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Economy and Fed ‘are going at different paces right now,’ strategist says

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Key Private Bank CIO George Mateyo joins Yahoo Finance Live to discuss Netflix's stock dip as subscriber growth disappoints, volatility, consumer price index data, and the outlook for the market.

Video Transcript

AKIKO FUJITA: Well, the drag on Netflix shares also dragging down the broader index. If we're watching the NASDAQ right now, coming off of the session lows but down nearly 1% right now. All three major indices in the red-- what's been a bit of a choppy session here on this Friday. Let's bring in George Mateyo, chief investment officer of Key Private Bank.

George, you've kind of warned about the volatility, as have many other analysts. But you say specifically that the economy and the Fed are operating at different speeds. What do you see?

GEORGE MATEYO: Yeah, thanks for having me. I think it's an important point to note that I think, as you pointed out, the economy and the Fed are really going at different paces right now and different speeds overall. You know, you've got the Fed. I think it's kind of catching up, but we've really seen COVID just turbocharge the economic cycle post the recession-- albeit the recession was kind of brief, and it was short, but it was deep. And it was very quick. And now we've recovered, and we're coming out of that recession, if you will.

The Fed now is just responding to that. The Fed actually went into the recession being very aggressive with respect to monetary policy, cutting interest rates to zero and essentially flooding the economy with all kinds of stimulus. Now the Fed has started to pivot again, and they've announced this. In effect, when we talked last, we were talking about the fact that the transitory language would have to be terminated, and it was. But now the Fed has to think about raising interest rates, withdrawing some of that liquidity. And with that, you've got a transition [INAUDIBLE] that's spun a lot of volatility for investors to contend with.

- And so you think also that the Fed is going to feel compelled to move faster than expected. We've heard this signaled early in the earnings season from some of the banks that have reported thus far, many of them coming out with their own expectations for how quickly that tightening process we'll have. What most notably would you be looking out for, though?

GEORGE MATEYO: Yeah, I think it's fair to say that there's probably a few people that still think that inflation is somewhat transitory. And I guess, in our view, it's gonna be a bit more persistent. I mean, nothing lasts forever. And I think we will get through this at some point.

But, from our view, I think inflation is gonna stay a bit hotter for three reasons. Labor prices are gonna continue to be pressuring economies, and that's gonna be with us for quite some time. Secondly, the housing market is just roaring, and that's also gonna be an inflation headwind. And then energy prices are somewhat of a wild card, but we think they're gonna be moving higher as well.

So you've got those three things of labor, housing, and energy that really spells inflation might be a bit stickier and a bit more persistent than people think. With that in mind, again, we think the Fed is gonna have to be withdrawing stimulus to the economy as it is, talking about tapering, talking about rising interest rates. And, really, next week will be a very key week in terms of what the Fed might do.

Since we wrote some of these notes we've talked about, the Fed actually has responded to this. They've started to signal that they're gonna be more aggressive. Just how aggressive they will be, though, will really hold the key for what the economy does going forward and how the markets perform thereafter.

AKIKO FUJITA: Yeah, we've had several weeks to really speculate all over the place. We'll finally get, hopefully, some clarity come next week. You mentioned all of those levers or the concerns around inflation. What's the hedge? What are you looking in terms of your portfolio-- looking at?

GEORGE MATEYO: Yeah, well, I guess, overall, we have a theme this year that it's gonna be hot, crowded, and flat. So, by that, I mean inflation is gonna run hot for a while. Markets are somewhat crowded overall. You've got some indices that really are dominated by a number of small companies. And, also, even the large indices are dominated by some very few number of companies.

So, right now, the S&P 500, for example, is made up of about five companies that control 25% of the market cap. And we have days like today, when you have volatility rising, that crowdedness in the market spells a lot more volatility. Overall, though, I still think, Akiko, that we can see kind of a flattish year this year as earnings growth could be quite strong.

We're probably gonna have a bit of a disappointment this quarter in the sense that Omicron is gonna take some of the wind out of the sails. But, overall, as some of those trends and those headwinds start to fade, we still think the backdrop of profits is pretty good. And, with that mind, flat markets overall is kind of our theme for this year and for the rest of 2022.

- Yeah, Omicron variant, and then, additionally, some of the supply chain concerns that we had seen already showing up in some of the data as well. And so even as we look further out into the future, how far out do you believe investors are looking right now and trying to price into the best of their ability some of the anticipated major movements that we're going to see, either from the Fed or even from the White House as they continue to go into a heavy political year with the midterm elections?

GEORGE MATEYO: Yeah, that's a good question. And, gosh, there's so many wild cards out there right now, right, with all respect to this game theory-ness, with respect to what the economy might do, what the Fed might do, how the administration might cajole the Fed to actually take action. And I think one thing we have to look at is really the slope of the yield curve. I think that's gonna be really key to watch in terms of how quickly the Fed actually starts withdrawing some of the stimulus and how the market responds to that.

Right now, the curve is still positively sloped by about 80 basis points. That's not great, but that's not bad, either. And, if we start to see that curve start to invert, and, really, the difference between short-term interest rates and long-term interest rates starts to converge, then that would signal that something might be more concerning.

So I think, in this environment, again, we've got hot inflation, crowded markets. Flat returns, I think, is the outcome. And, in that environment, you want to be very selective. You need to be somewhat nimble. I think you also need to be somewhat flexible with your mindset going forward.

And I think, if you can maintain that framework and be somewhat more valuable and more flexible than you might be in the past, I still think you can navigate this market fairly well. But selectivity is going to be very key going forward in our view.

- All right, George. Last time you were on, you said that the Fed should eliminate the stance of transitory. They did just that. We'll have to check back in in the future to see what else they may have been listening into as well. George Mateyo, who is the Key Private Bank chief investment officer joining us today. George, we appreciate the time.

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