solid and robust earnings season. You know, the Q4 numbers going into this will probably have some initial impacts of Omicron, but not as big as we may see in upcoming quarters. Just like what we saw with the economic data, a lot of the data that happened related to Omicron is probably less, you know, in the data than what we will probably see down the road.

That being said, we expect the earnings to continue to decelerate-- still very robust and in a good place as companies continue to drive to generate free cash flow and generate business. A lot of that is the excess demand. And we will hear a lot about supply chain disruptions and the potential higher cost. And in many areas and many sectors, we will also see how much the pricing power that these sectors may have has been transitioned to consumers.

I would probably think and our estimate shows that the outlook for the rest of the year will be very tame, as companies will probably put a little bit of uncertainty bail as to what may happen down the road, given that we're going to see peak inflation in the first part of the year. And obviously, the cost of doing business will continue to grow. And the labor costs, which is probably the key part of we're going to hear more, is something that is going to be on most earnings reports.

- I'm wondering if we've seen the dollar peak. We've seen it drop lately. And how does that in then-- you know, how does that make emerging markets look in context?

OMAR AGUILAR: Oh, great question. A significant part of our discussions with clients over the last few weeks have been precisely of the ability and the diversified internationally. And that's mostly on developed markets, probably less on emerging markets. A lot of that is, obviously, peaking of the dollar, which is something that is still very strong. And when you see periods of high levels of uncertainty and volatility, the dollar becomes sort of the safe haven.

So that's still going to become a headwind for emerging markets. I think the evolution of the pandemic, particularly when it comes down to China, this zero COVID policy is something that will continue to probably place quite a bit of a drag in their economic recovery and expansion, because it's very hard and it has economic implications. When you think about developed markets and you think about the lag that they have relative to the United States, while the US continues to be the leader economically, there is a very good opportunity for those developed markets to actually catch up and have probably more runway than what we have seen already in the US.

ALEXIS CHRISTOFOROUS: All right, Omar Aguilar at Schwab Asset Management, always good to get your insights. Thanks for being with us.

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