Chasing the Rally With One Eye on Rising Yields

0:00to latest here on the floor of the New York Stock Exchange, Chris Bergatti's with me, chief investment officer, SWBC. And the first thing that we notice here are these down arrows, right? And we know some of the reasons why. Some of your thoughts, Chris, in fact, I believe you may have even sold some ahead of today. We did. We're a little bit concerned about what's going on globally, internationally, especially with interest rates, what's going on with the oil picture. So it's a good opportunity to sell to get ahead of this, because interest rates seem to be going quite high. So how high can everything go? I mean, that's sort of a speculative question, but $100 oil, 4.92% on the 10 year. Is this the top? I don't think so. I mean, I've been calling for a 5% 10 year for quite a while now. And I think we're going to get there this week, maybe next week at the latest at Siena. We're within putting distance of being able to get there. So it's right on the cost. Is that merited? What do you think is driving this? And do we stay there? Well, the fact that we've got inflationary pressures. What's going on with oil?

1:00What's going on with the constant change with the tariff situation? The Canada dynamic is altering what's going on with the US picture. So all these inflationary pressures are really keeping the foot on the gas for higher interest rates, and that is not constructive at the moment. So we saw the PPI come in pretty much in line. Nothing within its screamed inflation. Nor did it say inflation's coming down dramatically. A lot of folks waiting on the CPI tomorrow. What will you be looking for? Be looking for an inline print for CPI tomorrow, much like PPI was relatively in line today. But that is not what is needed. What is needed is something disinflationary, something to take the foot off the gas of the inflationary picture, and be able to bring it down. Without that, the Fed is under extreme pressure to high rates in my opinion. Do you think we'll see multiple hikes, or even a surprise 50 or something like that? I think more like multiple hikes. I mean, we're at the cost of dealing with the midterm elections. It's a challenging political time for the Fed to have to deal with as well. But overall, I do expect multiple hikes this year.

2:02As soon as next week? As soon as next week. And it'll be interesting to see why they do that. Is it the inflation picture? Is it because it doesn't necessarily correlate with oil, right? I mean, if they raise rates, it doesn't make oil come down. No, it doesn't make oil. Why would they do that? Well, they're doing it just to stop the ability of the market to keep borrowing a cheaper rate, slow down the economy a little bit, and be able to really bring things back into the fold. I mean, Worsh has been really talking tough about doing things to combat inflation. And so far, the Fed has done nothing to do that. They have to get on the front foot. They have to get ahead of this despite the pressure from President Trump. They really need to do something to show that they have the resolve to follow through. Let's talk about some of the investment opportunities that are brought. We just had a guest talking about Japan. You also had Japan in your notes, pretty much a virtual half the way. You sold some ahead of what's going on here, I guess, at home. What are you looking as opportunities to brought?

3:04Looking for things in Japan specifically that are able to take advantage of the governance change that has happened in Japan. The fact that the government is trying to spur the big borrowers, the big creditors, and the big companies to be able to clean up their balance sheets, return better to the clients, return better to the investors, ultimately, and what that would benefit as people like Mitsubishi, as well as Sumitomo Bank. They also have the benefit of having Warren Buffett investment, which is just a show of faith for lack of a better word in my opinion, that somebody like Warren Buffett is investing in them. That's usually a good sign. Yeah, I spoke with the Mitsubishi America CEO, and he was here at the desk with me, and when I tell you about the billions and billions, he was talking about the investments that they're making, it seemed pretty big. It is big. It is big, and they're also able to ride a little bit of the wave of the wealth management pushed that is happening globally as well as in Japan.

4:05So they both have very strong wealth management businesses, and they can benefit as well. You also are looking at tech, maybe here at home, but also abroad, telling me about that. I mean, the tech picture is really kind of well-known, well-said, the AI plays well entrenched, and it's a good place to keep riding the wave. It's very strong with what's going on with capital expenditures. So if you look in abroad, there's things that are kind of tech adjacent that are going to benefit. Siemens is a great example. They're bringing things home-shoring, a lot of things. It's a big technology adjacent firm, and they're able to benefit in the long run by bringing things home and really investing in Europe. You did have Airbus, too. Tell me about that. Airbus, big airline and defense contractor with what's going on globally, not only in the US, globally with the war that's happening. There's a lot of investment in spend happening in defense, and we've seen that by every major country in the world, and what they're having to do is spend more, buy more planes, buy more resources, and ultimately that helps companies like Airbus who are big in the defense space.

5:06So your year-end target around 70, 700, is that right? Correct. Tell me what you sort of project between now and the end of the year, because investors here at home want advice. Yes. We've already hit 7,700, backed off of there a little bit. So my target was already reached around mid-year. I do expect it to continue going higher. I can see somewhere north of 7,800 on the S&P as we move forward, but I expect a pullback. And I think we're seeing a little bit of that right now. Now's the time of year where there might be a little bit of a little bit of a retrenchment, people pulling back a little bit. And ultimately, as we head into year-end, that push forward is really going to drive the market. So the push forward in December, what about the fact the seasonality of September and mid-term elections? How do you think the market may be, hey? Like I said, I think now is a good time to look for that pullback. So I think that's what would happen. The mid-term elections, seasonality issues, those are all very big factors that come into play. I was expecting a little bit more of a pullback in August. It's cyclically and typically a period of time

6:07where there is that pullback. We kind of barely got that. And now it's kind of pushing a little bit deeper into September. And I think we're seeing it. The 30 year at 5.34% the highest in June of 2007, the 10 year you said you're looking for 5%. Is there an investment opportunity here in fixed income? If so, what? There are. What's interesting about fixed income is now it's at a point where the yield investors can get at these north of 5% type of yield levels can offset some of the possible drawdown that could happen from a decline in price. So they're locking in some good yield, locking in some good rates. And we're at near 20 year high in rates. And if you're looking in the corporate space, there's a lot of good opportunity there. But you got to be very careful in the credit picture. The credit picture can really degrade, and that's a concern. OK. Chris Bergotti, thank you, Chief Investment Officer, SWBC. Thank you for being with us.