3 Fed interest rate hikes in 2022 'doesn't seem crazy,' portfolio manager says

Hennessy Gas Utility Fund Portfolio Manager Josh Wein joins Yahoo Finance Live to discuss the outlook for Fed action and the energy utility sectors in 2022.

Video transcript

BRIAN CHEUNG: --the S&P 500. I guess a basic question here. Will the good times continue to roll for the broad equity markets into 2022?

JOSH WEIN: Yeah, great to be with you. And yeah, it's a great question, and the market's up about 30% this year, you know, the S&P on a total return basis. And with that in mind, yeah, I think the good times will continue. And, you know, there's a nice setup here. The 10 year basically right at 1 and 1/2%. The earnings yield on the S&P 500 is about 5%. So that spread is as robust as it was before the pandemic started almost two years ago now.

So yeah, very bullish. And I think 2022, it won't be 30% would be my only prediction, but I think it'll be quite strong.

ZACK GUZMAN: Yeah, Josh, maybe not surprising to see some energy names among your guys' top picks here for next year. And, of course, energy led the way in 2021, and it was a sector that really kind of got overlooked, right, because who wanted to be long oil after what we saw play out in 2020? And yet it has proven to be the right side of the bet to be on.

So, I mean, when you look at 2022, we're already seeing oil prices come off their lows in the omicron scare, but what do you see in terms of the supply-and-demand dynamics playing out next year?

JOSH WEIN: Yeah, I mean, it's a great point. I mean, you know, energy, kind of E&P, oil, natural gas, you know, there's been a lot of volatility in the supply-demand picture there. It seems to improve by the day.

You know, what we focus a lot more on in our Gas Utility Fund are obviously utilities, you know, power generation and distribution. And as strong as pure energy stocks have been, what have been less strong have been utilities this year. So utilities are up about 15% on the year, which is great, but it's not 30%. It's not the market's return.

And I think some reversion to the mean is in order. You know, there's a nice setup in terms of dividend yield. It's about twice that of the market for utilities, broadly, and I think that it's a great way to kind of play, you know, a recovery and a return to fundamentals. And certainly there's a lot of high-quality names within the utility space.

BRIAN CHEUNG: Hey, Josh, you know, some people say this is a stock picker's market. If that is the case, are there certain names within the utility space that you particularly like?

JOSH WEIN: Sure. Yeah, absolutely, and I always say it's always a stock picker's market. There's always room to try to outperform an index.

So, you know, within the Hennessy Gas Utility Fund, we would point to two names that are relatively large positions in the fund. The first would be Southern Company, a diversified utility based in Georgia serving the Southeast. And also Sempra Energy-- so a little bit more of a diversified utility, some midstream assets, some LNG exportation exposure, as well as traditional regulated utility activity out in the Western part of the country.

ZACK GUZMAN: And I guess when we look longer term over 2022, there are dynamics that are a bit more macro. Everyone's looking at the Fed and what they're going to do in terms of their three projected rate hikes for next year. I mean, how do you see that maybe changing the dynamics? Of course, there's already a lot of fears around what the taper would have looked like. We saw that accelerated. I mean, what are your expectations for the market writ large in terms of how investors might navigate some of that volatility if it matches what we saw here in 2021?

JOSH WEIN: Sure. Yeah. Yeah, I think that, you know, the Fed is always front and center on everyone's minds and, they, you know, rightfully so changed their language around the taper, and they've accelerated that, and they've made it clear where that's going. Three rate hikes in 2002, which is I think consensus, that doesn't seem crazy.

About a week ago, I thought to myself that that seemed aggressive given what was going on with the new variant of the virus and case counts and all of that. And I think, you know, the market has gotten a lot more comfortable with where or how we're progressing in that regard.

So certainly a slowing of the economy in '22. We're going to go from almost 6% growth this year to just under 4% next year. But I think that the Fed has done ultimately-- and people can quibble about whether it should be one, two, or three rate hikes or even more. But at the end of the day, they communicate, I believe, quite effectively. They're forthcoming. You know, they're quite humble. They've admitted that they were a little bit behind the eight ball on inflation, and I think everyone agrees.

But, you know, I think that the Fed won't be the issue in '22. I think they've made themselves clear to the marketplace. I think the issue-- if there is an issue, it will be something that we're not talking about right now.

BRIAN CHEUNG: Yeah, we will see. I mean, 2022 certainly seems like the big watershed moment-- at least could be-- for the Federal Reserve.

But Josh Wein, Hennessy Gas Utility Fund portfolio manager, thanks so much.