BMO Wealth Management's Ph.D Chief Investment Strategist Yung-Yu Ma joins Yahoo Finance Live to discuss Fed Chair Jay Powell's chances of remaining in his position or being replaced.
Video Transcript
BRIAN SOZZI: All right, market watchers are increasingly focusing on that potential change atop the Federal Reserve and what it could mean for stocks and bonds next year. Yung-Yu Ma is the Chief Investment Strategist at BMO Wealth Management and joins us now. Yung-Yu, good to see you again. You just heard Brian talking about the potential change atop the Federal Reserve. Is that one of the biggest market risks for next year, that we could have someone else leading the Federal Reserve?
YUNG-YU MA: We don't see it as a big risk. It is certainly possible that Jay Powell could be replaced by Lael Brainard. We do think it is a horse race between those two. There might be some minor disruption in the markets, but we think, overall, the markets would take that in stride, and we don't see that as a major risk going forward.
EMILY MCCORMICK: Yung-Yu, this is Emily McCormick. I'm wondering, we just got another hot PPI print out this morning. We're still getting these elevated inflationary prints. I'm wondering how price sensitive do you think the US consumer is right now, and how long before these elevated inflationary prints start to actually create a meaningful pullback in spending that impacts economic growth, as well as corporate profits?
YUNG-YU MA: Yeah, we did get that high print, and that's a great question, because there is inflation in the pipeline. We will see higher inflation in 2022 than we're used to, and we've been used to for a long time and above the Fed's target of 2% for sure. So it remains to be seen when that actually impacts or if that actually impacts the consumer. Consumer sentiment has come down meaningfully in some of the survey measures.
It does take a while before a drop in consumer sentiment actually impacts spending. So that's going to be one of the big things going forward, to see whether or not that consumer sentiment can bounce back, whether consumers will be resilient in the face of these price pressures, or whether they'll start to pull back a bit and decide they're going to hold off on spending and wait to see when prices come down or at least stabilize before they spend more in the new year. So that remains to be seen, and that is a big question mark as we go into 2022.
BRIAN SOZZI: Yung-Yu, let me go back to what you mentioned on the Fed. Would a Fed chief Lael Brainard-- would that be a tailwind to equity markets?
YUNG-YU MA: I don't think so. I think, probably, the markets would like to see the status quo. The markets would take the most comfort in seeing Jay Powell reappointed and, sort of, knowing what to expect. With Lael Brainard, perhaps there would be a bit more dovish leanings, but that said, that's not necessarily what the markets need right now. The markets need stability, the markets want to see inflation come down, and the markets don't want to see the long end of interest rates rise too much, which could be driven by inflation.
So I think it could go either way, but all in all, the markets would probably prefer stability and knowing the leader they have right now is reappointed.
JULIE HYMAN: Yung-Yu, it's Julie here. You were talking about consumer inflation. I mean, I want to come back to the producer price numbers this morning as well because they're pretty remarkable, right? 8.6% increase in October. Core still up 6.8%. I mean, these are big, big numbers. We've been expecting to see margin compression. That doesn't really seem to be happening.
I'm talking about margin compression for companies. Do you think it's just because they have pricing power and we're not going to see a sharp pressure on margins?
YUNG-YU MA: Well, a lot of companies do have pricing power, and they're pushing through the price increases, and they're going to continue pushing them through. So a lot of companies take sort of a slow path to pricing increases. When they see their own input costs go up, they wait maybe a quarter or two before passing those along to see how prices stabilize. So at the consumer level, we expect more price increases over the coming quarters and we expect inflation to run hot, especially in the first half of 2022.
And you know, how that remains to play-- or how that plays out remains to be seen. But we do think inflation is probably peaking here. In terms of margin compression, one good thing that has been beneficial for companies is that they've been able to increase productivity. We see that GDP and output is well above pre-pandemic levels, but employment is about four and a half million jobs below pre-pandemic levels. So that just speaks to companies doing more with less, being able to find ways to gain efficiencies, automation, other enhancements that enable them to stabilize and even increase profit margins in the past few quarters.
EMILY MCCORMICK: And speaking of corporate profit margins and corporate earnings, of course, we're looking at an almost 40% year-on-year growth rate for the third quarter. Do you think this is the peak growth rate here?
YUNG-YU MA: We do think it's a peak growth rate, but we don't want to make too much of the peak. Really, what matters is once the peak is in. At some point, it's going to peak. That's inevitable. But once the peak is in, what does the trajectory look like after that? And we still think that corporate profit margins and corporate profits overall look healthy for 2022.
The expectations aren't exceedingly high, so we do think that the market is in a good place to meet or exceed those expectations. So we do think that's a tailwind for 2022 as long as other factors such as interest rates, consumer confidence, the Fed-- as long as these other factors remain somewhat stable, we do think that the earnings picture should be in good shape.
BRIAN SOZZI: Yung-Yu Ma, Chief Investment Strategist at BMO Wealth Management. Good to see you. Have a great rest of the week.
