‘There are so many unknowns at this juncture that we wouldn’t be surprised to see the market tread water’: strategist

Rebecca Felton, RiverFront Investment Group Sr. Market Strategist, joins Yahoo Finance’s Adam Shapiro and Seana Smith to discuss her thoughts on the current state of the economy, and the impact of the Biden administration’s tax policy changes and infrastructure plan on the markets.

Video Transcript

SEANA SMITH: We want to start the conversation today with Rebecca Felton. She's RiverFront Investment Group's senior market strategist. And Rebecca, looking at the action today, the S&P off just around a tenth of a percent, but still not that far from the record high. What's going to be the catalyst or what's needed to get us back to those all-time highs?

REBECCA FELTON: Well, thank you so much for having me. It's a great question. But right now, it's probably going to be some wait and see in terms of all of the unknowns still looming. Of course, the tax policy changes are one of the big question marks when and how the Fed will change policy. There are so many unknowns at this juncture. We wouldn't be surprised to see the market tread water here.

ADAM SHAPIRO: OK, so if we tread water, though, shouldn't we expect, I mean, a minimum-- I'm going to talk about that minimum global tax. We're going to be hitting that throughout the show today. But does that really throw a wrench into future earnings going forward for some of these major global companies?

REBECCA FELTON: Well, it could, Adam. I mean, when you think about the fact that we already have the GILTI tax, if you will, and other countries don't impose that, so we are already somewhat disadvantaged in that regard. But if we even get the statutory rate raised from the current level, it could be a couple of percentage points off of earnings.

But it's not so much the number as it is just that change and the rate of the change and particularly against the backdrop of the type of growth that we've seen in 2021. So it could just come under the headline of uncertainties and question marks in terms of how you value the S&P going forward, given that we're at 21 times forward earnings right now.

SEANA SMITH: Rebecca, another big headline that we got out over the weekend was from Treasury Secretary Janet Yellen. She was talking about Biden's $4 trillion in spending, his plans that he's put forward. And she said that it's still going to be good for the economy, even if it results in higher interest rates, a higher interest rate environment. I'm curious just to get your perspective on that from the markets. I mean, how big of a potential risk could higher rates be?

REBECCA FELTON: Well, we don't believe the Fed is [INAUDIBLE] the next meeting, except perhaps start talking about when they're going to change policy. We know that they have been very firm in signaling that they're unlikely to be proactive. Rather, they are probably going to be waiting on data, just like the rest of us, you know, from month to month. And we know that that employment number, while trending in the right direction, is still far above where they would like for it to be. So we would expect any changes in policy that they make going forward will be done in an orderly gradual fashion.

ADAM SHAPIRO: And when we talk about, by the way, treading water, that seems to be the same thing with the 10-year yield on the Treasury. Because it has yet to break out of the range of roughly 1.5 to 1.7. Are you anticipating that happening any time before Labor Day?

REBECCA FELTON: Probably not. I think it goes back to that original question of, what is your catalyst? And right now, there really don't seem to be a lot of anxious investors on either side of the inflation scare, while certainly still, and the headlines seem to have passed the bond market by, at least at this juncture. So absent a catalyst, we wouldn't expect any significant moves here.

SEANA SMITH: So Rebecca, how are you advising your investors right now, your clients? What are you telling them to do with their money?

REBECCA FELTON: Well, we are still risk-on. So we are overweight equities. We still prefer the US, although Europe is starting to look attractive to us in terms of just momentum and valuation. Within the US, we still are sort of divided between growth and value. Because we are looking at infrastructure, so we are overweight there. But we are also overweight technology and our longer horizon portfolios and neutral in our shorter horizon portfolios. So we believe that there is value in diversification across both those sort of value growth types of themes. And of course, if you look at how the sectors are responding today, you know, we've been seeing this type of action for the last several weeks in terms of that back and forth.

ADAM SHAPIRO: All right, thank you for being here, Rebecca Felton, RiverFront Investment Group senior market strategist. Good to see you again.