Markets opened lower on Thursday as investors continue to digest hotter-than-expected inflation data which showed U.S. prices up 8.3% in April. Chris Konstantinos, Chief Investment Strategist, Riverfront Investment Group, joined Cheddar's Opening Bell to discuss.

Opening Bell

Markets Open Lower As Investors Continue to Digest Hot Inflation Data

let's bring in chris Constantinos chief investment strategist at riverfront Investment group chris markets pulling back on Wednesday, ending the day across the board, lower opening today, across the board, lower all of this really on that cp. I read what was your take on the read and what was your take in terms of what it means for upcoming Fed activity. Sure. And, and thanks for having me today. Um, Alicia, I think he nailed it. The the the print is was higher than expected, which is obviously a negative for all of us hoping that, you know, the inflation beast was getting tamed. Um, and then, you know, you mentioned C. P. I. Which came out yesterday, but we also got a producer prices inflation number this morning, which was running around 11% and these numbers are just simply too high for the Federal Reserve to ignore. The Federal Reserve has two jobs really to keep inflation in check. Um, and to maintain full employment. And right now the Federal Reserve who's loose policies for the last decade or so has been a friend of equity investors. I just don't think we, as investors can expect that had to be our friend here going forward because they have to, they have to rein in this inflation, that means higher interest rates, which likely means continued lower valuations on stocks in the near term with with obviously yesterday Cp I report, as I noted there a moment ago, it clearly was assigned to investors that inflation has not peaked, factor in now, this morning, pp. I. Being 11% and we know one tends to kind of feed the other, What's how does that color your perspective in terms of whether inflation has peaked has gotten close to repeat or we still have room to grow when it comes to this inflation picture. Yeah, I think that I think the producer prices number this morning pushes out the forecast of inflation peaking. And if you really parse the inflation data that we've gotten this week, the concerning thing is it's not just about food and energy. Uh It's happening at the level to uh for instance, you know, core services accelerated a lot, the inflation, they're accelerated a lot and and that is pretty pervasive across our economy. So again, you know, we're not willing to say that inflation is going to be with us indefinitely. Um but it's just it's been much more persistent than than many people expected. And I think as an investor, you have to be concerned here. Obviously when Fed Chair Powell spoke last week, one of the things that that seemed to be notable for him and important for him to convey to the market was that he the Fed right now isn't considering a 75 basis point hike. However, this week we got those two reads on C. P. I. And P. P. I. And again, I look at PP. I always as an indicator for listen if producers are paying more, They're going to pass it off to the consumer, which then inflates kind of that CPI potential number and the prices that we're paying for everything else. Do you think the market is starting to to further price in a higher likelihood that despite the Fed's saying, we weren't going to see a 75 basis points, hike. do something a little more aggressive if PP I is also showing kind of higher and elevated inflation numbers? Yes, I I think you're absolutely correct. Um and if you notice the way the stock market traded, you know, last week we had the Fed come out, um Chairman Powell said what? He said, the stock market initially the next day had a big rally, but then has given it all back. And then some, and to me that's the market inherently saying, You know, Federal Reserve, we don't believe you, we don't believe that 50 basis points is going to be adequate for the level of inflation we're seeing. And and if you look into the bond market and you suss out what the expected interest rate hikes are from here to the end of the year that are implied by bond prices. You'll see that it's not just a number of 50 basis point hikes, it's probably something more than that, at least in the near term. So I think you're right. I think the reason for the weakness here in risk markets is just simply because no one believes the Fed that they're they're ahead of the curve here, everyone thinks they're behind and I team that question up to try to go step by step into this next question because if the higher probability of a 75 basis point hike is in there, that obviously means interest rates go higher. Interest rates have a direct impact on the tech sector. And we've seen that sector just get absolutely slammed. I mentioned a few moments ago, NASDAQ down 27% year to date. You look at some of these kind of bigger names, those are down 30 40 50 some 70% year to date over the past year, tech sector, we've seen it be hit. Do you think the worst is over or with kind of more aggressive rate hikes in the future? Those valuations continue to come into question and the tech sector has still a ways to fall. Well, I think you, you wanted to buy for k tech companies or tech stocks into two groups. Um, the first group would be tech companies whose valuations are still high relative to the market and particularly ones who don't earn a lot of money or make produce a lot of cash flow. I think the valuations for those companies are still vulnerable here because again, they are the most sensitive to interest rate rises there. What we call the longest duration assets, They're the ones that you have to price out really far into the future in order to come up with evaluation. That makes sense. You have to look at growth really far in the future. Um there's another subset of tech though. These are the more stodgy, boring, bigger mega cap companies who produce a ton of free cash flow are increasingly producing growing earnings and dividend stream these companies, in my opinion, I think there is a floor for their valuation because these are the kind of companies and business models that can perform in a variety of different economic environments. And so at riverfront we still favor those for in ring style mega cab companies who just, you know, produce huge amounts of cash and dividends. Um, and we're definitely staying away from the the riskier, more speculative, higher valuation side, which I believe will continue to suffer from interest rates rising in contrast to the tech sector right now, in stark contrast to the tech sector is the energy sector. Right? I want to get your thoughts on where energy is at right now in terms of the opportunity for energy. I feel like energy is a tough play for investors right now because it's been up for the last couple of months obviously. And so there is that fear, it seems to be like where you get in and maybe you got it at the peak, but do you think energy still has room to run? And is that a safer player, still an opportunity? Yeah, I'm really glad you brought up energy because I do think it's important to talk about if you dial the lens back, What you'll see is that energy as a sector has been a massive underperformer to the S&P 500 for like a decade and so depending on the lens from which you look. Yeah, maybe in the near term it's overbought. Maybe in the near term it's a little bit frothy and if you're really trying to get cute with timing, maybe you can time a little better. But honestly for most investors, particularly ones with a longer horizon investment horizon, we would still be very bullish on energy here because it's now just getting back to, you know, to the sort of levels, evaluation levels we saw years and years ago. We still think that it has plenty of room to run. And you know, these are the types of companies that, you know, they're economically very viable at at oil prices significantly lower than where we are today. So we still like energy as a theme. We still like that sort of reflationary energy, cyclical, industrial cyclical materials that are tied to commodity prices type of theme, Especially when you look at names, it was Saudi Aramco of 25% year today. We were talking about that earlier in the show