(Yahoo!Finance) - BMO Family Office Chief Investment Officer Carol Schleif joins Yahoo Finance Live to discuss market sentiment, Fed rate hikes, inflation, and the industrial economy.
Video Transcript
[AUDIO LOGO]
- Well, investors might be hanging on the Fed's every word for a shift back to dovishness. But our next guest says those investors might be missing the point, as the economy returns to normalized above zero rates. Here with a look at the bullish and bearish sentiment in markets is Carol Schleif chief investment officer at BMO Family Office. Good to see you, Carol So talk about what the markets are missing here. Because we got very comfortable with these historically low interest rates for a very long time that it's sort of warped what we consider a new normal.
CAROL SCHLEIF: Yeah, it definitely warped what we considered normal. Because we went a decade or more assuming that rates were gonna stay at 0 or less than 0, as many of the global rates were for a very long time. But historically, when you stretch it out and look at longer-term averages, 2% to 3% inflation in the economy tends to be pretty normal. And it also lubricates the system. It allows employees to have raises. It allows companies some pricing power. But getting back to that 2% to 3% level is obviously very jarring, especially coming off of the unusual situation we had with the pandemic and how it changed everybody's buying habits. And now we're shifting back towards some new normal, which is actually a reversion to a very old means.
- So then as we take some of this in, we're also coming at the tail end of earnings season as well here. So what are some of the three key focuses that you think bears and bulls should really hone in on this month?
CAROL SCHLEIF: I think the difficulty is we are coming to the end of earnings season. You saw nice performance in January out of the markets, much like you saw in July and October last year, when we had those early earnings report season. And it's not necessarily the earnings were overwhelmingly-- overwhelmingly bullish, if you will.
But-- so now markets are trying to figure out what to anchor to. And, as you just mentioned, they'll be spending a lot of time looking at every data point between here and when the Fed meets, trying to decide, will it be 25 basis points or will it be 50? So we'll listen to Fed commentary and all of the speakers that are out and about in the next few weeks for that. We'll look at the tail end of the retail commentary there as well.
But also looking globally at-- we've seen that China PMI has come out overnight and be stronger than people expected. You've got a lot of pent up demand there. So watching economic data will be important, but also watching what happens and listening in and going back and rereading some of those quarterly reports.
Cause there's a lot of activity going on, especially in the industrial economy here. The backlogs that are being built, the spending that's coming out are getting teed up from a lot of those-- lot of the acts that were packed, the Chips-- Chips Act, and the fiscal spending teed up for key investment in very important industries here. So you're already hearing some of that, even if you're not seeing it come through the numbers yet.
And then I think just watching how markets trade, watching those short-term interest rates is important. It's the first time in a very long time you've been actually paid to sit at the short end of the yield curve and watch how these things play themselves out. There's not a big impetus. There's not the fear that we had a couple of years ago, even, that there is no alternative. You have to participate. You have to buy every pullback.
- So then with that in mind, what are some of the questions that your clients have? And how are they putting their money to work?
CAROL SCHLEIF: I think clients are spending a lot of time looking not only at the micro issues, but at the macro issues. They're thinking a lot more, too, about geopolitical risk and about the tensions in Congress on both sides. But more macro, they're thinking about the tensions between the US and China and what's going on in the EU. They're watching globally more-- much more so even-- even than before.
But I think staying diversified is very important as well, being cautious. We do presume and our base case expectation is that we'll see more normalized returns out of both stocks and bonds this year. You had a nice January. This pullback that we've seen in here means that having diversification across a variety of asset classes, but being willing to sit on a little bit more cash sometimes. A lot of our investors are willing to sit at that short end, build out some Treasury ladders, look at some structured notes and structured assets that we can put together for them.
And so there's a lot of, just, watching, and waiting, and not getting too bold about any one potential scenario playing out one way or the other. but being able to keep options open is really important to a lot of our clients.
- And it's interesting because you mentioned some of these global issues that are clearly outside of the Fed's control. But with every data point that comes out, we do see the markets react, even as we saw mortgage demand falling to a 28-year low, as these mortgage rates climbing up with every rate hike, still have a tight labor market, still trying to-- a lot of companies trying to get a handle on the consumer as well, as they're still spending, albeit more disturbingly. What does this mean for the Fed's path forward?
CAROL SCHLEIF: I think it makes the Fed's path tricky. But also, it's important to remember-- and Chairman probably even alluded to this a couple weeks ago when he was speaking to the Washington DC Economic Club, where he talked about, it's not like we have 10 prior pandemics to look at how to model this-- this current scenario against.
So I think watching and waiting for what the Fed is going to do, it makes their job tricky. But then again, the strength in the economy and the fact that inflation is coming down-- it's not coming down as fast as everyone would like, but it is coming down to, a certain degree-- and the fact that the employment market stays so solid gives the Fed some wiggle room, if you will, to continue doing that.
And the Fed has been very clear about communicating. They intended to be higher for longer. Cause their number one goal right now of their two mandates, the number one goal is to get that price stability in the system. So they're not gonna let off on that issue, until they definitely see a string of economic numbers that show much more muted inflation.
- There's certainly a lot for the bulls and the bears to sink their teeth into. I like that picture behind you as well, signifying the bulls the bears. Carol Schleif, their chief investment officer at BMO Family Office. Thank you so much.
By Video Interview
Video Transcript
March 1, 2023
