J.P. Morgan Global Wealth Management Chief Investment Strategist Tom Kennedy joins Yahoo Finance Live to discuss rising treasury yields, the Fed’s policy pathway, and the outlook for investors.
Video Transcript
JULIE HYMAN: Investors still digesting Fed Chair Powell's hawkish tone on Capitol Hill this week with stocks retreating and bond yields surging higher. Let's dive into it with JP Morgan Global Wealth Management Chief Investment Strategist Tom Kennedy. Hey, Tom, good to see you. Thanks for coming in studio here today.
It's been such a whipsaw this year in terms of there's going to be a pivot to a cut later this year, no there's not going to be that, there's going to be no landing, there's going to be a soft landing, there's going to be-- what is there going to be at this point?
TOM KENNEDY: Good morning. Thank you for having me. The adjectives being used to describe the economic outlook are just outright confusing-- hard landing, no landings. Like, I think we, number one, have to understand the process of monetary policy. How it works.
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If you're an investor though, what did you get from Powell this week? You said it exactly right-- anxiety, uncertainty. It's quite odd to think about a central banker increasing the pace of rate hikes. That's the new news this week, that Chair Powell could instead of hiking at 25-basis point increments potentially move up to a 50-basis point increment.
I advise my clients to be long-term investors. What do they do with this new news is certainly think about the anxiety and the uncertainty, what to do about it. But really to zoom out and say the Fed is along the path to this disinflationary process. And I love that chart you're showing about recession risks are elevated. And if you're a long-term investor, how can you protect your portfolio against that I think is really an important process to be having the conversation about.
- And we'll get to that, how do you protect your portfolio. But what are the signs that you are looking at as far as this sort of restrictive environment that we're in if the Fed does hike to 50-basis points. What are you looking at as far as-- I take it you're not a no landing person here. You're not on the no landing team.
TOM KENNEDY: The no landing scenario is really hard for me to understand because it implies that interest rates can stay at these what I would call "restrictive levels," but growth could still remain at trend or even above trend. The way I was trained, I spent almost 10 years with the New York Fed. That doesn't really coexist for me. But I'm already seeing signs, or my team, that rates are restrictive.
Really three important things to look at. In the housing sector, the slowdown has been the fastest we've ever seen. A really important indicator for us. In development of new properties, completions of jobs are now higher than starts. Imagine if you run a construction business, if you complete 10 jobs and you're only going to start eight, there is a team there that needs to be laid off. So that's point one.
Point two is that capital is being removed from the system. Banks are tightening their lending standards at really the fastest rate we've seen since COVID and it should imply capital investment should go down as well. If I can't borrow money, how am I going to do a new project?
And then last on the consumer, which we all think is so strong and durable, they are, but you're already seeing auto and credit card delinquencies start to rise from a very low level. So if I'm sitting at the economy, I'm getting the evidence I need that rates are restrictive. It will just take time to really slow the growth and bring inflation back down to trend.
JULIE HYMAN: Yeah, really interesting points for people to consider. And then there's also the jobs picture, right, which lag is a big part of the conversation. To the point you were just making, we got initial jobless claims this morning ticking up above 200,000 for the first time in I don't know how long. It's been a while since we've seen that kind of a reading. We've got the jobs report tomorrow.
I know you said your long-term, but how are you thinking about the jobs market as how it feeds into how your investing?
TOM KENNEDY: These near-term variables are really important because it appears the FOMC is considering them very acutely, or in a relatively short window. January saw a surge in jobs. Over 500,000 jobs added is such a rarity in America over the last 50 years. So really what we're looking for is tomorrow we should see job growth slow it back down to the trend that we saw in Q4 and Q3 of last year.
Something like 200,000 jobs. Should that number come in substantially higher? 50-basis point hike looks likely. But should we return to maybe 200,000 or lower, maybe the 25-basis point increment matters. The bigger zoom out, though.
Again, for my clients, I think is most important. The trend should be slowing job growth. The real challenge of this economy as the labor market is just too tight and when people are realizing-- regular folks-- wage increases and higher earnings, they're going to spend. And it's hard to see inflation come down to 2%.
- So how do investors position their portfolios in this scenario?
TOM KENNEDY: I think you have to recognize this as a late cycle environment. What is the Fed trying to do? By definition, is slow growth. For companies, for investors that means expected earnings for corporations should slow. And that means interest rates are high. By definition, to slow growth.
I want to capture that in my portfolio. I want to be long bonds. And for the last 15 years these have been boring, unsexy ideas. I don't think they're that at all. I think they're actually quite opportunistic. You can lock in a 5% yield for five, even 10 years. I want to take advantage of that while I can.
JULIE HYMAN: I'm also curious since you're on the Global Wealth Management side, you're seeing it-- obviously, you're looking at the markets and making judgments. But you're also hearing from your clients.
TOM KENNEDY: Absolutely.
JULIE HYMAN: Some of whom are at the upper wealth end of the spectrum. How are they feeling right now? Because we've talked a lot about how lower income consumers are maybe going to feel the pinch. Are upper income consumers feeling the pinch?
TOM KENNEDY: I don't generally think of my clients as feeling the pinch the same way a lower income consumer might feel. But what I do get great insights from them is about their own businesses and what they're seeing and feeling. And in parts of America, you're actually seeing a notable slowdown. In other parts, maybe not so much.
And I think in our brains we can think of what those places may be. But it shows you that the recessions don't hit everyone exactly at the same time and they're felt unevenly across geographies. The mass migration that we saw post-COVID has moved supply and demand imbalances to different places. So this quarter, in 2023, is the first time I've really heard them talk about a slowdown.
That's meaningful input for me.
JULIE HYMAN: Hmm, really interesting. And for us, now, as a result.
- Right. Tom Kennedy, Chief Investment Strategist at JP Morgan Global Wealth Management. Thanks so much for joining us, Tom.