Inflation
Federated Investors---Duessel, Linda---Equity Strategist
>> we’re back, folks. the worst-hit market on monday, india. stocks and bonds in india plunged on concern the country’s new coalition government will reverse growth-friendly policies. the benchmark index plunged 11%, the biggest drop in 12 years. incoming prime minister sonia gandhi’s congress party needs help from communist groups to form a government and those groups are against some of the economic policies that spurred india’s growth, the fastest in 15 years. looking at how the a.d.r.’s of popularly traded indian stocks did today, not too well for three out of four of them there. little change in dr. reddy’s. our next guest expects the stock market to correct or fall further this summer. she says her biggest concerns are tensions around the world and inflation. laned seussle―duessel -- linda duessel joins us from pittsburgh. which is bigger, terrorism or inflation on the risk screen?
>> we think inflation is the bigger long-term concern. near term, we will have more concern about terrorism and that lines up with the weak summer market we expect. together, inflation, longer term concern.
>> can the fed do anything to stop inflation now they have it to get going, which they wanted to see, pricing power in the economy? they needed inflation to pick up with rates so low and couldn’t go much lower.
>> you’re right. about a year ago, we were worried about deflation and they have been trying to inflate the economy and one year passes and now we’re worried about inflation. we’re seeing a broad base across the economy and that’s what has people worried. the fed can try to stay ahead of the curve and i think the markets will tell us whether they agree if the fed is and that would be in line with the beginning of the interest rate increases we would expect to happen possibly in june. that would be ok.
>> it would be ok what?
>> it would be good for the stock market if they start raising interest rates in response to what looks like more pricing power going across the economic sectors and we think that a couple of interest rate increases, particularly at the measured pace they speak of, would actually be something that would give the equity markets some positive feeling.
>> i guess, then, june 30 can’t come fast enough for that fed meeting to raise those rates in your estimation because the market now slumping to its lowest level since mid december?
>> you’re right about that. but we think that the sentiment, it’s hard to call when the bottom would be. but the summer months, in line with the fact that we’ve really not have even more than a 5% move since the ran began, we need to consolidate and come down through the 1080 level, a big support level, maybe down to 1040 or lower to consolidate and set us up for a nice finish to the year.
>> we’ve had almost a 6% correction quarter to date. the s&p 500 is down from the beginning of april, second or third day of april, now 5.8%.
>> that’s right, that’s right. if you look at the highs, it may be 1137 and highs in february, if you give us a nice 10% correction, that is the 1040 level matching up with the good technical spot. a 10% correction, 10 to 15, we would consider to be a good correction which is what is needed in the market and historically is what you might expect approaching the fed tightening so everything would be quite normal and set us up for new highs.
>> let’s assume that happens. how do you get yourself back into the marketplace? if i were to follow that advice, i would sideline myself and wait for everything at bloomingdale’s to go on sale before i started buying but when i was ready to buy, where would you buy in?
>> that’s an interesting point of contention because if, as we expect, this economy is stronger than many think and we can go on for quite some time longer than even a normal cycle, global growth with decent, low inflation, we should return to the cyclical sectors getting hit hard right now.
>> i would assume you’re talking about materials and utilities and financials, which are down 9% to 7% quarter to date as a group.
>> no, actually not. utilities, unfortunately, they’re the most poorly hit whenever interest rates go up. thinking of those cyclicals in the capital goods area, industrials, technology, beneficiaries of the continued capital expenditure and income growth.
