With inflation running extremely hot and central banks under pressure to tighten monetary policy, along with the emergence of the omicron Covid-19 variant in recent weeks, global stock markets face a unique confluence of uncertainties.
The U.S. Labor Department pegged November’s consumer price index reading today at a nominal inflation rate of 6.8% which hasn’t been seen in over 40 years. This upward trend in prices is likely to continue as new Covid variants emerge and supply chain bottlenecks persist.
“I think it is going to still run above trend and our viewpoint still is that you want to own hard assets and shift away from the grow their areas of the market, like technology,” hedge fund manager David Neuhauser told CNBC’s “Squawk Box Europe” on Friday.
You want to own hard assets
“I think investors tend to dive into the grow their assets because they believe that in a low growth world, you want to own higher growth assets that keep up with inflation, or obviously outperform inflation. I think this time is going to be a bit different,” Neuhauser said.
The Federal Reserve has propped up markets since the onset of the pandemic with its ultra-loose monetary policy stance, but Chair Jerome Powell and other policymakers have shifted to a more hawkish tone in recent weeks in the face of persistently high inflation.
Reining in valuations
Neuhauser argued that while the standard approach for investors on previous stock market pullbacks has been to “buy the dip,” the increased risk of a policy error in 2022 jeopardizes positions in traditional growth names.
If you look underneath the current of the tech sector of the Nasdaq, which is having an explosive year, there are a number of companies that are trading below their 200-day moving averages, that are actually in a bear market, so it is a bit troubling and also fooling people a bit too.”
Neuhauser argued that the only tool the Fed has in order to address this, in conjunction with spiking inflation and negative trending real yields, is to raise rates.
“That would be bad for obviously any high growth names, technology especially. I think over the next several years, as you see tightening in terms of monetary policy, it could definitely have an effect in terms of reigning in tech valuations,” Neuhauser said.
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