Peter Boockvar is the Chief Investment Officer at Bleakley Advisory Group and has been a respected market voice for nearly 30 years. He regularly offers his macro views of the economy and the global financial markets on CNBC and his advisory newsletter, The Boock Report. He joined the ETF Think Tank to discuss inflation, the Fed and the grand re-opening.
The conversation started with a fairly simple question: what is going on? Why won’t large-caps break when other asset classes are? Boockvar believes it’s a classic case of market breadth narrowing, which tends to happen towards the end of bull markets. Investors figured out back in June that when QE is “off”, that’s effectively the Fed tightening and they’ve responded accordingly. He says what he sees now is people needing to be invested but taking exposure away at the same time. They often start by selling off smaller ancillary positions while maintaining the core large-cap holdings. That’s probably what we’re seeing here.
The topic of Fed tapering came up often. Most agree that we have tapering ahead of us at some point in the near future, but what’s the playbook when that happens? Boockvar notes that every major pullback in stocks that we’ve seen since 2010 has been surrounded by Fed tightening with corrections of 10-20% often occurring several months after tightening had begun. Whether it’s a slow tapering of asset purchases or more explicit means of tightening, the balloon will deflate. He says it’s strange to think that if the market gets giddy when QE is happening, the opposite won’t occur when QE is eventually removed.
Not surprisingly, inflation came up often in the conversation as well. Boockvar said that where inflation heads from here is the answer to everything. He believes that even if inflation is transitory, which he doesn’t believe it is, it could take two years to eventually unwind. If that’s the case, the Fed may be handcuffed into a response. The natural response would be to tighten rates during rising inflation, but if COVID remains a longer-term issue or the country needs to re-enter a semi-lockdown, the Fed can’t do much and it could be a disaster if the central bank’s hands are tied. It forces them to make policy based on a timeline that is given to them, not where they want to steer it. It’s a lack of inflation that’s allowed the Fed to do what it’s doing.
Boockvar believes that if the current inflation pressures don’t go away within two years, it could become a big problem. He notes that goods inflation over the past two decades is roughly zero. Services inflation, on the other hand, has been about 2.8% annually. This piece isn’t transitory; it rises every year. The current bout we’re experiencing isn’t temporary. The tech deflation aspect will always be there and goods inflation will remain cyclical, but the current bout we’re experiencing likely isn’t temporary.
A few other highlights:
- The current issues in the labor market are a result of a number of factors – extended unemployment benefits, supply chain issues and an inability to build among them. When kids go back to school and enhanced benefits end, we’ll get a better sense of the true labor market.
- With regard to COVID, Boockvar believes we have no choice but to move on with life. COVID isn’t going away and we need to find ways to live with it. He doesn’t believe the country will shut down again. There will be spreads and incidents, which can cause stops and starts in economic activity, but people can get through it.
- Officially, the COVID recession may have ended in April 2020, but it actually ends when what was lost is recovered. We’re not quite at that point yet. We’ve had the recovery for the most part, but what we haven’t had yet is the expansion.
- In a stagflation environment, valuations will matter and high valuation stocks become vulnerable. Dividends will become more valuable because they’ll make up a greater portion of total return. Investors need to understand they won’t get the same return over the next 10 years that they enjoyed over the past 10 years. Expectations need to be reset.
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