Markets are 'too hyper-focused' on the Fed, strategist says

The Federal Reserve has left interest rates unchanged in June as inflation continues to cool. BMO Family Office Chief Investment Officer Carol Schleif joins Catalysts to discuss how Wall Street is reacting to the decision and how investors should be best positioned in the current economy.

Schleif believes that the markets (^DJI, ^IXIC, ^GSPC) are "too hyper-focused" on the Fed, stating: "If you step back and zoom out from it, the Fed has much less control over even the short-term economy and short-term rates because a lot less of the lending goes through the formal banking system. We've got a lot of alternatives to credit now. We've got a lot of alternatives to financing now."

She believes that looking at demographics and other quantitative data is much more important and can be rather difficult to do when all eyes are on the Fed.

She adds that investors who are long-term believers in the markets "can keep a foot forward into the risk and growth opportunities." She says that these investors can keep a portion of their portfolios as long as they're comfortable with day-to-day volatility. Schleif is overweight on US securities and believes that the tech upgrade cycle will be a significant market driver.

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

This post was written by Melanie Riehl

Video Transcript

A little bit of a week here, but it seems like the market is in a wait and see mode.

What do you think when we are talking again a week from now will be the single biggest driver of the market throughout this week.

You know, it's, it's really hard to pick a single biggest driver.

Probably some of the fed speakers you alluded to coming out because we are definitely in that math period where between earnings, we had stronger than expected earnings in the second quarter, we've got to wait four or five weeks till we had other earnings.

We're past the fed meeting.

So that's out of the way.

You know, people are watching international politics.

I mean, they're really struggling to pick one specific thing, but I think we are really going to have to be the FED has ensured that we're going to be very data dependent.

So every piece out this week will aggregate it all up by the end of the week and then really start focusing on, on what those fed governors say when they're out on the talk circuit.

Carol.

Do you think the market's too hyper focused on the fed and why they, we do think that the markets are too hyper focused and a piece of it is, is if you step back and zoom out from it, the FED has much less control over even, even the short term and eco economy and short term rates because a lot less of the lending goes through the formal banking system.

We've got a lot of alternatives to credit.

Now, we've got a lot of alternatives to financing.

Now, we've got the IP O markets behaving differently and a lot of the models and the data sets that the fed predicates its numbers and we all look to are built for a time that doesn't necessarily exist anymore.

And when you actually look at the models too, they didn't really work in 0102.

They didn't really work in 0809.

And so stepping back and looking at demographics and a lot of other quantitative inputs is really important and it's something that it, it's really tough to do.

Well, it's interesting because I kind of look at it like the market is just going to do what it's going to do regardless of fed.

Speak with the f kind of trying to pour a little bit of cold water on CP I data last week in the market continuing to rally.

So talk to me about your thinking on that relationship.

Well, I think the piece is, is that it's much more important and you're starting to see the market anchor towards fundamentals and that's where it belongs in the intermediate and long term anyway, because in, in those terms, the fundamentals went out.

If you look at stock market performance in aggregate on a one year period, 75 or 80% of the time it's up, which means that there's a preponderance towards growth built into our system.

And that has to do with our economy because if you focus on fundamentals, focus on what's going on underneath structurally.

Are we rebuilding in America?

Yes, we are.

We teed up a whole bunch of economic potential basis.

If you look at municipal bond issuance year to date, it's the strongest.

It's been since the early 20 tens that implies substantial investment.

Yet to come in our infrastructure, our roads bridge just schools, the electric grid.

So there's a lot of that where as investors come around and start focusing on, ok, we'll have earnings starting in early to mid July.

And what will those companies be producing?

And so that focus on fundamentals is really important.

So girl, ultimately, then what does this mean for asset allocation investment allocation where you're seeing those opportunities?

And ultimately, what investors need to keep in mind when it comes to maybe balancing that risk?

Well, I think the important thing is is you can keep a, a foot forward into the risk and growth opportunities if you're a long term believer in the markets, which we are, you can keep a p uh at least a portion of your portfolio depending on how comfortable you are with day to day volatility.

As opposed to looking over the next 3 to 5 years, you can keep a portion in those growth oriented assets.

We've been overweight us for quite a long time.

But the great part is, is given the, the, the 5 4.5 5% 5 plus percent that you're getting in short term fixed income.

You can balance some of that risk by putting some there too so that you can stomach that volatility by having a balanced portfolio.

And the all the calls for the death of the 6040 portfolio back in 2022 we think were pretty premature.

I want to dig into your thoughts on tech here because you talk about how we're potentially heading for a little bit of an upgrade cycle even within some of the more boring corners of tech.

Talk to me about what trade that idea might initiate because there have been some questions from the street about what the upgrade cycle timing might look like even for some of the biggest tech name.

So give me a little bit more on that.

Sure, you, you're definitely seeing a case where a large companies, small companies are feeling like they have to invest to stay competitive and there's a lot of money pouring into building out that infrastructure.

We learned those lessons back when the internet was first hitting the scene back in the mid nineties.

And you saw a, a five plus year build out of internet infrastructure that everyone had to put the pipes and the plumbing in place in order to ensure that they were going to stay competitive in a new environment.

So take artificial intelligence and all the use cases being built.

We've all learned about it in, in a more obvious way with the, with the introduction of Chet GT GP T a year and a half ago.

But, but the technology itself has been around for over a decade.

Large companies have been building use cases for it.

And so you have to spend on that, you have to spend to clean up your database.

If you want to train A I on your database, you have to spend to think through.

Um how are we going to use it?

How are we going to use it in drug discovery?

How are we going to use it in logistics?

How are we going to use it in a lot of different places?

So there's a lot of investments there and then investments in data center mean you have to be able to get the electricity you need.

So you have to be conscious about where you're putting it.

You might have to help invest to upgrade that, that grid.

There's lots of 1st, 2nd, 3rd order ramifications that people have to think through and it's really gonna touch every aspect of our lives.