Why the Federal Reserve’s views align with the market

Hennion & Walsh CIO, Kevin Mahn, joins Yahoo Finance to discuss his views on the Fed’s recent announcement and the role he thinks it will play on the market moving forward.

Video transcript

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JULIE HYMAN: Stock index futures pointing lower after a decline yesterday following the Federal Reserve bringing forward slightly on the dot plot its interest rate increase expectations. Kevin Mahn is with us now, Hennion & Walsh CIO. Kevin, it's good to see you. Just sort of high level, what are your thoughts on what we heard from Jay Powell yesterday?

KEVIN MAHN: Our view on inflation is largely consistent with what I believe the Federal Reserve communicated to the markets yesterday, that being that the significant rise in inflation that we saw in April and May is largely transitory in nature, but inflationary pressures are likely to remain in place for the foreseeable future as the Fed continues to try and reflate the economy from the depths that it witnessed during the peak of the COVID-19 pandemic.

Let's just look at April's CPI to get a better feel for where I'm coming from in that regard. First, three specific components accounted for half the surge we saw in CPI during the month of April, those being airfare, lodging, and used vehicle prices, two of which are associated with the great reopening and that increase in demand for services that hasn't been met by an increase in the supply of demand in goods and services just yet.

And second, of course, being that supply chain interruption, specifically around semiconductors that's affecting new car availability, those pressures are likely to become a little bit more muted as we get through the summer months. But again, inflation will be present, and investors would be wise to position their portfolios accordingly.

BRIAN SOZZI: Kevin, you think the market rallies into the Fed's Jackson Hole event, where they could signal when they will begin tapering?

KEVIN MAHN: Yeah, I love the point that Chair Powell made yesterday. In corporate America, we like to have meetings to discuss when we're going to have our next meeting. He indicated that they had discussions yesterday about having future discussions around tapering back their bond purchases. I think the market is now anticipating there'll be some form of an announcement about the gradual reduction in the size of their balance sheet.

But I would be very surprised if that took place any time in the near future in terms of actually enacting that type of scaleback. Perhaps by the end of 2021 into the first half of 2020 is when we'll start to see those bond purchases being scaled back. Certainly much before any potential increases in the Fed funds target rate, which again, are not until 2023 at the earliest, even according to the updated dot plot chart.

MYLES UDLAND: All right, we've got about 40 seconds here until we get the opening bell on this Thursday morning. Again, markets continuing to digest some of that commentary that we got from Chair Powell yesterday. We got the dot plot, as we were just discussing. Those economic projections also, the Fed upgrading its outlook for GDP growth this year, also increasing its expectations for inflation over the balance of 2021. And a little uptick as it looks at 2022.

We see there live pictures from the floor of the New York Stock Exchange. Skillsoft set to ring the opening bell here--

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--this Thursday morning. We chatted with the CEO of Skillsoft just a couple days ago right here on our air. And there we see the bell from the floor, as we get this training session underway. Futures pointing to slight losses at the open. We'll see where things shake out as we get some opening indications on the averages and some of the key stocks in this market.

Kevin, let's talk a little bit about just the markets set up right now. I mean, the market hit all-time highs two days ago, and it feels very much like it did back in the pre pandemic era, where the market kept hitting new highs and no one seemed all that excited about it. What are your clients telling you about the market here? It feels like with meme stocks and the SPAC trade and all this hot air coming out of the market, people took their eye off the ball and did not see the S&P back at a record, the NASDAQ trading back above 14,000 as well.

KEVIN MAHN: Yeah, and that's led to some very stretched valuations right now, Myles. You consider that the PE on the S&P 500 right now is around 30. That's versus a 10-year average PE for that index of roughly 18 and a 1/2. It's going to be more and more challenging for investors to find pockets of attractive growth opportunities, at least as it relates to large US cap stock. But we still believe there's value and opportunities in smaller cap stock.

We believe it makes sense right now to consider investing overseas in international development, in emerging markets. And of course, there are certain sectors that still provide attractive upside potential, notably biotech in particular. BWC is forecasting a record year for biotech M&A activity. And we know that there are more rare and chronic diseases that we need innovative health care solutions for even beyond COVID-19. So there are areas for growth for investors to consider. But as the market continues to hit all-time highs, it's going to be that much more difficult to find those attractive areas.

JULIE HYMAN: Well, we wish you luck, and everyone else out there who's trying to find those opportunities. Kevin Mahn, CIO at Hennion & Walsh, thanks so much for being here and have a great day.