Jason Ware, Chief Investment Officer at Albion Financial Group, talks about the sectors to be affected by higher interest rates and highlights the pockets within tech that have room for growth. 

Opening Bell

Investors Digest Another Batch of Corporate Earnings While Awaiting Key Inflation Data 

for some more insight here on early morning trading. I'm joined by Jason where chief investment officer at Albion Financial group, Jason just want to get your thoughts on what I said there a moment ago, do you think we're seeing a little bit of hesitancy ahead of the C. P. I. Number? That will now be what, two days from now? We'll get that. Good morning. Yeah, I do. I think it's certainly that's been the report that everyone's been focused on the last six months more so than the jobs report. Typically it's the jobs report that traders pay most attention to as far as what the economic story is. But right now it's definitely inflation and C. P. I. And that number is going to be a big one Um coming up here on Thursday probably 7.27.3% year over year headline CPI I growth. So inflation is on the minds of all investors and it will be a report that people position ahead of in the position after to be sure and really because it has a lot of implications here. One implication, obviously, you know, being the there are some analysts looking at what five interest rate hikes starting in March one of those potentially being a 50 basis point rise with the job number that we did get, you know earlier this month, certainly it was a bombshell number a lot higher than most expected. That's good news for the economy. But essentially it clears the way for the to really react and focus on Inflation, given that that number comes out Thursday and depending on what that number is. If it's higher, what's your take on whether the Fed becomes more aggressive here potentially increases the number of rates or it goes ahead with a potential 50 basis point rise in March. It's a great question and, and our view is that the Fed doesn't have to be any more regressive than they already are. I think Jerome Powell has put out a very um, you know, assertive tone on monetary policy at this point, the pivot in november was clear to markets. I think the fact that they're going to complete taper here in March, which really is about six months sooner than anyone thought just a few months ago. The fact that we're the market's pricing and five rate hikes. You have folks at Bank of America saying as many as seven rate hikes, I think the market is very well. Um, primed for a pretty assertive fed here in 2022. Jerome Powell has been very clear in his press conference, is that they're also going to begin likely tightening the balance sheet as well as we work through the years. So enough has been done at this point. I don't see any reason to get any more hawkish inflation is going to be hot. The bed knows that it's not going to be a surprise. I think on the 50 basis point hike, markets are getting a bit ahead of themselves the last time we had a 50 basis point hike was in the 19 nineties and it was a different fed then they didn't communicate the same way they do today. Now they had all these policy tools in the communication at a press conference. After every meeting, There's just no reason for them to have to get out ahead of things with a 50 basis point that they can do it with communication and meter 25 basis point hikes at least. That's our view. You know when we talk about these these rate hikes we we talk a lot about tech right? Because we see tech pullback really on valuation concerns and how the rates you know potentially affect that. But but one area we don't talk about a lot, especially when it comes to Cp. I haven't talked about it at least recently. Is the retail sector and consumer goods really being affected by higher inflation unless you know the rate hikes. But really that C. P. I. Number more steadily, right as more consumers essentially see everything go up cost of living. And while ranges are going up, certainly not as high as the C. P. I. Numbers have been lately. What kind of reaction do you expect to see in the retail sector? And is there any concern about a slowdown in consumer spending in particular for retail spending here? Given that again everything is is going up higher. Yeah. Well our anticipation has been for some time that demand will normalize here in 2022. So this is not a surprise to us and our expectation is that as we work through this year, we will see retail sales start to moderate some. We had a really big um spending boom last year which of course led to an economic boom last year. Um we shouldn't expect nor want that to continue here to 2022. We're obviously seeing some of the issues around inflation from such spending booms and economic booms. And it does actually augur well, for a balanced economy of spending does come down and start to normalize. That's been our base case for some time. There's no reason to think that that won't occur if you look at excess savings in the economy that has come down. So a lot of that stimulus has been spent or it's been not only just on consumption, but on um on paring back household debt as well. So, you know, we think that as the year tracks on, yes, we have inflation, yes, we have wages going up but we will see a moderation to spending and that is something that we should all um welcome and celebrate. It's a good thing. As I noted a moment ago, tech sector has really been impacted around kind of the threat activity and anticipated activity. The NASDAQ has been down what 6.5% over the last four weeks, we've seen a sharp decline here in semiconductors. What opportunities do you see within the tech sector? Is it more software, less hardware. And I asked that specifically really around this inflationary, you know, concerned. Right. I think there's been the argument lately that when you're looking at, you know, a hardware company, you have more kind of, you're more susceptible to these inflationary concerns. That potentially with the software, yep. Yeah, it's a really good point. And you know the way that we invest across technologies, we kind of look at it in three buckets. There's young tech, these are companies that are innovative, they're they're doing things fast. Um They have no earnings and cash flow today. They have high valuations. There's established tech which are companies like the mega cap technology, we have investments in Apple and amazon and Microsoft, adobe, oracle google ah And then there's old tech which are like the Ciscos, iBMS and Dells of the world that are more hardware focused. I think those companies are going to face some inflationary pressures to be sure. But the valuations on those stocks are all very low 10, 11, 12 times earnings. So I don't think there's a lot of valuation risk but there's probably some margin risk over the near term. Looking at the aforementioned. You know, you look at the established tech companies, we think those are probably the area that investors really want to focus on for a couple of reasons. One because they have um wide economic moats within their respective markets too because they have pricing power, which is going to help offset inflation. And then three. And most important because to your point, they don't have a lot of component costs, they don't have a lot of high input costs on materials, etcetera. They're asset light, so their margins should hold up better. And then of course on the young tech, that's where the, that's the part of the market is going to get hit the hardest if rates rise, if inflation remains more problematic than investors expect. Really good point there. Um, obviously earnings have been moving the markets over the last two weeks or so. We've had some major names reporting and we still have some major names to report this week. We'll have what twitter, Disney lift a few other big names. What are you going to be watching with the earnings reports to come this week? Yeah. You know, just want to continue to see earnings come in better than expected. I mean look, we're about 60% of the way through smp earning season. We've seen about 77% of companies being on the top and bottom line margins are holding up fairly well, we're at around 12%. The high water mark was 13 in the second quarter last year. So I think companies are managing through this inflationary environment and the supply chain challenges really well. And quite frankly, you know, we're looking at about a 29% year over year pace for earnings growth, which is better than the 21% going in on 15% revenue growth. So the earnings calculus is setting up really well. I think it's providing a balance to the market amid what's volatility around inflation and central bank tightening. I think what I want to see quite frankly over the next couple of weeks is just earnings continue to come in and provide that support to stocks amid what's been certainly a volatile start to the year. We certainly have January. It was extremely volatile. The first couple of weeks there started to kind of ease up in the last week of January and it's been guess volatile, but not as volatile into February. Gotta talk energy right? Because here today that has been up 25% oil just under about $9 a barrel. A lot of talk about getting $200 a barrel. What do you make of energies run over the last four weeks? And, and, and I, instead of asking you about long term challenges, I really want to get any short term challenges. You see for the energy sector. Yeah. You know, it's interesting our our view on energy has been pivoting some, you know, so about six months ago, 12 months ago, even our view was that if energy gets over 50 $60 a barrel, we'd see kind of the same situation developed that we saw in the prior 10 years, which is, you know, us, shell companies start producing, we see baker Hughes rig counts go up, we see wells turned back on and that supply headwind Was going to be a challenge for oil prices going up in earnest above say $60, a barrel. It turns out what we've seen this time around and this might be more enduring than we had thought and we're doing some work here currently to see if this is the case, but there might be some more structural supply challenges this time that won't allow for supply to come back as quickly here in the United States. And if that's the case, then you know that swing, that swing influence actually goes back overseas like it was prior to the 2000 and 9, 2000 and 19 environment where shale just went straight up here in the US and that's a totally different calculus for energy markets and if that is the case, if there are some structural supply headwinds, which again, we're starting to see in the data that we're looking at, that biographer energy holding up at these levels now, is it going to go to 1 50? We don't see the supply demand imbalance. Therefore, to go to 150. However, it could remain, you know, 75-100 and that might be kind of the new normal for the next few years. So if that's true energy stocks probably have a place in one's portfolio. More so than they did over the prior decade. My own personal wallet. I don't even want to think about a 150 a barrel before I have to let you go here. Want to get your thoughts on there. Any industries or sectors out there, you see with growth potential that aren't being really focused on at the moment. Um, you know, I mean, we talked a little bit about established tech, I, I think, I think healthcare doesn't get enough, um, of a spot in the conversation among investors. It's kind of left behind. We talk a lot about technology and secular growth. We talked a lot about cyclical and the reopening trade, but healthcare is in this little spot. I think investors don't want to ignore because there's a lot of great companies doing some interesting things in health tech, biotech, I think looks really interesting here. Um, and of course, I think the established drug makers as well, like a merc, for example, have really low valuations against what are pretty interesting drug portfolio. So I would just encourage investors to not to move past. Just the obvious sectors that are always being talked about. The obvious themes value versus growth, secular, you know, technology versus reopening and look at some of these other areas like health care that have a lot of really great companies that one should own for for the long term. I always like to get inside on kind of the companies of the sectors that everyone doesn't have their eye on. That could be an opportunity, Jason so glad to have you on, by the way, appreciate kind of the terror logo on the backdrop, Jason Ware, chief investment officer at Albion Financial Group.