Consumers are ‘well-positioned’ for possible inflation increase: Strategist

Jeff Schulze, Investment Strategist at ClearBridge Investments, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss market outlook and CPI data for March.

Video transcript

KRISTIN MYERS: Let's bring in Jeff Schultz now, investment strategist at ClearBridge Investments, for this market conversation. Now Jeff, the CPI jumped more than expected last month, which, of course, yet again, raised those inflation concerns. And as we saw, came in higher than expected. How much concern should this raise over inflation? Or do you view some of these moves as temporary?

JEFF SCHULTZ: Thanks, Kristin, for having me on the program. So it's a bit of a sell the news situation today. Obviously, CPI, both core and headline, beat consensus expectations. And you're certainly going to see an inflation scare over the next couple of quarters as we lap the year over year comps of the economy shutting down. Also, you're going to have supply bottlenecks in the services industry, as demand overwhelms supply. And you also have global supply bottlenecks.

But I do think this is transitory because if you look early on in the economic cycle, whether it's high inflationary environments or low inflationary environments, you really just don't see the pick up of inflation for the first three years of that cycle until you have a full employment type of situation. And we're about 12 million jobs from being fully employed. So I think we're probably not going to reach that until the middle part of 2023. So I'd be fading the inflation story, even though it's going to feel like it's going to be a pretty scary inflationary environment over the next couple of quarters.

ALEXIS CHRISTOFOROUS: Yes, speaking of scary, I mean, we're seeing it play out in gas prices. I mean, they surged last month, a big reason why we saw that jump up in consumer prices. You've also got food prices soaring. And both those things hurt everyday Americans right in the wallet. So what do you think that's going to do, even if inflation doesn't become a long-term issue? In the short-term, what does that do for our buying power and for the economic recovery, do you think?

JEFF SCHULTZ: I think it hinders it on the margin. But if you look at consumers, they've been able to accumulate over $2 trillion of excess savings versus pre-COVID levels because of government transfer payments and the inability to spend. And once we reach herd immunity, I think you're going to see revenge spending, deferred gratification. And it's really going to unleash a lot of this consumer spending that's been pent-up.

What I'm really looking for is the retail sales number in-- that coming up later this week on Thursday. If you look back to January's retail sales, it came in at positive 5% month over month when you had that $130 billion worth of stimulus that went out as part of that December package. The stimulus that just went out because of March's package was $422 billion or 2.5 times the amount. So I think we're going to see a retail sales number that could approach double digits not only in March, but potentially in April. So even if we do have moderately higher inflation in the near term, I think consumers are well positioned to be able to handle that.

KRISTIN MYERS: Now, Jeff, I was reading your note, and you mentioned that policy has been the key catalyst for the market rally so far. Do you think that policy remains the catalyst going forward? And if not, what's going to replace it?

JEFF SCHULTZ: Yeah, policy has certainly replaced a lot of the demand that was missing because of the pandemic. And I think there's a lot of optimism priced into the markets. But I think when you get an explosion of economic activity over the next couple of quarters, as we reach herd immunity, and again, you unleash a lot of that consumer spending, I think that can continue to propel earnings over the next couple of quarters. And the beats may not be as big as what you saw in the second, third, and fourth quarters. But you're going to continue to see a ratcheting higher of earnings expectations.

The market year to date, the S&P 500 year to date is up close to 10%. Most of that is because of higher earnings revisions of closer to 7%. And I think that that's a dynamic that continues to take place over the course of not only this quarter, but subsequent quarters from now.

ALEXIS CHRISTOFOROUS: What about the move out of high growth and into value? Has that been a little overdone? And how exposed are you to big tech, especially since we're going to be hearing from these companies in the coming weeks about their earnings? And they're expected to be very strong.

JEFF SCHULTZ: I think that this has been a healthy consolidation back into the growth quality complex. But I do think once you start to see the retail sales numbers and you start to see much stronger economic data, that that's going to be the catalyst back into that value cyclical trade. What I find really interesting is that if you look at equity markets, you've clearly had some defensive/quality bias, a growth bias, if you will.

But if you look over to fixed income markets, high yield has been outperforming investment grade. So high yield is certainly still with that cyclical story. They're going for lower quality companies. And I think, again, when you get an acceleration of economic activity over the next couple of months, you're going to see that trade come back into spade. So I think that value trade, that cyclical trade, probably has another three to six months in it.

KRISTIN MYERS: All right, Jeff Schultz, investment strategist at ClearBridge Investments, thanks so much for all of those insights, as always.