‘The market thinks inflation will be coming down to 2.5%’: Angeles Wealth Management CIO

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Michael Rosen, Angeles Wealth Management CIO & Co-Founder, joins Yahoo Finance to discuss the latest market moves, outlook on inflation, and catalysts for the market.

Video Transcript

Now, I want to continue with the markets now and bring in Michael Rosen, CIO and co-founder of Angeles Wealth Management. Michael, it’s good to have you on the show again. Just your take, your overall view of the market action and how we’re starting the week here, with some weakness in tech, yet those Dow industrials holding up quite nicely.

MICHAEL ROSEN: Right, Alexis. Good to be with you. Look, this is just a function of the market rotating around concerns about inflation and Fed tapering, higher interest rates, slower economic growth, all of this favoring the value sector, small cap in particular, and really hurting the tech sector. Technology stocks are long-duration assets, typically. Their cash flows are in the more distant future.

And so when we discount back present values, we’re very sensitive to interest rates. And small changes in interest rates have a big impact on valuations in technology. You also have very, very high valuations in technology. And so really, anything that could be of a concern is going to have an oversized impact in the stock prices here. So again, I think this is really just a rotation around concerns of rising inflation, slowing economy, and concerns about valuations, as well.

You touched on interest rates. We showed what was happening in the bond market. We now have that benchmark yield on the 10-year closing in on 1.5%. Some market strategists we’ve talked to are still predicting 2% by the end of this year. What are your predictions, and what does it all mean for investors who, as we know, are always chasing yield?

MICHAEL ROSEN: Yeah, really the key will be the inflation outlook. Inflation over the last 12 months has been more than 5%, as we all know. The market doesn’t seem particularly concerned. The market thinks inflation will be coming down to 2.5%. And so that means perhaps slightly higher interest rates that we may see over the coming months or so. But really, I think the key to bond returns, and really to the stock market, then, is going to be what happens with inflation. And it does seem to me that there are risks to the upside, that inflation might come down off of its 5% peak, but will remain elevated.

And that will hurt all financial assets, including bonds. So I think you could see bond yields move a bit higher if inflation doesn’t come down in the fairly near term. And I think it’s likely to remain elevated for a couple of reasons, primarily these issues of supply constraints that we’re seeing, the problems of getting semiconductor chips, as well as just electrical components and appliances and furniture and all the various inputs that we have in our supply chain is putting pressures on inflation, and putting pressures also on slowing economic growth. So that combination, slow growth and rising inflation, just generally bad for financial assets.

Well, you know, we’ve also got a couple of other catalysts for this market. That is, earnings season going to be ramping up in a few weeks. We’re going to get another monthly jobs report. How can investors start to strategically look at their portfolio if, as you say, inflation is going to remain elevated for the time being?

MICHAEL ROSEN: So this stock market has been driven by earnings. This has been the best earnings season we’ve seen in decades. It’s been nothing really short of remarkable. But that’s in the rearview mirror. The question is, where are we going forward? Expectations are still very high, and valuations are also very, very high. So even if earnings come in good, if they fall somewhat short of expectations, we could see a reaction in the markets.

I think the concern around jobs, as well, sort of somewhat related here, could put significant pressure on the Fed and its policy response here. Job growth has been strong. We’ve added 17 million jobs since the bottom in last year. But we’re still 5 and 1/2 million jobs short of where we were pre-pandemic, so we have a ways to go in bringing more people into the workforce. Any signs of slowing of economic growth, particularly in the labor market, will, again, help to put pressure on the overall economy. It will help to also increase pressures on inflation. And this makes the Fed’s job a lot more difficult. If inflation is rising and the economy is slowing, the Fed will be in a very difficult position of what to do with monetary policy.

All right, well, we’re going to have to leave that for our next conversation. Michael Rosen, CIO and co-founder of Angeles Wealth Management, thanks so much for being with us.

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