There’s a ‘tremendous amount of economic uncertainty out there’: Expert

Dennis DeBusschere, Sr. Managing Director of Portfolio Strategy and Quant Research at Evercore ISI , joins Yahoo Finance to discuss the outlook on the market and the latest economic data.

Video Transcript

- But I want to continue this conversation on the markets right now. We're joined by Dennis DeBusschere, Senior Managing Director of Portfolio Strategy and Quant Research at Evercore ISI. Dennis, I want to start on some of those CPI figures with inflation jumping today.

However, looking at the markets, a little bit surprised at the reaction that we're seeing here today, especially since it seems these inflation concerns have really dominated a lot of the market conversation and narrative over the last couple of months. Are some of those concerns, were some of those concerns overblown, especially considering the market reaction we have today?

DENNIS DEBUSSCHERE: Yeah, I was afraid you're going to ask that because it's a very difficult question to answer. It does seem odd that we had what appeared to be a pretty decent feed on inflation, the stickier parts of inflation, meaning owners equivalent rent was a pretty decent driver of the number.

Some of the supply areas, the auto prices, used auto prices, in particular, came down month on month. When I say come down, it didn't go up as much the previous month. So you know you would think that you have this path to a stickier high inflation rate over time. A lot of Fed notes came out across the street following the numbers suggesting that this might pull forward the pace of tapering. And yet, we're looking at a bond market that is going the opposite way, right? I'm looking at yield going the opposite way.

So the best I could come to is that there is just a tremendous amount of economic uncertainty out there, where it's the first time we've ever exited a pandemic with a new monetary policy framework and significant fiscal stimulus. And there's just so much uncertainty. And when you have a tremendous amount of uncertainty about the economy over a multi-month basis, that tends to anchor 10-year yields, because bonds are used as a hedge against some type of volatile outcome.

And that's the best explanation I can come up with because on the face of it, it doesn't seem like this number should have drove-- driven, excuse me, 10-year yields lower.

- Dennis, do you think part of it is that investors are starting to buy into the idea that this rise in inflation is indeed temporary? The way Fed Chair Jerome Powell keeps saying, keep using that word transitory is the fact that this economy is snapping back so quickly. And the fact that we're seeing prices rise so quickly not a big surprise, and that things will start to calm down as the economy opens up and things return to normal.

DENNIS DEBUSSCHERE: I think that's a really good point that it's unlikely that we're seeing a type of demand boom that would lead to some type of inflationary shock that the Fed would have to respond to. So yes, to answer your question. I think it's pretty well known that some of these supply side constraints seem to be easing, and that yeah, it's a little bit transitory.

That does not necessarily justify the move lower yield. At the end of the day, it appears that we're going to be in an economy that's significantly stronger relative to the post-war period. We have a massive stock in savings. You have a housing market that's very firm. It was dormant for eight years following the global financial crisis. You'll have Fed that wants to drive inflation higher relative to the post global financial crisis period.

And all of those elements suggest a pretty firm demand outlook longer term. Global GDP estimates show that. US GDP estimates show that. Internal earnings estimates to the market show that and yet here we are with 10-year yields going down. So yeah, peak inflation.

But if it's peak inflation but the demand outlook is still very strong, that just implies stronger real economic growth. And if we have stronger real economic growth, shouldn't you see the yield curve steepened over time? So I guess that's where I'm confused. I don't understand why 10-year yields would come down if the longer term economic growth outlook is still firm

- I also want to ask you, Dennis just on the back of some of what we're seeing with these inflation moves, what's happening right now with tech? Tech usually takes a hit when we see some of those inflation numbers spike. And yet I'm seeing, at least on a sector basis, it is one of the four sectors right now that is leading the NASDAQ right now, up 3/4 of a percentage point out of the three major indices. It is performing the best today.

How to navigate between that tech narrative. We've seen so much rotation in and out of some of those tech names, those big growth names. How to navigate the next couple of months, second half of the year, given this confusion around the economic data, the picture that we're being given at least in terms of approaching our portfolios, but particularly between some of those cyclicals, those value names and some of those big tech names, some of those growth names.

DENNIS DEBUSSCHERE: I got an entirely unexciting answer for you. You don't navigate because one of the things we've been writing about is that economic uncertainty gets back to a point I was trying to make. Economic uncertainty is so high right now, and there's a variety of outcomes that could happen. Yes, today may look like inflation is transitory. Tomorrow that might not be the case.

Again, we've never exited of a pandemic with the amount of fiscal stimulus that we've had and a new monetary policy framework. So given that there's so many different potential paths for the economy, factor volatility, sector volatility, the things that benefit or do not from changes in rates, it's going to be all over the place.

So tech is doing great today. It did poorly last month. It did really well the month before. I have a sneaking suspicion that a lot of the worries about peak economic growth are going to start to fade once payroll growth starts to accelerate, will likely happen once unemployment insurance claims falls off. And then that'll be a negative for tech.

And until we get to September and we have a better idea of what the trend economic growth is for the economy beyond just the reopening noise, and the Fed is a little further along the line in signaling and telling us about tapering, it's just going to be a mess. In fact, the background sector and probably the fastest way to lose money is to trade it. You're better off with GameStop, I guess, I don't know.

- Oh, man. You know that's where we are right now, Dennis. Dennis DeBusschere, Senior Managing Director of Portfolio Strategy and Quant Research at Evercore ISI. Always great to have you here with us.