There’s ‘a lot of confusion’ on Wall Street: People's United Advisors CIO

John Traynor, Chief Investment Officer, People's United Advisors, joins Yahoo Finance Live to discuss expected rate hikes, outlook on the bond market, and buying opportunities in the market.

Video transcript

KRISTIN MYERS: I want to keep this market conversation going. We're joined now by John Traynor, chief investment officer at People's United Advisors. So John, I just want to start with what we heard from James Bullard, essentially moving up that timeline again on some of those interest rates hikes. What's some of your reactions to his comments? And do you think that the Fed itself right now could be one of the risks to equities? I mean, right now, investors are really not taking kindly to some of this news.

JOHN TRAYNOR: That topic dominated our investment call this morning. And we had our equity team and the fixed income team really debating that because, for quite some time now, the Fed has tried to convince the market that they are going to let the economy run hot. If anything, they were going to err on the side of higher inflation.

Now they've come out, two days. We had the Fed meeting. And then you had Bullard this morning, basically saying, you know what, it may be time to start thinking about tapering. It may be the time to start thinking about raising interest rates. So we were questioning this, thinking, the Fed is invested so much effort in convincing people that they're going to let the economy run hot. In the last couple of days, they've turned things around.

So there's a lot of confusion on the Street. I think you're seeing that in the stock market today and the last several days. And it's really showing up in that reflation trade. Look at the financials, as Jared just discussed. The financials are getting crushed because rates are coming down. The yield curve is coming down. It's starting to flatten.

And it's probably not the message that the Fed wanted to get across. So we were debating whether or not there might be a rephrasing of the messaging fairly soon out of the Fed. But it's very, very confusing, very confusing.

ALEXIS CHRISTOFOUROS: Yeah, I think you hit it. It is confusing, even for the pros. It's sort of refreshing to hear you say something like that. So when you look at your portfolio, especially at financials, now that we have a little more clarity, we think, on when interest rates might start to rise, what do you do with your financial holdings? And what are your expectations for the bond market and for yields there as we head into the summer?

JOHN TRAYNOR: Yeah, two very good questions. And we talked about the financials. But we talked about just the positioning of the portfolio. And last year, we had a growth tilt on in the portfolio. And it worked out nicely for us.

Well, rather than move all the way over to have a value tilt, we decided in the fourth quarter of last year to have a neutral. We basically went neutral, made sure we were even between growth and value, sort of the value trade and then the reflation trade and the slow growth trade.

At times, that has looked like it's a mistake. But boy, oh, boy, we were reaffirmed this morning that we're very happy with that positioning, basically trying to be neutral because trying to call the growth-value shift or call the different moves in the market, very, very difficult.

Now, to your focused question on financials, we like financials. So we looked at this morning and said, we may be getting a little buying opportunity in the financials. They've had a good run. They're coming back. We still think, know from an economic standpoint, from a credit quality standpoint, the financials make sense.

So we're evenly weighted in the financials right now. But we were actually debating, do we go to an overweighted position in the financials because we do like them.

KRISTIN MYERS: So John, where else are you seeing some buying opportunities? Alexis was pointing at the VIX a little bit earlier. And we have so many phrases, don't we, when we talk about the markets. And of course, I'm thinking of the VIX is high, it's a time to buy. So where are you seeing some other buying opportunities outside of financials? And then how are you thinking about hedging against some of these inflationary risks that we're seeing?

JOHN TRAYNOR: Yeah. Well, from a buying standpoint, we're still focused on adding to the economically sensitive parts of our portfolio. So we made some moves yesterday in our equity portfolios to reflect that. So we still like the industrials. We still like the consumer discretionary stocks. So we're still adding to the economic growth names in our portfolio, big picture.

From a bond market standpoint, actually, we've decreased our holdings in the mortgage-backed area. We've been cutting those back. Spreads are basically nonexistent. And if it looks like the Fed is going to start tapering, we believe it'll probably start in the mortgage-backed area. So from the bond portion of the portfolio, we're decreasing our mortgage-backeds.

At this point on the yield side, I'd rather be taking profits on the bond portfolio than adding. We do think we're going to see higher rates. You're seeing that on the short end. We do think you're going to see that on the longer end. So we're being a little defensive on the bond side. And if we're aggressive, we're being aggressive on the equity side of the portfolio.

ALEXIS CHRISTOFOUROS: And what about when you look at the reopening trade, things like the airlines, things like the cruise lines, are you buying in there at the moment?

JOHN TRAYNOR: We debated that. And those are not stocks that we would normally buy. And boy, we had great, great debate about the cruise lines. And yes, if you bought and ticked those stocks, you made some money. But those are not the kinds of stocks that we would buy. So we decided, you know what? We're going to hold off on them.

So I agree with you on the reflation trade. But we'd rather play that through the industrials and the stocks that were a little bit more comfortable with than the airlines and the cruise lines. They're not our type of stock.

KRISTIN MYERS: All right. John Traynor, chief investment officer at People's United Advisors, always great to have you here with us. Have a great weekend.