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JACK: THE FEDERAL RESERVE IS
EXPECTED TO MAKE SEVERAL
INTEREST RATE HIKES THIS YEAR TO
BRING INFLATION UNDER CONTROL,
BUT HOW AGGRESSIVE WILL THEY
GET, AND HOW WILL HIGHER RATES
AFFECT THE MARKET AND YOUR
MONEY?
JOINING ME NOW, CHARLES SCHWAB’S
CHIEF INVESTMENT STRATEGIST, LIZ
ANN SAUNDERS.
THANKS FOR JOINING US ON THE
SHOW.
>> MY PLEASURE.
JACK: ONE OF THE REALLY COOL
THINGS ABOUT YOUR RESEARCH IS
YOU FOCUS ON THE FORWARD-LOOKING
INDICATORS.
WHAT ARE THE DATA TELLING YOU
ABOUT INFLATION RIGHT NOW?
>> THERE IS SOME HOPE.
FIRST OF ALL, WE HAVE WHAT I
WOULD CONSIDER THE REVERSE SPACE
EFFECTS THAT WILL START TO KICK
IN AT SOME POINT.
WE HAVE TO REMEMBER WHAT CAUSED
THE INITIAL EYE-POPPING NUMBERS
IN INFLATION IN THE MIDDLE PART
OF 2021 WAS THE COMPARISON TO
THE YEAR PRIOR WHEN WE WERE IN
LOCKDOWN MODE AND WE WENT INTO
THAT PANDEMIC-FUELED DEFLATION
ERA.
AND NOW, OF COURSE, AS WE GET
FURTHER INTO 2022, THOSE COSTS
GO -- COMPS GO UP AGAINST MUCH
HOTTER NUMBERS.
IF YOU LOOK AT RATIOS LIKE ISM,
NEW ORDERS RELATIVE TO
PRODUCTION OR INVENTORIES, THOSE
TEND TO BE LEADING INDICATORS.
THOSE ARE STARTED TO ROLL OVER,
SO IT’S NOT UNIVERSAL.
WE STILL HAVE THE WAGE
PRESSURES.
THIS IS NOT AN IMMINENT DECLINE
IN INFLATION.
BUT LOOKING AT RATE OF CHANGE,
THAT SECOND DERIVATIVE, AND
LEADING INDICATORS SUGGESTS THAT
WE COULD START TO SEE AN EASING
IN PRESSURES OVER THE NEXT
SEVERAL MONTHS.
JACK: AND, OF COURSE, THE FED IS
WORKING ON THAT.
BILL ACKMAN AND SOME OTHERS ARE
HAVE SUGGESTED THE FED MIGHT GO
WITH 50 BASIS POINTS INSTEAD OF
THE USUAL QUARTER INTEREST
POINT, AND, OF COURSE,
EVERYBODY’S SPECULATING ABOUT
HOW MANY RATE HIKE WE’LL SEE.
I THINK THE MARKET IS PREDICTING
FOUR, BUT JAMIE DIMON SAID WE
MIGHT SEE AS MANY AS SEVEN.
WHAT DO YOU THINK?
>> I THINK IT DEPENDS ON THE
DATA.
SOMETIMES THERE’S THIS
UNDERLYING NOTION THAT I THINK
PEOPLE HAVE WHEN ASKING A
QUESTION ABOUT THAT, THAT THE
FED HAS A PLAYBOOK AND THEY’RE
JUST DECIDING WHEN TO SORT OF
DRIP OUT THE INFORMATION TO US
SLOWLY, MARKET WATCHERS.
BUT THE DATA WILL DICTATE THE
SPEED, THE TIMING, WHETHER THEY
WANT TO FRONT-END LOAD IT WITH
50 BASIS POINT HIKE VERSUS YOUR
MORE STANDARD 25 BASIS POINTS,
HOW QUICKLY THEY START QP ONCE
TAPERING ENDS.
BUT THERE ISN’T A SET PLAYBOOK
AT THIS POINT, SO IT REALLY
DEPENDS ON WHAT THE DATA SAYS.
OBVIOUSLY, THE INFLATION DATA.
AND SOME OF THAT IS DRIVEN BY
THE VIRUS, AND THAT’S THE BIG
WILDCARD THAT NONE OF US CAN TRY
TO GAUGE.
JACK: WELL, YEAH.
SPEAKING OF THAT, WHAT IS THE
EFFECT THAT OMICRON IS HAVING ON
THE MARKETS AND THE ECONOMY
RIGHT NOW AND OVER THE COMING
MONTHS?
>> WELL, WE’VE SEEN A PRETTY BIG
DOWNGRADE TO GDP NUMBERS NOT
JUST FOR THE FOURTH QUARTER
WHICH, OF COURSE, IS ALREADY IN
THE BOOKS, WE JUST DON’T KNOW
THE READING YET, BUT IN THE
FIRST HALF OF THE YEAR BASED ON
WHETHER IT’S CONSENSUS ESTIMATES
OF ECONOMISTS OR SOME OF THE
WELL KNOWN ECONOMISTS AT SOME OF
THE MAJOR INVESTMENT BANKING
FIRMS HAVE BEEN RATCHETING DOWN
NUMBERS.
SOME OF THAT IS A FUNCTION OF
OMICRON.
BUT PROBABLY NOT ALL OF IT.
IN FACT, I THINK IF THOSE LOWER
NUMBERS ARE ACCURATE, I THINK
OMICRON DOESN’T EXPLAIN ALL OF
THAT.
I THINK WE’RE ACTUALLY
EXPERIENCING SOME OF WHAT IS
CONSIDERED COUNTER-CYCLICAL
INFLATION WHERE PRO-CYCLICAL
INFLATION YOU GET IN THE EARLY
STAGE WHERE RISING DEMAND CAUSES
AN INCREASE IN PRICES, AND THEN
SOMETIMES LATER IN THE CYCLE THE
INCREASE IN PRICES STARTS TO PUT
DOWNWARD PRESSURE ON DEMAND AND,
IN TURN, GROWTH.
SO I THINK IT’S A COMBINATION OF
OMICRON AND SIMPLY THE FACT
THAT, YOU KNOW, AS WAS ONCE SAY
ABOUT COMMODITIES MORE
SPECIFICALLY, BUT THE CURE FOR
HIGH PRICES IS HIGH PRICES, AND
THAT IS CAUSING A DAMPENING OF
DEMAND.
JACK: THE FED’S WORK MIGHT GET
DONE FOR IT.
THAT’S INTERESTING.
I WANT TO ASK YOU A QUESTION I
ASKED BEN WHICH IS WHAT ARE YOU
LOOKING FORWARD TO DECIDE IF THE
RECENT DOWNDRAFT IN STOCKS IS
JUST AN AIR POCKET OR THE START
OF SOMETHING MORE SERIOUS?
>> WELL, WE COULD SEE A
CONTINUATION OF WHAT WE HAVE
BEEN SEEING WHICH IS MUCH MORE
WEAKNESS UNDER THE SURFACE THAN
WHAT YOU SEE IF YOU’RE JUST
LOOKING AT THE INDEX LEVEL.
OF COURSE, THE DIFFERENCE IS SO
EARLY IN THIS YEAR THAT WE HAVE
STARTED TO FEEL THE PAIN AT THE
INDEX LEVEL WHICH WAS DECIDEDLY
NOT THE CASE LAST YEAR.
I THINK THE REAL FORCE THAT
MATTERS ALWAYS -- NOT JUST IN
THIS CYCLE -- IS THIS SHIFT FROM
VERY LOOSE MONETARY POLICY TO
TIGHTER MONETARY POLICY.
AND THAT ALMOST ALWAYS USHERS IN
BOUTS OF VOLATILITY AND
WEAKNESS.
JACK: GREAT POINT.
LOOK, WE’RE OUT OF TIME, BUT CAN
YOU GIVE ME MAYBE ONE SECTOR
THAT SCHWAB THINKS WE OUGHT TO
OVERWEIGHT UNDER THESE
CONDITIONS?
>> WELL, WE ARE DECIDEDLY NOT
TAKING A MAJOR SECTOR APPROACH.
WE THINK INVESTORS ARE PROBABLY
ILL-SERVED TO TRY TO BET ON A
SECTOR OR TWO.
WE THINK FACTOR INVESTING MAKES
MORE SENSE.
WE BELIEVE IN THE COMBINATION OF
REASONABLE VALUE, STILL
REASONABLE GROWTH WITH, KIND OF
A QUALITY OVERLAY.
AND THE ONE SECTOR THAT CHECKS A
LOT OF THOSE BOXES IS HEALTH
CARE.
AND THAT’S THE ONE SECTOR WE
HAVE AN OUTPERFORM, BUT THAT’S
VERY DIFFERENT THAN SAYING WE
THINK HEALTH CARE WILL BE A
CONSISTENT OUTPERFORMER OF ALL
OTHER SECTORS.
IT JUST ENCOMPASSES A LOT OF
THOSE QUALITY FACTORS WE THINK
THAT WILL, ULTIMATELY, BE THE
LEADERSHIP THIS YEAR.
JACK: GOT IT.
YOU MIGHT BE BUYING AT A
DISCOUNT.
IT’S BEEN A TOUGH FEW MONTHS FOR