U.S. inflation metrics are either meeting or surpassing the Federal Reserve’s two per cent target and economic growth continues to ramp up. Peter Canelo, Chief Investment Strategist, Argus Research, talks to Sara D’Elia about why they are expecting stocks and bonds to perform in the second half of the year. Argus Research reports are available on TD WebBroker.
In the US, economic growth continues to ramp up. The S&P is about 5% above fair value. And key inflation metrics are either meeting or surpassing the Fed's 2% target.
But my guest says the bull run isn't over just yet. Joining me from New York, to share his outlook and explain where he sees opportunities, is Peter Canelo from Argus Research.
Nice to see you, Peter.
Good to be here.
So I know it's unseasonably warm in New York today, so I have to ask you, when you look at where the Fed is, you say they've fallen behind the curve. So are things too hot? Or are they cool enough?
Well, we just had a batch of inflation reports over the past week. And they show that the Fed's favorite measure of inflation-- the PCE deflator, the consumer deflator-- had just hit their target of 2%. Other measures-- like core CPI, the medium CPI-- have been well above that for some time.
And people are talking about wages being too slow. Well, we have wages at a nine-year high. And total compensation is 2.8% year-over-year. All of these numbers are 2% or higher. And that means that they have been a little too slow in moving interest rates up, because we're going to see some problems in the bond market as a result of this.
One of the things that's getting a lot of attention or people are asking quite frequently is, you mentioned jobs are, and wages, are all rising. Economic indicators are pointing to a pretty strong US economy. But now the question that's being asked is given the flat yield curve we're seeing, are we at a risk of a recession? Are the good times over?
Oh, hardly. Interest rates are so low relative to the rate of inflation. If, in fact, short-term interest rates were to go higher, people on fixed income could make more money. Right now they're making nothing.
When rates are this low relative to inflation, it doesn't matter if the T-bill is lower or the bond yield is high. It's irrelevant. There's very strong growth. The Fed's predicting 4.5% GDP growth here in the second quarter, at least 3% next quarter.
And so, we look at the real level of interest rates after adjusting for inflation, and we don't see any problem with the yield curve. We would have to grow substantially higher before there's any real risk to the US economy.
So just to summarize, you actually think we have some more hikes coming down the pipeline for the Fed. You think the US economy is still pretty strong.
Now, we're in the heart of earnings season. And analysts are expecting about 21% earnings growth this quarter, but layering on that we've heard some talk of lofty valuations, how do you see that playing out? Do you think there's still room to grow? What's your outlook for both stocks and bonds, really?
Well, first of all, those forecasts of earnings have consistently been too low. Remember, we cut corporate tax rates quite substantially. And that's the first reason why profits are much higher.
Secondly, when you have lower interest rates, the hurdle rate on investment for corporations is lower and they're investing more. Orders for durable goods, non-defense orders for capital goods are running at incredible-- I think it's 27% and 38% annual rates over the past two years. That's not shipments. That's not capital goods yet.
This is the strongest labor market since Reagan in 1984.
We're going to have you back, Peter. I know you highlight six investment themes with some specific stocks that you're watching. So we'll cover that in the next segment of our show. Thanks very much.