Fed rate cuts ‘more of a 2024 event,’ strategist says

MJP Wealth Advisors President Brian Vendig joins Yahoo Finance Live to discuss U.S. inflation, Fed policy, consumer spending, and the outlook for rate hikes.

Video transcript

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- All right, well, labor data shattered analyst estimates last week with the US adding over 517,000 jobs in January. Still, companies are finding it tough to hire due to the availability of jobs for those seeking work. Well, could that tightness in the labor market increase the odds of another rate hike by the Fed? For more on the Central Bank outlook, let's get to MJP Wealth Advisors President, Brian Vendig. Thank you for joining me, Brian.

So obviously, markets having to digest the lot, but you don't think that the Fed will start cutting rates this year with the labor market as tight as it is. What do you think the markets are perhaps not pricing in correctly at the moment?

BRIAN VENDIG: Thank you, Rachelle. Great question. I think right now there's a fundamental disconnect in the expectation of when the Fed is going to ease back on raising interest rates versus market expectations. And I think the Fed has let us know that they went from a position of being unconditionally hawkish last year to a point of being conditional in their conservative outlook for rates. And they're letting us know that they're going to continue to increase interest rates.

And I think this most recent jobs number confirms the point that we should expect another rate increase in March, and it's possible to have another one after that depending on how inflation numbers go. And they're going to hang out at an interest rate level of 5% or more this year until they get confirmation that inflation is coming down. And where is inflation coming from? Demand.

And if we go back to your last segment, we've heard that earnings now are contracting for the year. And as a result, you look at those outlooks, and businesses are concerned, will the consumer continue to spend in this environment? And I think our view is that the Fed is trying to slow down demand. They will stay focused on that over the next couple of months. Take a pause but not cut rates this year because the probability of an economic recession might be there and could be in the cards but not one that's going to be as deep as we've seen in other recessionary environments before.

So if you're hoping for a rate cut this year, we think that's more of a 2024 event. And investors should stay still constructive on the markets, but also be cognizant of the risks that still exist in the short term.

- And speaking of those risks, I know that you're still watching some inflation in the services sector as well. We're still not hearing much talk about at the moment, but what do you think that's signaling about where the Fed could be headed this year?

BRIAN VENDIG: Definitely, great point, Rachelle. In the services market, we got surprised last week with an expansionary number on PMIs for services while we're still seeing the manufacturing sector contract. And we're seeing hiring in certain sectors where more support was needed in the short term, and businesses are holding on to their workers because of a tough labor market.

So I think what we're seeing right now is a little bit of a false positive coming from the services sector. But because services, 70% of our economy is supported by labor, we're still seeing people getting paid more than 4% year over year. And yes, those numbers are coming down month over month, which is the good news side, good news item in the inflation discussion. But wages are sticky. And wages, I think, will help to keep inflation somewhat elevated over the course of the year, well above the 2% target the Fed keeps talking about.

And as a result, we don't expect this level of services expansion to continue over the balance of the year because again, going back to my earlier point, it's all driven by the consumer and how much the consumer is willing to spend while still the cost of living is still high and above historical levels that they've recently appreciated.

- So I mean, it's a lot for investors to take on. They're trying to sort through some of this noise here. But you are seeing opportunities, and you like health care and financials. And we'll start with health care. It has been under pressure year to date. But what is it that you like in health care? Which companies are the standouts for you?

BRIAN VENDIG: Thank you, Rachelle. Yes, in the health care sector, we think that's an area where you can play offense and defense at the same time. There's a lot of health care names that have great free cash flow, showing innovation, and expanding their pipelines in the big pharmaceutical space, for example. We're also looking at health care insurance providers as a means to help to combat the aging demographic in the US and trying to help to support cost affordability of coverages.

So there's areas where the insurance companies as well as the manufacturers of health care and other technologies are still looking for growth opportunities while at the same point in time, their free cash flow generation with stable dividends is a good place to hide.

On the financial side, it's really more of a mispricing that we think could exist potentially in the sector. Because if we don't hit a deep recession and it's more of a mild or elongated economic slowdown, then financials actually have the next highest free cash flow generation just after energy and look very fairly attractive when you look at the value of their stock as compared to the value of their balance sheet. So I would say it's something to keep an eye on as we move forward over the balance of the year.

- And as you talk to clients, what are their main concerns in this environment as they try to navigate how to allocate some of their assets at the moment?

BRIAN VENDIG: Well, I think with everyone coming off of an extremely difficult year from an investing perspective, in 2022 when we see stock and bonds both down double digits, something that we haven't seen since the late 60s, I think right now investors are focusing on, where does it make sense to be calculated and taking risk as part of their portfolio? And I'd like to try to not have the same experience I had last year in seeing drawdowns both in stocks and bonds.

So what we're trying to do right now is focus on areas of the equity market that has expansion of dividends and free cash flows, still tilting a little bit more to value that versus growth stocks. We also think interest rates is an opportunity for the fixed income market, because bonds do look fairly attractive, and bonds actually have a chance to continue to rally while stocks are trying to figure out their way over the balance of the year.

And lastly, I would just say, take a look at some other areas where you don't have to take as much risk. We're getting compensated now for 4% or more in prime money market accounts, and that makes sense as we're trying to move through this noise of what the Fed's going to do and how's the rest of earnings going to go, where you can hide out in a money market fund getting 4% over the balance of the year. And I don't think that's a bad deal in this environment.

- There you go, there's definitely some places to put your money to work right now. MJP Wealth Advisors President, Brian Vendig, thank you for joining me in this morning.