Inflation: Tech companies may be ‘best able to withstand rising input costs,’ strategist says

Los Angeles Capital Chief Investment Officer Hal Reynolds and 1879 Advisors Vice Chairman James Bruderman joins Yahoo Finance Live to discuss how the market will react to inflation and supply challenges facing tech companies.

Video Transcript


BRAD SMITH: Welcome back to Yahoo Finance Live, everyone. Just seconds remaining in today's trading session. Brad Smith here with Emily McCormick and Rachelle Akuffo. And also joining us for the market close, we've got Hal Reynolds, Los Angeles Capital chief investment officer, and James Bruderman, who is the 1879 Advisors vice chairman.

Hal and James, we're going to kick off our discussion in a moment. But first, we've got to check in on the major averages to see where we are trending. Now moving closer to the closing bell, just seconds out, the DOW holding onto gains of about 1.2%, 400 points higher on the day. S&P 500, you're seeing that hold onto gains of about 1.5% right now, 68 points higher. And the NASDAQ composite, tech-heavy average there, that's up by about 344 points.

On the sector front, we're being led, it seems right now, by consumer discretionary going into the close. You've got about 9 out of 11 sectors in positive territory right now. We'll continue to watch that, plus some earnings on the other side of the closing bell. Let's watch as the bell rings.



EMILY MCCORMICK: And that is a closing bell this Tuesday, February 15. A lot of green across the screen as we take a look at the three major stock indexes. The DOW Jones Industrial average up more than 420 points, or about 1.2%. The S&P 500 up about 1.6% led by the information technology, consumer discretionary, and material sectors, all outperforming in that index. And the NASDAQ composite, the outperformer on the day, up about 2.5%.

Now turning back here to our panel, Hal, I'll turn this first question over to you. Is this increase that we're seeing across stocks something that can be sustained, or is this just a momentary relief rally on the more positive news that we've been getting today out on the Russia-Ukraine front?

HAL REYNOLDS: Well, we'll certainly take the good news that we received today. Hopefully, it'll last. None of us know. But I would say, no. I would say, you know, the underlying fundamentals that we're facing here in terms of rising rates and decelerating earnings, that's going to present a challenge for stocks in the coming year.

EMILY MCCORMICK: And James, if we take a look under the hood here at the sector performance, energy was one of the-- actually, the biggest laggard in the S&P 500 today. We saw oil prices moving lower. Do you think this is a sign that this out-performance that we've seen in the commodity space, and in the energy sector specifically, was perhaps a little bit overdone? Or, do you think this is potentially something that we could see rebound?

JAMES BRUDERMAN: I think that the threats we've seen on the geopolitical front, and the thought of higher energy prices, especially given the constraints of supply I think across the universe, bode well for energy companies in a rising energy rate environment. But whether or not these rising prices are sustainable, depends as much on the geopolitical environment as it does on the economy.

RACHELLE AKUFFO: And Hal, I want to bring you in here. As a more hawkish Fed prepares us to raise interest rates multiple times, most likely aggressively, we're seeing investors obviously pouring now more into treasuries, some of these safe havens. How else should investors be preparing as the credit market tightens, and the Fed pulls back its policy stimulus?

HAL REYNOLDS: Well, you know, it's an interesting question, because there are really two questions. What is the impact of rising rates on valuations. We know quite clearly that's been a real problem, even for the highest quality growth stocks. It's their valuations that have come down because of rising rates. But I think you really, maybe, need to look past the next six months, and ask yourself, where can you find protection should inflation persist longer than many believe?

Many of us think that the unwinding of the supply constraints will happen in the second half of the year. And that the central banks, maybe in another year or so, will be back to fighting the old war of disinflation, and possibly even deflation. And so, anyway, I think you can't ignore the fact that inflation can be sticky, wage inflation particularly, and so one needs to look at companies that have pricing power, that have better profit margins, and who withstand-- you know, have the ability to pass those higher input costs through to their customers.

And so while technology has certainly been beaten up here in the last couple of months, I think some of those firms may be the ones that are best able to withstand price, you know, rising input costs, and be able to pass those costs on to their customers.

RACHELLE AKUFFO: And speaking of passing on costs to customers, James, I want to bring you in here. How concerned should investors be about US wholesale prices jumping 1% in January, blowing past those 0.5% expectations? As these costs do get passed on to consumers, which just adds to some of this inflationary pressure.

JAMES BRUDERMAN: Yeah, and they certainly have jumped. But in terms of their overall growth-- and they haven't softened either, but they haven't jumped as much as they could have. And I do think that, you know, we're seeing something of a topping out on the year over year comparisons. In fact, we think that as we go forward, we'll see some of that supply chain easement, and some of that base level effects as a positive earnings-- I mean, as a positive backdrop to the otherwise seemingly hot inflation environment.

Simply put, we're not as concerned about rampant inflation as-- you know, as a lot of the pundits on the street currently are.

BRAD SMITH: And James, sticking with you, you believe that GDP could revert to a more sustainable trend of around 3% by Q4 of 2022. What would that be on the back of, or what would be the catalyst for that target?

JAMES BRUDERMAN: Well, we think there's a lot of-- we think there's a lot of natural demand. We think the economy certainly has it's-- you know, certainly has the wind at its back. We had a very-- we had a very strong Q4, maybe a little bit over strong, as companies were replenishing inventories.

We're off to a weak start in Q1. I base a lot of that on maybe some of the hiccups we saw with Omicron coming in late in the quarter. And certainly, you know, having a significant portion of the workforce home in January. So we think that we're going to see a continued pop. We think on the one hand, on the good side, things from a supply chain standpoint ease themselves-- maybe not so quickly with automobiles.

But for goods in general, we see inflation becoming less of a big thing. We do think that hospitality and entertainment, and a lot of the service economy, is certainly going to have their day. And that could lead to things heating up later this quarter, and certainly, into the summer. And then, you know, as we progress further into the year, we do think that there's enough economic strength, and there's enough buying power in the economy. Certainly, there's strong wages. Productivity is on an upswing.

So we think, inherently, underpinning the entire-- underpinning the market is a sense of growth that we think stabilizes somewhere in the 3% range as we get closer to Q4.

BRAD SMITH: All right. Hal and James, we got to leave things there on the day. We've got some earnings coming out. Hal Reynolds, Los Angeles Capital chief investment officer joining us, as well as James Bruderman, 1879 Advisors vice chairman. We appreciate the time here today.