Investors need 'inflation-sensitive assets': Strategist

Initial jobless claims decreased by 6,000 compared to the previous week, with 233,000 individuals filing for unemployment benefits in the week ending on June 22. Meanwhile, new pending home sales data revealed a 2.1% month-over-month decline, rather than the 0.5% increase economists expected.

US Bank Wealth Management senior investment strategist Tom Hainlin joins Market Domination to give insight into recent economic data and its implications for the labor market and the economy as a whole.

On the stock market, Hailin points out, "If we look at just the pillars of growth, inflation and interest rates, even though the data was a little soft, it's still a positive economy. Inflation will get a new reading tomorrow on the PCE...We have positive but decelerating inflation, and Treasury yields have stabilized around four and a quarter here. We think that's a pretty good setup for stocks to price higher at least at the broad index level."

Hainlin recommends that investors tilt more toward positive growth and inflation-sensitive assets: "So for the typical diversified investor, they've got some allocations to stocks and bonds and things we call real assets. We would have some of that money out of core bonds and into those US large-cap equities," he adds.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

Investors.

Why a new batch of economic data including a key inflation reading on Friday PC.

Joining us now is Tom handling us bank wealth management, senior investment strategist.

And Tom, let's start with some of that econ data that we got this morning.

In particular, continuing claims that number hitting the highest level in more than two years.

Do you see this is a normalization of the labor market or isn't an indicator that higher rates are hurting the US economy?

Yeah, thanks Alexander.

You know, we saw the, the data that this morning, uh it suggests that the feds, you know, rates are, are having an impact on the economy and, and, and in the way that they are anticipating, which is kind of gently slowing the labor market, gently slowing investment and, and economic activity so that they can go ahead and move forward and with moving forward to interest rate cuts perhaps in the second half in the in the fourth quarter of this year.

So that was kind of almost like a bad news is good news, uh type of uh economic print this morning where the the numbers were so bad to, to suggest that we're having a sudden contraction in the economy but that the, the the these rates are starting to have an impact.

You know, Tom, as I read through your notes, you sound constructive on the stock market, Tom, but maybe, you know, the vibe I get is kind of cautiously constructive.

Am I reading that?

Right, Tom?

Yeah, Josh, if we look at just the kind of the pillars of growth, inflation and interest rates, you know, even though the data is a little stopped, it's still a positive economy.

Inflation will get a new reading tomorrow on the P ce as Alexandra alluded to, you know, we we have positive but decelerating inflation and you know, treasury yields have kind of stabilized here on four and a quarter.

We think that's a pretty good setup for stock to to price higher, at least at the broad index level.

And then as you mentioned earlier in terms of performance, we we still think those secular growth, you know, large cap names are still likely to carry the market forward just because that's where you see the greatest visibility in terms of sales and earnings growth.

But we pair those those technology or investments with some uh some additional sectors like those dividend paint sectors, like consumer staples and some select health care names and and some you know, some of those like non office real estate sectors where if you do get rate cuts in the second half of the year you get some less competition from, from treasury yields and that kind of helps those dividend payers look more attractive.

So, Tom in terms of portfolio positioning, considering that there are some overhanging risks, we don't know if and when we're going to be seeing those rate cuts, would you say um would you advise your clients to be more offensive or defensive at this point?

Yeah, Alexander, you know, our recommendations have been to kind of tilt more to those towards those positive growth and inflation sensitive assets.

So for typical diversified investor, they've got some, some allocations to stocks and bonds and, and things we call real assets.

We would have some of that money out of the four bonds and into those us large cap equities, but also pairing that with things like inflation protected bonds and, and commodities again, inflation is coming down, but it's still above the fed's target rate, it's still positive and typically those assets tend to do well in that scenario, you know, I wanna get your take on the A I trade as well, which of course has been a big theme for investors.

Mikron, you know, reported last night that stock, you know, roared into that print time.

I mean, investors just bet that was uh another, another name that was gonna benefit from this mega A I trend.

It's getting hit today afterwards.

Uh Just as a strategist.

How are you thinking about that trend?

Tom and how do you want to invest in it?

I if at all?

Yeah, Josh, we, we still see A I in this discovery phase.

And so the ultimate demand for, for, for all the feedstock into it and the, and the semiconductors and the cloud and the uh kind of the overlay of of of the U user interface that's still in, in play in terms of, you know, how many industries and how many companies see a productivity benefit in that if we look at early in the kind of the robotics uh in automation phase, it took a while to figure out that that was gonna move into everything from the primary economy like mining and farming all the way into medical devices, you know, robot assisted surgeries and into the home in terms of like robotic vacuum.

So we still still think that A I is in an early stage of, of discovery of what it can do and what the ultimate users will, will, will do with it in terms of productivity that will help determine ultimately the, you know, the the the the ultimate, you know, opportunities set there.

So we still think it's early, we still think there's there's room for those, those, you know, assets supporting the A I investment continue to run.

But again, in order to be a little bit more defensive, we would pair those again with some of those more dividend orient opportunities just to give you a little bit more balance in that equity portfolio.

And Tom, we have a little thing coming up in November the US election, but we're seeing markets significantly outperform typical election years.

Given that, do you view the election as a potential risk to stocks and how should investors be positioning their portfolio ahead of November?

Yeah, it's a, it's a unique set up.

Alexander.

I think this is the first time since in the post war uh time when we've had a uh a debate occur this early in, in June, you typically go through a process of the conventions and the nominees and you start to see the platforms from each candidate and then you have a debate to kind of flesh out the differences between the candidates.

So definitely a unique set up for for this evening's debate.

You know, the work we have done at US bank and, and we published it.

And if you find it uh doing a web search for for how elections impact markets is, we still find a much more significant impact of that setup of growth and inflation and interest rates, then ultimately, which party resides in the White House or has control of either House of Congress.

So we think this is still a good set up for stocks leading into the election.

And typically you do have positive performance on on election years where you have a candidate up for real as is President Biden.

But again, the path forward for the stock market is more likely to be determined by, you know, how do, how does the economic data come in?

What's the fed path around interest rates, is inflation coming back to target?

And, and that will have a much stronger influence on capital market performance than perhaps the outcomes on November 5th.

Tom.

We'll get you out of here on this for fixed income uh investors who are listening.

Right.

Tom, what's your, what's your guidance?

What's your advice to them?

You know, when we say we're tilted towards equities in real assets, it doesn't mean we don't like fixed income here.

We still think clients should have a healthy allocation there within a, within the fixed kind of the bond market.

We still see opportunities for clients that don't pay taxes for those, those those sort of institutions.

We see areas around those, those part of the mortgage market that's not backed by agencies, you know, home prices are still strong.

Uh, homeowners are still having supported by a strong labor market and wage growth.

So those non agency mortgages within kind of those escra areas of the bond market for taxable investors, we still still see a lot of value in municipal bonds and being able to go out in maturities taking that extra yield that you get and also high yield municipal bonds where default rates are historically pretty low and, and investors can earn additional yield there.

Tom, always good to see and have you on the show?

Thanks for joining us, Josh Alexander.

Thank you so much.