Kristina Hooper from Invesco: Bold Predictions on CPI, Earnings, and the Fed - Buy Hold Sell Special

[00:00:05] The day started out with a key inflation report, which came in slightly hotter than anticipated. We saw the year-over-year rate at 3.7%, which seems like miles away of what the Federal Reserve's target of 2% is. But yet our guest today actually says, look, things are actually looking up, we're going

[00:00:23] to be fairly optimistic for the fourth quarter despite the higher inflation rate and the risk of what the Fed may bring next month. Welcome everyone to Buy Hold Sell! I am your trader, Todd Schoenberger and I am joined by my friend and co-host Tobin Smith

[00:00:36] out in sunny and hot Scottsdale, Arizona. It's warm! It's warm, it's not hot, okay? Sunny and warm, sunny, it's hotter than not, probably New York though. But we've been very successful guests. It's a driving, thank you Katie.

[00:00:49] Kristina, we have a very special guest with us on Buy Hold Sell, Kristina Hooper. She is the Chief Global Market Strategist at Invesco, which currently manages well over one and a half trillion dollars for its clients. Kristina, welcome to the program. Thanks so much for having me. Absolutely.

[00:01:09] Well, we're going to start with you because we had that key inflation report that came out today and really the anticipation was 3.10 of 1% where we'd have a year-over-year increase of 3.6%, just a little bit hotter than normal but still raised the alarm for Wall Street.

[00:01:26] Traders actually started selling off throughout the day. We saw the 10-year Treasury yield go up, actually hit 4.7% intraday trading. Where are you on this? Do you think that the Fed is going to tighten them one more time?

[00:01:39] They're going to hike one more time in November or do you think this is just a pause for the time being? I don't think the Fed is going to hike again, although it's not going to tell us that.

[00:01:48] It's probably going to continue to employ hawkish rhetoric but what we've heard thus far is that the Fed is very much data dependent. And if it is data dependent, what we are seeing when we put together the mosaic of data is a very strong disinflationary narrative.

[00:02:07] Now not every data point is going to be perfect. It is not going to sink 100% with our story but what we saw today was fairly good. It was slightly off but we're still part of very much a disinflationary period and it should be because of the Fed.

[00:02:28] Now I think the reason markets have reacted the way they have is because they've been walking on eggshells since the release of the most recent dot plot back in September. And there was one particular thing in that dot plot that concerned them and it was the

[00:02:43] Fed's change for next year from what was implied to be four rate cuts to just two rate cuts between the June and the September dot plots. And that really set markets off and got them very, very concerned.

[00:02:59] But I will just remind that the Fed's dot plots aren't always incredibly accurate. In fact we're going to go back to December of 21 and we look at their expectations for the Fed funds rate at the end of 22.

[00:03:14] It was a median Fed funds rate of 90 basis points and of course we know how that turned out. Hey Christina, I am always want to find out from something like you who has such a stature out there.

[00:03:28] I don't get the fact that you know in like a finance 101 there were leading indicators and there was trailing indicators and why is it that the Fed completely disregards the actual leading indicators because if you took the leading indicators today we

[00:03:43] would be at 2.8 percent inflation rate based on leading and throw out the real estate stuff because you know if you look at some of the indexes that aren't from the Fed side but Zillow index I can tell you I have a lot of friends who are big apartment

[00:03:58] owners and their rents are going down in all the major cities. So leading or lagging what do you follow? Well I try to follow all of them but with a recognition of what is leading and what isn't. And I think the Fed tries its best.

[00:04:11] In fact when Janet Yellen was chair of the Fed she had created for really her purposes a 17 point labor market conditions index. The Fed is always trying to look at data and it even looks at qualitative data I can call

[00:04:28] it that in terms of the Federal Reserve Beige book and the kind of anecdotal information that's provided in there. They really are trying to look at the big picture unfortunately I think there is too much emphasis on that which is lagging like employment.

[00:04:43] But even if we look at employment that picture is looking good. It's not about non-farm payrolls and job creation it's about average hourly earnings and that is syncing very much with the disinflation narrative. Yeah you're still writing that tie.

[00:04:58] The other point I wanted to ask was not only do some of the leading indicators but I love you use the term narrative because that's what I learned at Payne-Weaver back in the day which was that you could be a man all you want to do it.

[00:05:12] When a narrative takes hold it's very hard to change it and right now you know I think we are we have 50% of the people on the narrative of oh yes there's going to be a recession

[00:05:22] let me show you all these data points that say why the recession is a certain deal. And there's other people like me who says well I actually do math and if you actually add up the math for a variety of reasons it's almost impossible it's like we have

[00:05:37] this gravitational pull that as soon as we get down to a certain point the after burners kick in because of the structure of the United States and it drives me nuts. That something just say well here's 50 data points in a recession what's your case against a real recession.

[00:05:56] Well it's largely focused on how tight the labor market is and how solid the consumer is. Let me first point to the labor market we have unemployment that's well below 4% it is very very hard to see a recession. In a consumer driven.

[00:06:15] As in never but you know yes. I never say never but in a consumer driven economy like the US where the consumer is is two thirds of the economy to see unemployment at 3.7% it is very very hard to envision a recession.

[00:06:33] Even if unemployment were to go up to 4.7% I think it would be hard to see any kind of very significant broad based recession. Number two is the health of households not only do some still have some level of excess

[00:06:52] savings and there's a big debate on how we calculate excess savings but some still have some their balance sheets are in order and I think that the key thing I would point to is the fact that unlike the global financial crisis when we look at homes with mortgages

[00:07:08] what we see is that about 92% of them have long term fixed rate mortgages and the average mortgage rate is well below 4%. And that places the US consumer in a very different position than consumers and other

[00:07:26] Western developed economies that do not have the privilege and luxury of having a 30 year fixed rate mortgage. Yeah I look at Canada you know they've never had long term mortgages. You go to Vancouver today I was up in Quebec a little while ago you know there's a world

[00:07:43] of hurt there. Americans don't understand that most countries you have a variable interest rate and they reset every year and they had just reset on October 1st in Quebec and our hosts were paying 11.5% on a mortgage rate which reminded me of going back to like the first

[00:08:02] house I bought during the great you know 16% inflation rates in 82 where I was paying 15%. When you tell somebody today that I was paying 15% mortgage they will say to me you're on some drug but go to Quebec go to Berlin go to you know most every part of the

[00:08:20] world except for the 30 year you know world that we live in so I you're dead on. Todd let's have her on again okay she's up there right. That definitely well Christina do you think the Fed reaches this 2% target for inflation?

[00:08:33] I think it takes time to get there but I think it does. There are going to be parts of the inflation picture that don't cooperate as much as other parts and they're going to be components that are a bit stickier but I think the

[00:08:46] Fed does get to around 2% maybe 2.3% within the next 18 months. Here's the argument Todd quickly. The world is different we're de-globalizing all the disinflation that we had for you know 18, 20 years was basically offshoring lower cost for all goods and then services blah blah blah.

[00:09:09] Why shouldn't we in a completely different world with the 115 economists they have down there at the Fed building why wouldn't we expect a higher inflation rate given the de-globalization of the world economy? Well it's all about whether or not we have a countervailing force so certainly we would

[00:09:28] have elevated inflation in a more de-globalized world although I would argue I don't think it's going to be fully de-globalized but what's really key to look at is that countervailing force which in my opinion is technological innovation.

[00:09:44] Just think about artificial intelligence and what we've seen thus far in studies in terms of anticipating the level of efficiency that it can create for call centers. Imagine a world in which you're actually on shoring jobs and making productivity

[00:10:03] so much higher that you can live without the level of globalization you had in advance of 2019. And clearly the productivity rate was much lower in the same time we're talking about over you know in the lab from 2005 let's say.

[00:10:23] So yeah it is an excellent point countervailing is the word I'll tell you I wrote a research report today for a client of mine and I was thinking about my old research assistant who

[00:10:33] I would have said hey Sandy get in here you gotta do this, this, this and this and you know get back to me in two weeks and on bin.com and then on you know their other ones the other one they're doing the co-pilot.

[00:10:46] I finished it in 90 minutes and it was at every detail point every you know link to the source I'm with you, I'm with you for at least for white collar jobs and for call

[00:11:00] center jobs and for you know rally we have a client who has a software development that lowered logistic cost labor cost which is their primary cost 30% by you know following your iPhone around and having it know where everything was and CBS just you know put it

[00:11:21] into 55 different distribution centers because they can't afford to have a higher 30% higher labor cost than their competitors right so I'm with you. Okay Christina before we go to the break I want to go back to the the Fed and the 2-2.3%

[00:11:36] target you had mentioned the if that is the case then we should expect the Fed to continue to hike rates into 2024 is that your belief? It isn't because the Fed does know and recognizes that there are lagged effects for monetary policy

[00:11:52] both in terms of the impact on growth and the impact on inflation so if it's moving in the right direction and they're comfortable with that which I believe most are and in

[00:12:02] fact what we heard from Mary Daly last week is that hey the 10-year yield is doing a lot of the work for us so in that environment the Fed does not have to hike anymore and

[00:12:13] I suspect it will start cutting sooner than we thought and sooner than they predicted in their most recent dot plot. Yeah let's not forget we have a presidential election cycle and I lived in DC for 25 years

[00:12:23] and rule number one around that little big building down there was you don't hike rates going into a presidential matter of fact you cut them otherwise you know there's some other Harvard or you know Princeton place for you to go work but you're not

[00:12:37] going to be working here. Well then with that logic then Christina then you're not anticipating cuts next year though are you? So the Fed funds rate yes. Oh okay interesting alright well I like that. We're here for how much, how much come on don't hold out.

[00:12:53] Well it really will depend upon the data but I suspect that you know the Fed has implied 50 basis points and rate cuts next year I suspect it will be more than that. Then we have a hell of a stock market next year don't we? We could very well.

[00:13:07] Not like that. I like that a lot. Well that's a great way to close out this flock that's for sure. I love the optimistic tone. So with us today we have Christina Hooper she is the chief global market strategist at

[00:13:19] Invesco and when we come back after the break we're going to ask Christina about the upcoming earnings season maybe some sectors to focus on maybe others to stay away. We also want to ask what she's telling Invesco clients so keep it right here

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[00:15:42] You've got to listen to Todd and Toby on Buy Hold Sell. Welcome back to Buy Hold Sell. We saw the stock market sell off today right after we saw the inflation report which actually gave us a year over year reading of 3.7 percent just slightly higher than what

[00:16:04] Wall Street was anticipating but probably nothing that's going to be earth-shattering at least for the for the foreseeable future. But with us today we have Christina Cooper she's the chief and chief global market strategist for Invesco and Christina we had lived this whole thing so but Christina when

[00:16:24] we left it at the last break we were we were talking about really the potential of um whether we're going to see rate cuts which I was surprised to hear your reaction to that and you are fairly optimistic going forward with the earnings season kicking off tomorrow

[00:16:39] morning. We have we have the three big financial companies coming out and I know you're with Invesco where we've had a lot of strategists on Buy Hold Sell recently who are not very optimistic about the financials but what's your take? Do you

[00:16:53] think it's going to be a great earnings season? Are you seeing this 10 percent earnings growth rate that some people are talking about or do you think we might be a little bit too optimistic on that side? Here you go Todd. Well I'm a little cautious on earning season

[00:17:07] and I think that's a good way to be right? I'd rather hope for the best and plan for the worst. What has been surprising is that earnings momentum has improved and you know the revisions have really been centered in a few sectors like energy but also tech and

[00:17:25] communication services for different reasons energy it's been all about the increase in crude oil prices and for tech and communication service it's been about the the cuts that they've made that have improved profit margins and other sectors not looking as good.

[00:17:42] So I think this is very much going to be a mixed bag this earning season. I think we'll be pleasantly surprised with many of the companies in some sectors but not all and there will be some disappointment

[00:17:55] marginally perhaps better than expected when we look at the big picture. Well I would Todd you know I'm now using just metaphors I don't speak actually in sentences anymore and big tech has been a life raft.

[00:18:08] It's been a life wrapped in as an old money manager the last thing you want to do is jump off your life mask. You're rascals. Shoot me saying again life raft I got there's one constant. Yeah I got a tongue on it. I get

[00:18:19] excited when I think about the life raft and so therefore when we go into the end of October where a lot of mutual funds that's the year end and you made profits and all this stuff you're going to sell

[00:18:31] your crappy stuff that's a technical term Christina and then you're going to take some a little bit of profits on your stuff that's one so you even out your book right now you get into November 1st,

[00:18:42] November 2nd whatever the first Monday is and you buy up the hell back because you don't get rid of your life raft and there's very good reasons why mega tech magnificent 7 8 12 15 whatever you want to talk about is the life raft. So I don't see

[00:18:59] you would be in a bite you know despite your face to take whatever year you've had and then throw it away because you know it's overvalued really you got two months you want to make money or

[00:19:10] you want to lose your job right that's what they used to tell me right well with that Christina the first half of the year we really saw a considerable amount of growth in the markets and Toby's right I mean it

[00:19:21] was really the handful the the magnificent 7 or whatever you want to call it on the tech side but it was really just two letters AI that really was the octane for for that bull market but now August and September seemed to really slow down it really was helping

[00:19:36] to fed with their argument because we're lowering the wealth effect but don't worry I mean is AI going to start coming back into this me because everybody's looking at these tech earnings thinking that's going to save the day as it has all year

[00:19:48] I mean what you're feeling on tech I mean do you think that's a sector that are you telling your investor clients yeah okay this should be the area that you should really be concentrating on well we really preach

[00:20:00] the the portfolio of diversification right but but to specifically answer your question on technology I mean there have been different headwinds and tailwinds this year AI was very much a psychological phenomenon an excitement about the possibilities as opposed to anything that really

[00:20:18] showed up in earnings right but it was a powerful tailwind and in fact it helped overcome some of the headwinds created by rising yields now we're moving into what I think is more tangible and that's actual improvement in earnings because there have been significant cuts made

[00:20:40] by technology companies and communication services companies some of which used to be in the tech sector and just got relabeled right and and to me that's that's perhaps a more real driver although the drivers do the

[00:20:57] same thing they they can drive up stock prices and so I think that that's what we're likely to see as we head into the end of this year is that earnings improvement drives excitement around technology and helps compensate for headwinds created by higher yields

[00:21:15] yeah and Todd I would I would add that to support her point because she's now my favorite guest ever that if you take the average what people in America do not understand is in the greater Silicon Valley whether that's Austin or Seattle or the Silicon Valley

[00:21:28] those 385,000 jobs that they cut the average the average salary benefit all in was $285,000 a year now the average salary for any white color work in the United States is significantly less than that okay so they have a five or six time multiplier effect

[00:21:47] on their earnings and on overall earnings and yet they only cut 350,000 jobs so that's that's the math that just uh is you can't refute it's just that nobody really understands unless your kid works for

[00:22:01] Facebook and comes home and says hey uh tell listen I uh do you want to borrow some money because I just got another 300,000 dollar raise and I got a bonus and I sold my Facebook shares

[00:22:12] and I've got like five and a half million bucks in my account and I'm 29 years old well yes and I can help I can help you you know so the dichotomy is not appreciated in my opinion and those jobs that we lost on a

[00:22:27] relative basis should have been lost you know because you know you want to I mean when you hired 500,000 people at 250 grand a year well they could do it but then one day you know Zuckerberg woke up and said hmm I think we need the age of austerity

[00:22:41] this year which was a nice way of saying OMG are we overstaffed and oh you know and we could we they raised our their problem margin 1,100 basis points yeah and let's be realistic a lot of these companies were hoarding employees that really weren't providing

[00:22:59] any level of real productive functioning for for the company so so the the risk reward on this is pretty pretty compelling yeah and I don't think this story has been told well enough Todd I really don't yeah because it's just when you look at the APS

[00:23:17] their revenue top line only went up two and a half percent their bottom lines are going up 13th that's called leverage earnings leverage power EPS power and and since they represent what's the number now 48% of the entire value of the S&P

[00:23:32] they're going to have an outsized you know value versus you know the GLP one people who are getting crashed I couldn't believe the hospitals got hit yesterday the kidney friends the guys got hit yesterday because they came out report out that

[00:23:46] that the GLP one you know weight loss drugs are helping kidneys we have an index now of GLP one victims it's now 125 stocks Christina that are directly being affected by the new narrative which is another money management thing I

[00:24:04] learned a long time ago when that narrative starts that you're going to be hurt whether it's right or not I shoot first we'll figure it out later Christina has in Vesco with their managed money accounts have they changed their their portfolio

[00:24:17] allocation at all this year maybe going more into a heavy or overweight into bonds well we actually have very very short term tactical asset allocation portfolios so you'll you could see shifts on a monthly basis in portfolios like that

[00:24:35] in general though a lot of it has to do with macro drivers and so you could toggle back and forth between overweights and underweights what I would say though is that in general what we're seeing and it's it's really a you know it's

[00:24:49] it's a good thing to see for someone my age who has lived through years of many years of very scarce yields is that we're seeing an abundance of yields in so many different sub asset classes within the fixed income space it's really exciting

[00:25:04] have you ever remember utilities getting just bonkers as they are right now I remember the widows and orphans back in the 80s you know we put them in waste management then we put them in utility conhead and for the power fpl which is now next era energy down

[00:25:21] 64 percent in the last nine months I mean are there sectors that you are guys are you know totally avoiding well no we haven't talked about specifically totally avoiding anything and again what we believe in is diversification and also for for most portfolios

[00:25:40] having a long-term orientation you know certainly there can be components of a portfolio that are very tactically asset allocated if one does that professionally right but but um for for most of the portfolio it makes sense to have a long-term allocation and to be well diversified both across

[00:25:59] and within the three major asset classes because it's not just about stocks and bonds it's also about alternatives when they tend your treasury what are you in your team seeing the yield topping off that so our expectation is that we think that it doesn't have much more room

[00:26:17] to run and that uh we would anticipate that as soon as we see clarity on the end of the rate hike cycle and that could take a little time because the Fed really is um I think uh speaking out of

[00:26:34] both sides of its mouth and really trying to remain um hawkish in a lot of its rhetoric but once we have clarity that the rate hike cycle is over I suspect that will be the end of um

[00:26:47] or that will be the peak of the 10-year yield and that will start to come back how will we know we have clarity when they're one side is job boning the other ones you know I've never seen the Fed more

[00:26:59] uh split between the when you see chair now walking into a room in a meeting with a briefcase that's the signal he's going to get back to the free expand days thank you for that professional opinion Todd let's actually get a professional opinion

[00:27:15] my ratings are so high exactly well as soon as we see it could very well be something as simple as uh reading the fomc minutes and seeing them talk about when they're going to start cutting rates that's probably going to be a very

[00:27:29] clear sign that rate hikes are over will you will you text me before you know that for a fact because when the market's up a thousand points that day I want to thank you uh Christina I want to give you serious props send her some flowers

[00:27:44] we'll see I mean it could be in his announcement right that we're looking ahead to rate cut I mean who knows how it's going to play out I just think it's going to be pretty soon okay one final question for you

[00:27:55] I the the war in Israel uh clearly unrest uh we have no idea where this is going to how it's going to end and when um are you is InvestCo just fielding calls non-stop from clients that are worried

[00:28:10] wondering what should I do should I just go completely into treasuries or are you advising everyone so you know I hate to sound like a broken record but it's all about maintaining that long-term perspective we're going to have lots of

[00:28:25] different geopolitical risk events think about the Russia Ukraine war for example and certainly investors even get jitters about elections but the reality is that typically these kinds of geopolitical events don't have any kind of significant long-term impact on portfolios in fact I would argue that sometimes the biggest

[00:28:50] mistakes investors make is to get scared because of something um we saw many get scared for example during the GFC um with good reason but getting out getting out of um the market and then missing out on a recovery and not knowing when to get back in

[00:29:09] sometimes that can be the biggest mistake that's made and and so so again it's it's trying to inform looking at history and looking at what past geopolitical events have done um in the grand scheme of things um

[00:29:24] and uh and encouraging a long-term orientation but I will tell you this time we picked up a bunch of 10-year bonds sort of pretty dug on near 5% and back in the old days when I was selling bonds

[00:29:36] that were 16% I told people that do you understand that when they start cutting rates your bonds are going to go up more than stocks and they said ah that'll never happen and sure as heck those 10-year bonds I remember selling a Louisiana pension plan

[00:29:50] and they generated a 30% IRR for 21 years holding those bonds it beat their stock people you know senseless um and uh you know no one even the last 12 years has ever wanted to buy a bond because

[00:30:06] I mean because they were in a bull market for a little for 20 years right but there is an opportunity Todd to just lock in and sleep well at night with a five you know a 10-year bond knowing that you're going to earn

[00:30:17] more than stocks probably in this new little paradigm that we're in but people never think of it so I appreciate your point here absolutely Toby I I think back to being in business school in the late 1990s and one of my

[00:30:32] professors bragging about all the bonds he picked up in the early 1980s when we were in middle school and couldn't pick up any bonds and uh and I think about him a lot I'm flipping bonds at 10 times it's this is a you know relatively speaking

[00:30:50] this is a very attractive time for fixed income okay just people I'm just I don't know if Todd I mentioned that people for the last 20 years I never thought about bonds ever it was you know because they kept going up in value pension people

[00:31:04] kept going up in value I'm the smartest person on the world then they crash and the average pension plan you know bond portfolios down 48 percent which is worse than the stocks by the way yeah and so

[00:31:15] well history repeats itself maybe maybe it rhymes but right now it's going to repeat itself on my mind there you go well I like it I love that that tone as well Christina just take the long view

[00:31:27] and um and you'll be uh you know looks like things will be okay at least that's what history has told us before so that's wonderful well listen we're gonna leave it there uh Christina Hooper thank you so much she is the chief global

[00:31:38] market strategist at Invesco and we can't thank you enough for joining us today and we hope to have you back very soon God she gets the BGE award best guess ever I'm telling you right now

[00:31:49] best guess ever yes thank you tell me where to send the bribe check that's right it's VIP so listen I'm not a senator from New Jersey okay I can't be one all right well thanks thank you again so what do we have up to Christina Hooper

[00:32:07] and to open Smith I am Todd Schoenberger thank you once again to everyone for joining us on Buy Hold Sell we'll catch you next time take care Buy Hold Sell brought to you by Crosscheck Management how much do you understand the future of finance

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