Strategist on trade relations with Russia: ‘You can’t really put this toothpaste back in the tube’

MJP Wealth Advisors President Brian Vendig and Zach Hill, Horizon Investments Head of Portfolio Management, join Yahoo Finance Live to discuss inflation in consumer-facing commodities like crude oil, the Fed's interest rate hikes, and consumer price indexes.

Video Transcript

[BELL RINGING]

- And that's your closing bell for this Monday, March 14. And taking a look at the New York Stock Exchange, you got American Century Investments ringing the closing bell there.

We have the major averages ending the day mixed. But don't get it twisted. It was essentially a slide throughout the day. There you're taking a look at the NASDAQ composite end the day down by 2%. The S&P 500, that ends the day lower by about 7/10 of a percent.

And the Dow Jones Industrial average just barely-- I mean by the hair of its chinny chin chin-- was able to close in positive territory. Flat. Just barely to the upside. Not even a full point for DJI there. So to put some additional color around the market activity we saw play out during today's session, let's bring in Brian Vendig, who is the MJP Wealth Advisors president, and Zach Hill, Horizon Investments head of portfolio management joining us now as well as Rochelle Akufo and Dave Briggs.

And just to kick things off here, Zach, first and foremost, we have a de-escalation scenario. You've said even in a de-escalation scenario, rather, sanctions and the pullback from business in Russia are unlikely to come off anytime soon, particularly as we've been continuing to track oil prices. They fell from some of their highs. But do you expect a continued cooling amid the Russia-Ukraine war at all?

ZACH HILL: It's really hard to say because the situation is quite fluid now in that regard. But just in terms of kind of business relationships with Russia, it's just really hard for us to envision things going back to normal. You just can't really put this toothpaste back in the tube. And so we think that's important when you're thinking about the outlook for energy, the outlook for commodity prices, and just for inflation broadly. And not to get ahead of ourselves, but it certainly makes the Fed's job this week a little bit more difficult than they would like.

ROCHELLE AKUFO: And to that point, Brian, I want to bring you in here. In your notes, you said that the headline inflation data will decline as supply chain inefficiencies improve and demand for goods and services normalize in the second half of 2022. But then you also have, as we've seen now, these outbreaks in China and some of these supply chains, things involving Foxconn and Apple. With that in mind, how are you advising clients to really navigate this volatility, especially given what we might see from the Fed for the rest of the year after this initial quarter point hike?

BRIAN VENDIG: That's a great question. I think in the short term, we should expect heightened volatility, at least through the middle part of the year, especially because monetary policy decisions are going to be updates on a monthly basis really focusing on the pace of the interest rate increases and how much each time. And I think at the same point in time, with the war in Ukraine, as well as news out of China today and these headline inflation numbers, I think going back to some of the commentary is that some of these inflation concerns might be pushed out a couple of months.

We still think that by the end of the year, overall headline inflation should be lower. But as these uncertainties are playing out, it's putting pressure on inflation staying stickier and also staying elevated. And as a result with uncertainties around supply chain management, some of these inefficiencies may take a little bit longer to work out than previously expected.

DAVE BRIGGS: And Zach, staying on inflation there, how long do you expect this high inflation to stay? Will it get better before it gets worse? Can the Biden administration do anything, ultimately, to help bring it down?

ZACH HILL: That really is the important question today. And I generally agree that what's going on right now in commodities and energy prices is going to extend-- push the peak a little bit further into the future. And so when we listen to Chair Powell on Wednesday, we're interested in how he's thinking about that and how other members of the committee are expecting interest rates not necessarily for the next three to four months because that's relatively baked in, but what they're projecting in terms of throughout the end of this year, and then even probably more importantly throughout the end of next year.

The market is pricing in almost one full cut in 2024. And so that could be very incongruous with the Fed's outlook here on Wednesday. And that's something that's going to likely continue to fuel volatility in broad markets, and especially in some of the more heavily valued parts of the market, like the NASDAQ that's down over 2% today.

- Brian, in addition to what Rochelle was raising and what you had getting into a moment to go there on the number of hikes that we may hear from the Fed, long term on that front you, believe that the economy can withstand three to five increases due to the strength of the labor market, housing market, and consumer. But what would you believe the size of those increases will amount to in total?

BRIAN VENDIG: Sure. I mean, we still are looking at I think five increases 25 basis points each time because the Fed has definitely hinted that they are going to be data dependent and cautious and slow as we go. And look, I mean, you can politicize inflation or look for the causes, but I think everyone forgets about Milton Friedman and the M2 money supply, which is up 40% since COVID started. And if you just look at money flows, that's really what's driving inflation.

And the Fed definitely is going to take liquidity out of the system. But I think what investors are focusing on are the speed of the rate increases, the number of rate increases, and are we going to shrink the Fed balance sheet. And in light of the fact that we have the conflict in Eastern Europe, supply chain concerns coming out of China, I think the Fed is going to continue to go slow. And as a result, I think that's going to help to ease investors' concerns over the balance of the year.

ROCHELLE AKUFO: Now, Zach, I want to turn to you because you've said that the US consumer is a huge focus for you. How do the trends that you're seeing with consumer sentiment and spending amid inflation as well as COVID with us, obviously, how does that inform how you're positioning your portfolio?

ZACH HILL: Sure. So, yeah, I mean, the US consumer is kind of the main focus for us. The theme going into this year for us was a hand off from government spending that we saw in 2020 and 2021 to the US consumer starting to shoulder the load themselves. And so that's something that we're paying quite a bit of attention to. And I would say on that front, things are a little mixed right now. Some of the survey data is a little bit worrisome.

People are very sensitive to gas prices and food prices, which are going up quite dramatically and likely to continue to go up from here. So that's one thing that is a little troubling for us. But on the other hand, the labor market is really, really strong, and especially at lower wage levels. And so that's the kind of environment that can support spending if we do have continued price increases. And so this for us is really the key outlook. And, unfortunately, it remains to be seen how we weather these next six months and the economic volatility that we expect.

DAVE BRIGGS: And, Brian, back to your comments about the Fed. How much is Wednesday's action, let alone another hike, already baked into what we're seeing?

BRIAN VENDIG: I think Wednesday's hike of 25 basis points is definitely baked into the cake, as well as some additional hikes between now and June. I think, again, the consensus is on average about five hikes this year. That seems about right. If that headline inflation numbers surprise us and do come down slightly, considering higher energy costs and food costs, then it's possible the Fed might ease back in some of their measures. But I think five hikes is already priced into the market. One other comment I'll make, which could be a surprise regarding inflation, is keep in mind that people's income year over year is not going up at the same pace of inflation.

So we expect over the balance of the year that there will be lower demand since we are in a decelerating economy, which should also help to naturally cool inflation when considering rising costs for food and energy and impacting the consumer in the US. But I agree with other comments that balance of the year going into this inflationary cycle we're actually on stable footing, which is different than where America was back in the late '70s and early '80s.

ROCHELLE AKUFO: We do want to thank our market panelists as we leave that there. Brian Vendig there, MJP's wealth advisor president, and Zach Hill, Horizon Investments head of portfolio management. Thank you all for your time today.