Name: Pricing Pressure & Frothy Valuations
Uploaded: 2023-09-11T12:00:00Z
Duration: 10 min 2 s
Description: Lindsey Piegza of Stifel discusses the upside risks for inflation while SoFi’s Liz Young explains why she’s cautious on the market through year-end.

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Lindsey Piegza of Stifel discusses the upside risks for inflation while SoFi’s Liz Young explains why she’s cautious on the market through year-end.

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Pricing Pressure & Frothy Valuations

Welcome to your "MarketBrief". Let's get you ready for the week ahead. September is off to a shaky start, as fears of higher interest rates weigh on Wall Street sentiment. The major averages are all lower so far this month, with the NASDAQ seeing the biggest decline, off about 1.4%. This week, the latest reads on inflation could shed some light on the Fed's next policy moves. The closely watched consumer price index will be released on Wednesday, followed by a read on producer prices on Thursday. Will prices continue to cool, or is the Fed's inflation battle heating up? Here to weigh in is Lindsey Piegza, chief economist at Stifel. We began by discussing her CPI expectations. Watch this.

Well, unfortunately, at least from the headline, we do expect to see rising price pressures. With the headline potentially pushing back up to 3.6%, so inching closer to that 4% level. Making it very difficult for the Fed to continue to spout the notion of a potential pause next month. Now, the core, we do expect to see a little more improvement. The core CPI, as you mentioned, the most important of this week's reports, inching closer to 4%, down from 4.2. But again, still nominally elevated. When we look at this on a broader based level, and still more than double what the Fed is expecting or the Fed would like to see in terms of that 2% target.

And also oil prices have been ticking higher. How big of an inflationary risk are higher oil prices, and how problematic could that be for the Fed?

This is one of the substantial upside risks for inflation. Now, we've already seen back-to-back months of energy prices inching higher, but with the recent announcements from Russia, Saudi Arabia extending those voluntary cuts through the end of the year, this could continue to put upward pressure on oil prices, translating into further inflationary pressures from that energy component.

Lindsey, a pause is widely expected for the next meeting, but when the Fed does make another move, do you think it's more likely to hike or cut?

Oh, I don't think the Fed is quite done with policy tightening. Now, they are increasingly willing to move to the sideline later this month. There has been a change from that more hawkish rhetoric, as we heard from Chair Powell out in Jackson Hole, to one of more of patients. But even those that are willing to move to the sideline, as we've heard from a number of Fed officials more recently, there's still this sense that there's more to be done. So again, a pause doesn't mean that the Fed is going to be completely through with additional rate hikes, as we do expect to see the summary of economic projections show still the majority expect at least one additional hike by the end of the year. So when the Fed moves again, we do expect that to be in the upside direction, moving us closer to that 6% target.

The Fed, up until this point, has seemed to be threading the needle if you will, achieving this so-called soft landing. Do you think a recession can be avoided?

Well, I think when we talk about a recession or a downturn, we're sort of splitting hairs here, but I do expect the economy to feel compounding weakness. Particularly on part of the consumer, as savings are drawn down, we tap out access to 401 s or credit cards. The consumer is already becoming increasingly choosy. Now, surprisingly resilient, yes, relative to earlier expectations, but we've already started to see this waning momentum as consumers to continue to outpace expenditures relative to their growth in income. And without some sort of organic supplement to bridge that gap, we do expect these temporary supports to eventually run out and result in compounding pressure, as I said, on not just the consumer, but the broader economy by extension.

So compounding pressure on the broader economy, but is a recession in your forecast?

We are expecting a negative print of growth by the end of next year, but right now, an outright recession, I do think that we will be able to avoid that. But of course, just like the Fed, we're data dependent, and we'll have to wait for that incoming data to see if that mounting pressure on the consumer is even larger than we anticipate, eventually resulting in a potential technical recession.

Thanks to Lindsey Piegza. Meanwhile, even if the latest economic data paints an improving picture, my next guest is proceeding with caution when it comes to stocks. Liz Young is head of investment strategy at SoFi. Here's why.

I think one of the big headwinds that the market is up against is the impressive gains that we've seen year to date, because it's brought multiples up to a level where on the broad S&P we're at almost 19 times. And then there's certain stocks, particularly in the Nasdaq, if you look at big cap tech stocks, that are well beyond their long-term averages. So we're pretty frothy as far as PE multiples go, and the reason that I think it's really important to focus on that is, you have to step back and ask yourself again, what is a PE multiple? Usually it's what we would pay for earnings for the next 12 months. If the next 12 months are not gonna produce really strong fundamentals, really strong revenue and earnings, then a lot of these stocks likely don't deserve the multiple that they're trading at currently, especially because of the market that we're in right now, with yields and where rates are. So, I think that's probably the biggest thing that the market is up against, and likely what's caused some of this most recent decline, is just sort of letting the steam out and saying, "Okay, we went a little too far too fast."

So evaluations are looking a bit frothy, and this is a market that could be very reactive to any bad news. How should investors be thinking about where they position themselves between now and year end?

Well, I don't think that this is the time to jump on the big tech bandwagon. I think that a lot of investors, I imagine that a lot of investors have already put a decent amount into or rotated into things like treasury bonds, money market funds, things that are paying a four and a half to 5% yield. You're getting paid to wait. There are other sectors in the equity market, if you don't wanna take money out of the equity market, there are sectors in the equity market such as utilities, which are pretty oversold at this point, usually pay a good dividend, and are a good place to hide if volatility does come on the near term horizon. You've got healthcare as a sector in the index that's underperformed the other sectors so far this year. So again, not overvalued, does usually play a more defensive role in the large cap space. But there's stuff in healthcare, like pharma and biotech, that can really produce growth, but is not as interest rate sensitive as things like consumer discretionary and technology. So healthcare is another thing to consider. And then lastly, energy. Number one, we've got rising oil prices. I do believe that oil prices are indicating and showing market participants that there could be some sort of contraction coming. A lot of times you see a spike in oil prices before volatility rises in the broader market, but there's also a lot of energy companies that are very shareholder friendly, paying good dividends, doing buybacks. So those three sectors, I think are good places to be. Along with, if you don't have treasury bonds yet, if you don't have money markets or something that's paying you to wait, those are good options as well.

So Liz, safe to say you're cautious heading into your end, you're skeptical that we can continue to see a continuation of this rally?

Yes, very safe to say that. However, I recognize I've been cautious and saying that most of the year, and begrudgingly watched the market go up, particularly the Nasdaq go up over 30%, and scratched my head. There's a lot of chatter about, well, this time is just taking longer, or this time is entirely different. I am of the mind that I don't think this time is entirely different. And in fact, I think when you look at what's happened over history, which is always only a guide, not a rule, but what's happened over history is that at this point, we are 17 months into the Fed hiking cycle, and we are about 14 months into a major yield curve inversion at the twos tens. This is exactly the timeframe when some of those negative effects start to rear their ugly head. So a lot of times when we're thinking it's just taking longer than usual or this time is different, I think it's very possible that we look back on this period and say, "You know what, this time was actually pretty similar to what's happened on average in the past." So I would be eyes wide open, particularly September, October of this year after the summer that was a little bit up and down and indecisive. And yes, safe to say I am cautious through fall, probably through the end of the year.

Many thanks to Liz Young. In terms of what else is on the calendar this week, Apple is expected to unveil its new iPhone 15 at its launch event on Tuesday. Shares had been under pressure after China banned its government officials from using iPhones. Also on Tuesday, Google begins its long awaited antitrust trial in Washington DC. It's considered the first monopoly trial of the modern internet era. On the earnings front, we'll hear from a few names, including Adobe and Lennar. Meanwhile, SoftBank backed Arm Holdings is expected to IPO this week. The chipmaker said it's offering price at 47 to $51 per share. It could be the biggest IPO since Rivian went public in 2021. That concludes this week's "MarketBrief". Thanks so much for watching. I'm Caroline Woods, and I will see you next week.

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