Markets are 'too focused' on the Fed right now: Strategist

T. Rowe Price Global Head of Multi-Asset and CIO Sébastien Page joins Market Domination Overtime to discuss possible deeper signs of stress in the market, how investors should position themselves, and why markets are "too focused on the Fed."

Sharing his economic outlook, Page explains that markets could be due for a pullback with economic data decelerating, as seen in PMIs. Looking 12 months ahead, however, Page says he expects healthy stocks and credit, a market due for broadening toward value stocks, and no recession.

The strategist also discusses his "be boring" approach, noting that between stocks and bonds right now, it is not the time to "load up on risk," nor is it the time to be entirely outside the market. He urges investors to think about their strategic asset allocation and risk tolerance in an environment where growth is decelerating but still high by pre-pandemic standards.

When asked how much of his outlook is dependent on the Federal Reserve's policy in the next 12 months, Page says markets react to the Fed "way too much right now."

"We're looking at a market that is sensitive to a 0.1% difference in a monthly inflation print," since the Fed is "telling everyone they're going to be data dependent," he tells Yahoo Finance, highlighting that the economic data is "pretty random."

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

This article was written by Gabriel Roy

Video transcript

And I'm curious, Sebastian, whether you see any kind of broader, deeper signs of stress in the market that would that would indicate to you maybe this is just kind of the start of something nastier.

Look, we could get a pull back further than what we've seen today.

The economic data is decelerating and you see this with the PM IS and we've had a really, really, really good run in the stock market.

But if I step back and I look 12 months ahead, I don't expect a recession.

I think stocks will do OK.

I think credit will do OK.

I think the market is due for broadening.

I also think a I is going to continue to boost spending and earnings.

It's real.

The thing I worry about is that we're pretty far from the 2% inflation target that the Fed has set for us, so we're positioned slightly long value stocks.

It's not like we don't like growth stocks.

It's just that we think the market will broaden towards value stocks and that in part reflects our macro views.

And, uh, you summarised that strategy by saying be boring, which I love that framing of it, I And and is that what you mean by that sort of be slightly long value?

Don't expect maybe more fireworks.

Or don't try to position for more fireworks in the market.

You know, Julie, it's my first time on your show.

I wish I had a pound the table asset allocation view, but my point is between stocks and bonds right now, you don't want to load up on risk in my mind, but also you don't want to be completely out of the market.

So I go back to thinking about your strategic asset allocation.

What is your risk tolerance and how much stocks should you own in a quote unquote normal environment or never in a normal environment?

But right now I would just stay close centre.

You know how much risk you're willing to take between stocks and bonds?

Kind of stick to that.

That's a little bit boring, But you know what?

This is the kind of environment where growth is decelerating, but it's still pretty high by pre pandemic standards, and earnings are actually coming up.

But all of this seems priced in the the fear gauge.

The VIX index This morning was it had a 11 handle.

So and we've had a great run in markets in words.

Nobody's worried.

That's what Julie, which is when you want to be a little bit more worried than usual.

We tend to be contrarian.

We like to lean against the wind.

And so right now I would just stay in the middle.

How much, Sebastian, if sort of your outlook, your thesis, How much is it dependent on the Fed and what they do over the next 12 months?

How many cuts are coming?

Look, I think the market thinks about the Fed or talks about the Fed, or even reacts to the Fed way too much right now.

But it's hard, Sebastian, because they don't stop talking.

That's part of the problem.

Yeah, I know, I'm I'm with you, But look, we're looking at a market that I call it Narrative Ping Pong that is sensitive to a 0.1% difference in a monthly inflation print.

Why is that?

Because the Fed is telling everybody they're going to be data dependent.

And guess what?

The month to month data is pretty random.

There's a big, unpredictable component to it.

So we're in a knife's edge.

But if you think about it, 25 basis points, yeah, probably rates are coming down.

Probably one cut over the next 6 to 12 months, maybe two.

Does it really make a huge difference?

We had a 550 basis points rate shock and markets have been quite resilient thus far.

So the economy and ultimately I think markets have become a bit less sensitive to the Fed.

Even though we're obsessed with it, then we just keep talking about it.

Look in our portfolio is slightly short duration, so we think that there's probably upward pressures on rates due to upward pressures on inflation.

Wages are still growing over 4.5%.

That's not consistent with 2% inflation.

And finally, you know, I know you don't have a pound on the table kind of conviction call, but is there anywhere?

Be boring.

Maybe be mostly boring.

Is there anywhere you think people should sort of reach for risk?

Any areas?

So believe it or not, even though credit spreads are pretty tight, the way we position the fixed income portion of our portfolio is a barbell between cash, which by the way because the yield curve is inverted, cash will give you five plus percent.

That's pretty nice.

And credit so actually long credit.

So we have this.

Yeah, investment grade credit, even high yield, even emerging market debt.

You diversify the credit exposures in stocks where we're a little bit contrarian because we've seen so much, so much flows into growth stocks that if you wanna position for the market broadening, I would not necessarily do it with small caps.

I would do it with large cap value stocks.

There's a wave of a I productivity coming, and some industries that have not been touched by the magic of A I are actually going to start to get spending productivity increases and so on, and it it's going to help by the end of the year.

By the way, the value stocks are expected to grow their earnings year over year faster than the growth stocks.

That's because you have very easy comparables for value stocks, but there's a passing of the baton that if you look forward, not backward because that hasn't worked so far.

But if you look forward, you can expect that broadening.

It turns out There's a lot of, like, different investment ideas and be boring.

And you know what, I?

I I'll say this.

I am aggressively, convincingly neutrals.

I'm pounding the table to be neutral.

Thank you so much for being here.

Really appreciate you being in studio with us.