Underlying Equity Fundamentals & Overblown Inflation Fears

“Companies are buying back stocks in 2021 at a record pace as underlying fundamentals for equities are rather strong,” says Laila Pence. On inflation, she believes that it is experienced by everyday consumers. “Average inflation” leads us to think that the zero interest rate policy will be here for some time.

May 24, 2021

Host: (00:00)

Don’t fight the Fed. I understand it, and I think it’s been accurate, but tell me, why now?

Laila Pence: (00:10)

Well, the Fed looks at the price consumption expenditures. They look at PCE a lot more than they look at CPI, and they want some inflation. They’ve wanted inflation for a long time. So we think the Fed will stay on the sideline for quite a bit longer until they really see inflation in at least the 3% range.

Host: (00:34)

You know, it was so funny because I just was looking at something former Treasury Secretary Larry Summers said – and I know Janet Yellen has chimed in, and obviously Jay Powell, what he says goes here. But I thought it was interesting when former treasury secretary Larry Summers said, policy projections and suggesting that rates may not get raised for whatever close to three years are creating a dangerous complacency. Are we complacent? I mean, what needs to be different? Or do we just get in this wait-and-see mode with the Fed?

Laila Pence: (01:13)

I think there’s probably three years, maybe a little longer. And I think that may not be the case, but we’ll probably be a little complacent if it is the case. We’re expecting maybe 2023 is when they raise. So that’s about two years from now, but, you know, I think there’s just no reason right now for the Federal Reserve to raise interest rates. We’re still going through COVID. We still have technology that’s helping as inflationary against inflation. We think this is totally transitory right now with the supply chain. I mean, it’s unbelievable. The biggest reason we have inflation as it is right now is from used cars and autos; if you take that out, CPI would only be 2.3. It’s just that there are no cars out there. There are just no new cars, and people are buying these used cars. I thought that was a very interesting stat.

Host: (02:13)

Ah, so that lifts the metrics, is what you’re saying more than what the truth is. Tell me about your comparison today to the Dot-com bubble in the 2000s.

Laila Pence: (02:26)

That was a completely different scenario back then. Right now, we have so much more money in the economy because of the stimulus and because of savings. We also have COVID, which was an unusual situation. So we just think the Dot-com bubble differs completely from this situation. Plus, there are earnings; we have amazing earnings from these companies right now.

Host: (02:58)

Are you worried about inflation at all? We stick to this zero interest rate policy now; how do you do an investment strategy? It sounds like you’re really watching the PCE, just like the Fed is. I’m assuming you’re not particularly worried about inflation because you say it’s just a metric, like the used autos that are spiking it. How’s the investment strategy now?

Laila Pence: (03:21)

I think certainly there’s going to be a bit of inflation, and we like financials. But we really like big tech. I mean, big tech has the earnings; big tech is about the same as Procter and Gamble right now. They’re not getting the love that these other companies are. So they have the earnings, but they’re not getting the pricing. So we think this is an area that we still like and we’re focusing on right now. Because we don’t think there’s going to be truly real inflation, it’s not so much real inflation – it’s that the federal reserve will not react to that inflation for a long time. That leaves us to own big tech, especially right now, since they have the earnings and do not get the price compared to the earnings.

Host: (04:09)

And when you say big tech, for example – when I looked at the Dow today, Cisco, Microsoft, Intel, Salesforce, and Apple are the five best performers on the Dow. Is that what you mean when you say big tech?

Laila Pence: (04:24)

Yes. It’s about time they started moving; they haven’t done much for the last six months, and they’ve had just blow-out earnings – maybe except Cisco – but the rest of the companies have had blow-out earnings, and their prices have not kept up. As a matter of fact, I’m not recommending any stocks, but Apple is down for the year.