Investors and bond market getting nervous about inflation: Expert

Katie Nixon, CIO at Northern Trust Wealth Management, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss job trends for March and outlook on the market.

Video transcript

ALEXIS CHRISTOFOROUS: Welcome back. Time is flying because it is the final day of the month, also the final day of the quarter, and we're seeing a pretty nice performance from stocks. In fact, the S&P 500 has reached an intraday record high, up now 35 points, knocking on the door of 4,000. The Dow is up 70. We've got the NASDAQ off to the races as investors pile back into those recently beaten down tech stocks, up now 2%, or 265 points.

I want to bring in Katie Nixon now. She is CIO at Northern Trust Wealth Management. And Katie, before we get into the nitty-gritty of the markets, would just like your view there at Northern Trust about this infrastructure plan that we're waiting to hear about later today from President Biden. Some economists are saying it could provide a sugar rush for the economy. What's your take on it?

KATIE NIXON: Well, it would be a sugar rush on top of a sugar rush. You know, we're taking it as it comes. We look forward to hearing more of the details at 4 o'clock this afternoon. And then we sort of view this as the beginning of the beginning. This is a very complicated and very large plan, with both revenue and-- and costs associated and tax increases associated.

So it's going to be complicated. And there's no sense of emergency the way there was with the American Rescue Plan, so this is probably going to take some time. We would view what we hear today as sort of the first bid, and we'll take it from there. But clearly, there will be something done this year on infrastructure.

KRISTIN MYERS: Wondering what kind of tailwind, or perhaps even headwind, this might provide the markets going forward? You know, economists have estimated, or at least according to the Biden administration, that this could boost economic growth by excess of 6%, which, of course, is great news. But we know that there is definitely going to be a fight on this, especially as this plan has baked in these corporate tax rates, a hike on those to 28%. So what are you expecting for market reaction going forward from this plan?

KATIE NIXON: It's such a good point you raise, because there are headwinds and tailwinds associated with this. And that's on top of what is sort of a cross current economic environment that we have already with a lot of investors, and certainly the bond market getting a little bit nervous about inflation, even without the infrastructure plan. So yes, this is going to add complexity and perhaps confusion to an already uncertain environment and will really rely on the contours of the plan, what will happen immediately, what has a longer tail.

A lot of the things that are in the infrastructure plan do have a very long tail in terms of how they'll be chunked out over time and what the ultimate economic impact will be over time. So we'll have to see when we get the details. But you raised the right question, which is, will this add more fuel to an already pretty hot fire?

ALEXIS CHRISTOFOROUS: And I think you hit the nail on the head when you talked about inflation. I mean, this infrastructure plan, for all the good that it is expected to do, could also stoke inflation. I'm wondering what you are doing with regards to your client portfolios as you try to hedge against that impending rise in inflation? And-- and when do you think the Fed might have to react? The Fed still saying they're not going to have to raise interest rates until 2024, but some economists and strategists are saying it's going to have to be earlier than that.

KATIE NIXON: So we actually side on the-- with the Fed on this one. We agree, and I think there's a growing consensus that the inflationary push that we're going to see over the next few weeks, and maybe even months, will be transitory. It's going to be a result of this sugar rush that we talked about at the beginning-- at the beginning of our conversation. We do think that will be transitory.

Our base case is that once we get past the effect of the stimulus, and once we get to the other side, whether it's 2022 or even-- early '22 or even later and into 2023, you're going to see these-- these things really tail off. And in sort of the base effect that we're worried about right now will completely reverse and we'll have sort of this base effect that's going to take inflation down perhaps below trend. But longer term, we believe the sort of structural impediments to inflation remain in place, the debt that's only gotten higher, demographic challenges that have only gotten more acute, and this increased use of innovation that's been really accelerated by the pandemic.

So we see these things as structural ceilings to inflation over the intermediate and longer term. That said, I think it's-- it's only fair to admit that we are in uncharted territory. And as we were just chatting about the infrastructure bill, that could change the dynamic over the next 12 to 24 months if we see some of these programs have-- have longer legs.

So we'll see. Right now our base case remains stuckflation. It doesn't mean that we don't want inflation protection in our client portfolios though. And one way that we've been getting that is through Global Natural Resources Equities. So we have on a tactical perspective a double weight right now to Global Natural Resources.

And there you get kind of the best of both worlds. You've got the equity beta, and we're constructive on equity markets, but then you also have the protection against unanticipated increases in inflation. And that's really what we want to protect our clients against if our base case turns out to be wrong.

ALEXIS CHRISTOFOROUS: All right, Katie Nixon, CIO of Northern Trust Wealth Management Thanks for being with us.