Combination of growth & modest inflation is a ‘good recipe’ for equities: Portfolio Manager

Jack Janasiewicz, Portfolio Manager and Lead Portfolio Strategist at Natixis Investment Managers Solutions, joins Yahoo Finance Live to discuss the end-of-year market outlook, the state of the energy market, and inflation concerns.

Video Transcript

- And to stick with the markets now and bring in Jack Genesee which is portfolio manager and lead portfolio strategist at natixis investment managers solutions. Jack Thanks so much for being with us. We've got this nice strong rally today, but I'm wondering if you believe there's real conviction in this market, and how much are you believing what you're seeing today.

- So you know I think we're going to get a lot of information out over the next couple of weeks. I think earnings are what really matter the most for obvious reasons but the one thing I think is very interesting in here. There's a lot of bearishness that we find built into the marketplace. We've had a number of Wall Street strategists come out and basically call for a correction.

If you look at things like the surprise indices, they're all trending lower they've actually broken below zero. We look at earnings revisions, those have actually come down quite a bit. Earnings estimates for the third and fourth quarter of leveled off. To me it feels like the market's leaning bearish, and when we start to think about the, the five, the firepower that can come back in when everybody starts to flip positive, C which you know earnings might be that certainly that catalyst. We could certainly see that upside and then we go into that seasonally strong portion of the market, which is the fourth quarter. We see reasons to be optimistic rather than calling for a correction in some weakness.

- OK. So then you it sounds like you are bullish longer term. Do you believe that we're going to end the year higher for all three major indexes or could that, that big correction and maybe even a bear market happen in the next few weeks?

- So Yeah, we still think the markets will end up closing higher for the end of the year. But the other thing I think is interesting, when you talk about those sort of corrections we probably have already had that underneath the surface and this has been going on all year long. If you look at the sector rotations that we've been seeing, there's been sweeping bear markets basically underneath the surface all year. And so, you know with that backdrop, we may have already had plenty of them across multiple sectors. And so I think that's another thing to consider in terms of how we're thinking about that sort of run into the end of the year. Totaly we've already had a pretty significant amount of rolling corrections that have taken place.

- That is for sure. I want to talk a little bit about specific sectors and I want to begin with energy. We're seeing explosive price action for, for crude, for gasoline, for natural gas, we're hearing all the,all the horrible warnings about us paying, you know much, much more to heat our homes this winter, but what about opportunities for investors right now in that backdrop, because we know energy has been one of the leading sectors for this market this year.?

- Sure, and I think it's been pretty easy to ignore the energy sector because it's been such a small portion of the overall allocation to the indices. You know there's the ESG thematic that's been pushing through the marketplace so longer term, you know the move away from fossil fuels has certainly been a thematic. But again, I think it's been fairly easy to ignore this segment of the marketplace and then all of a sudden we start to get these big move higher, and then you're looking at Yeah, maybe you're underweight that portion of the marketplace but because of the size of the move in energy in a lot of the energy related names, that's having an outsized impact, especially if you're having some tracking error issues.

So you know the fact that these sectors in our own sector that certainly I think gives more credence to the idea that flows can still come in and push this market up. When we look at the relationship between spot crude prices and where for example the XLI index is trading or the ETF, there's a pretty big disconnect between where spot has been trading and where that ETF is so, we certainly do still see upside in the energy complex going into the end of the year there's some catch up in there.

- And we know that higher energy tends to feed into higher inflation, which we are seeing plenty of across our economy. Given that backdrop, what are you doing in terms of client portfolios right now? How are you repositioning as this market starts to get its head around the fact that inflation may be here for a while?

- Yeah, so we've always been in sort of the transitory camp that really hasn't changed much for us. You know one of the things that we point to you know it's still a lot of the pent up demand, the bottlenecking, the reopen issues that are, I think, really at the heart of why we're seeing a lot of that significant pop up in the core CPI. What's interesting, if you look at it on a month on month basis for example, we're basically back to the 2018, 2019 trend levels. We've had from March, April, may and June are pretty good pop in the month on month numbers but that's since settled in. So maybe we're looking at a step up increase and then we're going to level off rather than seeing that continued grind higher. And I think as we sort of get to the idea that COVID is getting behind us, the workforce is probably going to start to increase we're going to get people getting back to work, a lot of these bottlenecking issues, a lot of these inflation related concerns I think can be traced back to the virus.

And once we get the virus under control I think a lot of this concern over the inflationary pressures that are building behind the scenes will start to dissipate a bit. So when we talk about client portfolio, we still don't think inflation is about to run away to the upside. We're actually saying a little inflation is probably a good thing especially for the earnings backdrop because it operates in a nominal world not the real world, and you're getting growth in there as well. So we think a combination of growth and modest inflation maybe a little bit higher than where we're at currently. It's actually a pretty good recipe for equity. So we're still recommending overweight equities and overweight the cyclical portion of the market. That's where we think there's opportunity into the end of the year.

- All right making a convincing case there for the Bulls, Jack Genesee what's at natixis, Thanks so much for being with.