As markets assess the possibility of inflation reigniting, Kathryn Rooney Vera, StoneX chief market strategist, joins Morning Brief Hosts Seana Smith and Brad Smith to discuss how to hedge against the risk, namely diversifying into "underloved" sectors.
Rooney Vera outlines that geopolitical conflict, China’s central bank’s recent stimulus package, and the easing of monetary policy around the world as possible risks to inflation. “Ultimately, inflation expectations do not correspond with the potential for a re-acceleration in inflation.”
She says, “What I'm advising our institutional clients is to protect your positions. Protect your interest rate-sensitive sectors, such as tech, with the purchase of put options. While those options are cheap, while volatility is low, and it's cheap to protect yourself.”
“Industrials and manufacturing are likely to see an uptick from contraction to expansion if we avoid a recession here in the United States, which is ultimately my base case scenario. So as we're seeing, manufacturing [is] in contractionary territory. But given the monetary easing and the beginning therein of this easing cycle, I do suspect we're going to crack expansionary territory over the next 12 months.”
Well, escalating tensions in the Middle East, monetary easing, and China stimulus are all potential catalysts for a return of inflation that could potentially change the narrative around Fed cuts that have been baked into the market psyche. Joining us now, proud to hedge around that risk, we want to bring in Kathy Rooney Vira, StoneX Chief Market Strategist, and Catherine, it’s great to have you here. Let’s just take a step back because I think investors have been looking at that massive run-up that we saw in crude last week, it was up 9%, moving once again to the upside here this morning, and they’re trying to figure out just how big of an inflation risk that is at this point. What do you think?
Well, any conflagration in the Middle East and any potential closure of supply routes of oil globally is effectively an inflation risk. But add to that, uh, Chinese stimuli, um, that’s also an inflation risk, and with its upside to commodities, we’ve already seen that play out. And the way to hedge is by buying commodities. And the third thing is that we have global monetary policy easing, which should juice the industrial and manufacturing sectors globally. That, of course, as well, adds to, uh, a growth story here in the US that really doesn’t seem to be following, uh, a slow landing or soft landing, um, trajectory. So I think that, uh, ultimately, inflation expectations do not correspond with, uh, the potential for a reacceleration in inflation, not the base case, but certainly something that, in my opinion, what I’m advising our institutional clients is to protect your positions, protect your, uh, interest rate-sensitive sectors, such as tech, with the purchase of put options while those options are cheap, while volatility is low, and it’s cheap to protect yourself.
And how would you be playing on the other end of that, industrials and manufacturing, as you were just mentioning a moment ago?
Yeah. Well, industrials and manufacturing are likely to see a, a, a re-, an uptick from contraction to expansion if we avoid, uh, a recession here in the United States, which is ultimately my base case scenario. So as we’re seeing, we still see manufacturing in contractionary territory, um, but given the monetary easing and the beginning therein of, of this, of this easing cycle, I do suspect we’re going to, uh, crack, um, expansionary territory over the next 12 months, of course, absent a recession here in the US. Um, but my positioning recommendation is a barbell strategy, and this has worked out beautifully for us. So coming into 2024, utilities was my top pick in terms of the S&P, and that was way out of consensus because this was the most battered and most unloved sector, not sexy, kind of defensive, historically, but that was our top pick, and it’s done, um, very, very well, up 30% year-to-date. Um, so I think that that has played out well. And I think going into 2025, there are some inherent risks that are underappreciated and underpriced in risk positions right now.
Catherine, since you just mentioned utilities, given the massive run-up that we have seen, congratulations on that call that you did get correct, is there still room to move to the upside, or should investors be looking to take some profits there given that massive run-up?
I think it’s over, I think it’s done. The trade has played out just as expected with that 30% appreciation in price. And I’m actually going to publish a piece this week talking about this precise trade. I think it’s time to realize those gains and to rotate into the next underloved, uh, underperforming sector, which is also defensive. It doesn’t have the same attractive properties as utilities, but I think healthcare could be one of the sectors that does well in 2025, especially if we do get, um, some cumulation and some erupting of these underappreciated and underpriced risks, not only just on the geopolitical side but also on the economic and political side.
You know, Catherine, you mentioned the puts a moment ago within technology there. You know, does that mean that the AI trade has, has already kind of started to show that it’s going to be decelerating here, or at least that there’s some rotation in the broadening out effort that you would expect to come forward?
The AI trade, I think, has reached a mature stage. So I think the, the market’s going to be more discerning and not just, you know, corporations say the buzzword AI in their earnings calls and their guidance, and their stock surges because of using the buzzword, buzzword. So I think we’re in a mature phase, and I’m looking for second derivative plays, and that’s part of the reason, Brad, why I recommended utilities, but I also like industrial real estate because this is a second derivative, um, trade on AI that can benefit from its ongoing, um, you know, development because ultimately, uh, artificial intelligence is going to improve productivity. We haven’t seen the full, um, manifestation of that, um, of its utility. I think a lot is baked into prices, um, but as I said, I think it’s going to be, um, pretty mature and, and stable and, and trading at a stable range. Um, there could be some more upside, but I do love playing second derivative trades on the AI, um, perspective, as well as diversifying into underloved sectors because the truth is, AI really, um, does improve productivity and efficiencies, lifting many boats. So why not broaden out our exposure to other sectors?
Catherine, how are you looking at the move higher that we’ve seen in yields, especially on the back of that strong jobs print? Now we have the 10-year yield right above that 4% level. Is that going to act as a headwind, do you think, for equities? Or what, what is your read at this point?
It should, right? Because that takes away a bit of the equity risk premium, uh, from equities, and I think it’s also correctly repricing, um, Fed cuts. They’re likely not going to be as aggressive as the market had previously anticipated. And if the economy does effectively avoid recession, which it seems poised to do, um, with the US consumer being so robust and jobs, while companies are hiring less, not engaging in mass layoffs, that to me says that, um, uh, that the Fed is not going to slash rates. There’s no need to do so. In fact, if they were to cut rates aggressively, I’m talking 200, 300 basis points, it would, it would probably be counterproductive and bring inflation back, causing this whipsaw effect in monetary policy that nobody wants or loves. So, um, so that would take a hit to credibility. So the bottom line here is I think that, um, you know, markets are repricing Fed cuts, markets are repricing the possibility of inflation not, um, hitting that 2% target anytime soon or anywhere near, near, near that. And I think the Fed probably cuts maybe one more time this year, um, but next year, I think probably cuts less than the market is currently anticipating. And that’s what’s happening right now in the markets, and they’re, they’re internalizing that, that likelihood.
Catherine Rooney Vira of StoneX, thanks so much for taking the time here with us this morning, just after the opening bell. And our viewers can stay tuned as well. You can check out a deeper conversation with Catherine. Be sure to check out Opening Bid with Yahoo Finance Executive Editor Brian Sozzi. Catherine, thanks so much.
My pleasure.
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She says the strategy of playing an underperforming sector has worked out well so far this year. “Coming into 2024, utilities was my top pick in terms of the S&P. That was way out of consensus because this was the most battered and most unloved sector. [It's] not a sexy kind of defensive historically, but that was our top pick and it's done very, very well. Up 30% year to date.”
Rooney Vera notes that she thinks the utilities play is done, given the significant appreciation, but says healthcare could be the next move. “I think it's time to realize those gains and to rotate into the next underloved, underperforming sector, which is also defensive. It doesn't have the same attractive properties as utilities, but I think healthcare could be one of the sectors that does well in 2025, especially if we do get some accumulation and some erupting of these underappreciated and underpriced risk, not only just on the geopolitical side but also on the economic and political side.”
On the AI trade, the strategist says she thinks “we're in a mature phase. She adds, “I'm looking for second derivative plays. And that's part of the reason why I recommended utilities. But I also like industrial real estate because this is a second derivative trade on AI that can benefit from its ongoing development.”
“I do love playing second derivative trades on the AI perspective, as well as diversifying into underloved sectors because the truth is, AI really does improve productivity and efficiency, lifting many boats. So why not broaden out our exposure to other sectors?”