MoneyLife with Chuck Jaffe
Sanjac Alpha's Wells: Interest Rates Will Rise This Year, Even if the Fed Cuts
Why It Matters
Understanding how geopolitical shocks and inflation are reshaping corporate pricing and labor trends helps investors anticipate consumer price pressures and profit outlooks. Wells' insight on rising rates and the shift of bond exposure toward tech and private credit signals where yield‑seeking investors might find opportunities in a higher‑rate environment, making the episode especially relevant for anyone managing portfolios in 2024.
Key Takeaways
- •Middle East conflict lifts input costs, compresses profit margins.
- •Firms plan price hikes, no expectations of cuts.
- •Recession probability rises above 25% among surveyed economists.
- •Wells expects higher rates; AI turns bonds into tech funds.
- •Private credit absorbs junk bond risk, offering safer high-yield.
Pulse Analysis
The latest NABE Business Conditions Survey shows U.S. firms grappling with higher input costs tied to the Middle East conflict. Energy and transportation expenses are squeezing profit margins, with only 18% reporting profit gains—the lowest since October 2023. Nearly half of respondents are passing price increases onto consumers, and a growing 16% plan further hikes, while no company expects to cut prices. Hiring momentum has stalled; only 6% saw headcount growth, the weakest level since 2020. Meanwhile, economists’ recession probability rose, with roughly half assigning a 26% or higher chance of a downturn within the next year.
Andy Wells of Sanjak Alpha warned that interest rates are likely to climb this year, even if the Federal Reserve trims policy settings. He highlighted how artificial intelligence is reshaping bond portfolios, effectively turning traditional bond funds into tech‑focused vehicles. At the same time, private‑credit markets are swallowing the risk once held by junk bonds, providing a comparatively safer high‑yield alternative. Wells remains optimistic about a solid equity year—10% to 25% returns—provided investors secure additional yield to offset persistent inflation. His outlook underscores the need to reassess duration exposure as rate hikes loom.
Technical analyst Matt Harris echoed the market’s mixed signals, noting that while the S&P 500 has reclaimed record highs, breadth indicators are weakening. He stressed the importance of diversification across sectors, especially as small‑cap stocks demonstrate strong rebounds off key moving averages. Harris also warned that media‑driven soft data can distort investor sentiment, making a balanced, data‑driven approach essential. By monitoring advanced‑decline lines and leadership profiles, investors can better gauge whether the current rally is broad‑based or driven by a handful of winners, informing prudent rebalancing decisions.
Episode Description
Andy Wells, chief investment officer at Sanjac Alpha, says he expects the stock market to continue on its positive roll and wouldn't be surprised if it's up by about 6% from current levels over the next six months, but he also says that investors should expect interest rates to go up this year — even as he thinks the Federal Reserve will look to make a cut — because there is so much incoming bond supply driven by the artificial-intelligence boom and the need to fund A.I. projects. Further, Wells says that investors' bond funds are becoming "a tech bet" as the market changes and tries to absorb the massive funding needs behind new technologies.
Matt Harris, chief investment officer at The Hausberg Group, says the current trend can drive the market higher, though the trend would need more breadth and participation to generate more optimism. He says investors should be using volatility to their advantage, especially in areas where consumer sentiment is weak, to buy into sectors that are on sale. Specifically, he is looking for alternative ways to play artificial intelligence, such as with energy companies and other adjacent industries.
Martha Moore, chief economist for the American Chemistry Council and survey chair for the National Association for Business Economics discusses NABE's latest Business Conditions Survey, released Monday, which showed that corporate economists see shrinking profit margins and, as a result, higher prices being passed along to consumers, which could keep inflation higher for longer. Despite that, the economists remain modestly positive on the next calendar quarter.
Plus, Chuck answers a listener's question about how to view a portfolio that just set a personal peak, but that is overloaded with growth stock funds.
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