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Expert reveals why 'we’re going to see inflation'

Phil Palumbo, Palumbo Wealth Management Founder, CEO, & Chief Investment Officer joins Yahoo Finance Live to discuss investors growing inflation concerns and outlook for economic recovery amid the pandemic.

Video Transcript

- Now let's get to our first guest right now. I want to bring in Phil Palumbo, Palumbo Wealth Management founder, CEO, and chief investment officer. And Phil, I actually want to start with some of the stuff that, out of the Fed and on the tenure, this new bogeyman. Not new, always around, inflation. Are you concerned about inflation, or is inflation actually a good thing that could help us here?

PHIL PALUMBO: I'm not concerned about inflation. I think inflation is a good thing. Overall, the way we look at things is, we understand that there are four economic environments. It's either inflation is rising or declining. It's either growth is rising, or growth is declining.

So it's our thesis that, we are going to enter into a phase where inflation is going to rise and growth is rising and will continue to rise. So inflation, we don't believe we're going to see a '70s style type inflation, but you have to get inflation if you have consumers that were restricted last year due to lockdowns. Lockdowns now are going to be lifted or starting to be lifted. And all the fiscal stimulus that's going to be put into their pockets, I think the floodgates, when they open, it's just going to be tremendous amount of spending that I don't even think markets are prepared for.

So I think that's a reason why we're going to see inflation. And then also, with the possible infrastructure spend bill as the next thing in line, we believe that could also increase inflation as well. Which is just all to say that over these really last six months, some of the best performing sectors have been commodities. So they're frontrunning inflation expectations going forward. So that's our feeling on that.

BRIAN CHEUNG: Hey Phil, Brian Cheung here. So are all of those things that you just pointed out when it comes to inflation expectations, infrastructure, spending, maybe already baked into where bond yields are right now when you look at the 10-year getting closer and closer to 2%? At what point does that optimism for economic snapback end up getting to a point where the Fed does end up maybe pulling forward a rate hike? What would that do to markets?

PHIL PALUMBO: So interest rates drive everything. Greenspan always says, show me where the 10-year is, and I'll show you where the economy's going. So first of all, rising rates is healthy overall. It shows that we are growing as an economy. The big question is, is the Fed going eventually step in to pressure rates lower? Because that could eventually hurt the economy if rates move really too high.

So this is what we're watching very closely, so our feeling is that around 2% on the 10-year is probably an area where we'll see some buying in treasuries. If you think about where yields are all around the world, we still are the best house on the worst block.

So our feeling is rates can move higher, maybe even overshoot from where they are today. And that's naturally what markets always do, but, ultimately, it's going to be difficult for the Fed to let rates move higher than 2%. Because, ultimately, that could really affect the market, the economic growth that we're expecting on the back half of this year and for going into '22.

- There is a lot of optimism in the US for growth, and it comes after a year, I mean, Johns Hopkins reports that the US has more people that have died from COVID than any other country. It's almost 540,000 people.

So I was struck, in your note, about this idea of trimming US and adding to emerging markets. Because, right now, even though the US, 2020 was terrible, shots are getting in arms. Things seem to be improving while we're seeing lockdowns in Europe. We aren't seeing vaccine rollouts as robust in emerging markets. So why reposition capital that way right now?

PHIL PALUMBO: US markets, when you think about where we are from a multiple standpoint, we are definitely stretched and fully valued at this point here. Yes, last year multiples rose strictly because the Fed stepped in, price went up, earnings went down. This year, it's got to be all about earnings, and, typically, when you enter a phase where you're getting past a recession, PEs typically contract on average by about 28%.

So I just think, from a performance standpoint, the market's fully valued, especially in the growth names, especially names that are training at 10 to 50 times sales, which is the area that we feel is really overvalued.

So emerging markets and even international markets in general, I'm not saying you can get completely out of US. What I'm saying is you trim some of US stocks, especially some of those high growth stocks, reposition in international and emerging markets. The valuations are more attractive there. We believe they will recover. They're behind us in terms of recovery from COVID, but they will recover. And we feel there's some value there relative to the US.

BRIAN CHEUNG: So Phil, on that point, where specifically do you go in emerging or international? Because we're all seeing a stronger US dollar, which could increase the purchasing power here in the United States, so are you looking at exporters in other countries that are sending goods over here?

PHIL PALUMBO: So we just play to the emergent markets' exchange traded fund, which gives us a diversified approach to approaching emerging markets. Same thing on the international side as well. So we'll just utilize ETFs to capture that rather than betting on single countries, which we believe would be added risk. So just to keep it simple and diversified, we just use exchange traded funds.

- Phil Palumbo, Palumbo Wealth Management founder, CEO, and chief investment officer. Thanks so much, and have a great weekend.

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