‘We see upside risk really coming from reopening’: Strategist

U.S. Bank Wealth Management Senior Investment Strategist Rob Haworth joins Yahoo Finance Live to break down the latest market action.

Video Transcript

AKIKO FUJITA: Let's turn our attention back to the markets because new data out this morning pointing to a surge in the Producer Price Index, rising 1% in March. When you look at the annual gain, it was the largest in more than nine years. And we are seeing bond yields moving on the back of that, the 10-year T-note there yielding 1.6%. We're also seeing the 30-year yield at 2.3%.

Let's bring in Rob Haworth, the US Bank Wealth Management senior investment strategist. Rob, you know, these-- the number we got out this morning seems to suggest that those inflation fears are real. How do you break that down?

ROB HAWORTH: Yeah, we definitely believe that reflation is a part of this narrative in the first half of the year. We've had significantly higher commodity prices. And that is starting to work its way through the economy as we eventually get to reopening, which we think probably brings another surge to inflation.

And it's interesting to see this working its way through the producer side first, which seems to imply some price increases that will trickle onto the consumer side. We'll have to see if that works out for wage increases as well as we get into the year. But it leaves us very constructive as we look at this first half of the year, both for growth and inflation, which we think is a positive.

ZACK GUZMAN: All right, so Rob, it sounds like you're buying into what we're hearing from the Fed, too, that this is kind of going to be a momentary thing before it becomes a problem. There are people who are worried that it might be. When you factor in maybe some of the other spending out there, and of course, we're still kind of waiting to hear what will happen on the infrastructure front. But what does maybe the back half of the year look like, since we're now starting to hit some of what the Wall Street full year 2021 targets were? We're basically there for a lot of these targets, now just in April.

ROB HAWORTH: Yeah, no, our base case is probably that things soften as we get to the back half of the year, just because we've seen prices climb so much already. But there is some upside risk. And we see upside risk really coming from reopening. Right now, we're thinking and the data from the CDC is showing us about 70% of the population will be vaccinated by the middle of June, which we think leads to reopening the economy. That means more people employed.

We're seeing some early signs of that coming from increasing consumer confidence. And we've had a high savings rate. So there's probably some pent-up demand. That does mean price increases could continue into the back half of the year. That said, we would still view these as transitory because until or unless we see these translating into wage growth and wage growth that kind of affirms these price gains, we think there's two long-term factors that continue to kind of hold down this potential inflation.

One is demographics. We still have an aging population. And two is what's a secular growth story in the market, and that's innovation and technological improvement, which continues to hold down the potential for overall price gains over time, even though we may have some short-term increases and temporary shortages, which push prices up in the near term.

AKIKO FUJITA: So, Rob, with that said, what does that mean for your positioning in terms of your portfolio? We have had so many guests on who've talked about those inflation fears leading to that cyclical or the rotation out of growth into value. I mean, it sounds like you think, well, the inflation will tick up higher. It's going to be pretty tempered here. How are you looking at your investment portfolio right now?

ROB HAWORTH: Yeah, no, great question. We still favor growth at this time. And we're looking-- meaning equity assets for the most part. We think that the cyclical story is intact. And that should do well. But over the longer term, that secular story remains in play. And so we wouldn't shy too far away from that secular growth story, meaning technology and innovation, even though it may not be the leader, as we get through the course of this year.

The rough asset class for investors this year is just going to be bonds. As we start to incorporate these higher inflation rates, interest rates, especially long-term interest rates, are going to move higher, we think. And that just presents a tremendous headwind. So investors need to find other sources of return for this year. One would be going down in quality in the bond portfolio. And the other would be growth.

And in particular, we'd look towards the mid-cap names in the US market. That brings you more of a cyclical bias in your portfolio and has kind of slightly faster growing companies than what we typically see in the large cap end of the market.

AKIKO FUJITA: Rob Haworth, US Bank Wealth Management senior investment strategist, it's good to talk to you today. Have a good weekend.