Nasdaq TradeTalks: Rates, Inflation and the Role of Dividends

Jill Malandrino:

Welcome to Nasdaq, Trade Talks, I’m Jill Malandrino. Global Market Reporter at Nasdaq. Joining us for this segment we have Jeremy Schwartz, Global Chief Investment Officer of Nasdaq listed WisdomTree to discuss his outlook for rates, inflation, and the role dividend stocks are going play in this environment. Jeremy, it's great to see you welcome to Trade Talks.

Jeremy Schwartz:

Jill, thanks for having us, great topic for today.

Jill Malandrino:

It certainly is. And I guess a million-dollar question, of course, Jeremy is how many rate hikes do you think are feasible that we could get this year?

Jeremy Schwartz:

You know, it's amazing how fast the market has come. I mean, just today, we got another PPI report. You're seeing these numbers come in very, very hot. We were early on the thesis that the market wasn't correctly figuring out what the Fed was going to do. The Fed's [Federal Reserve] coming quicker. You know, we're, closely watching, Powell's going to be giving a Humphrey-Hawkins testimony in the next few weeks. That may be more important than the first Fed meeting. Like we think there's a real chance they go 50 [basis points] at this first Fed meeting. We were early saying they could go as much as eight hikes. Nobody was talking three hikes. When we started saying eight, we're saying they can get really, you know, more aggressive, but we see inflation being a real problem. But obviously the data will dictate. The markets come a long way in pricing in these additional Fed hikes, but we're on the ‘inflation is hotter than most people expect for longer than they expect’. And so to think the fed will adjust to that reality

Jill Malandrino:

Is inflation solely about the supply chain or rising prices?

Jeremy Schwartz:

You know, what's, it's about, that the Fed's not talking about, is the money. So if you go way back, the Fed talked about the money supply and you've had this huge double-digit money supply growth 12, 13% a year, and to get, and, and so this money in the economy, you know, it it's different than the quantitative easing during the financial crisis when all these excess reserves sat on bank balance and didn't go into the real economy. Now you've this huge money supply growth that's in the economy, it's in people's checking accounts. And so it's, yes, the supply chain is a factor; you need more labor supply, you need more goods, you have all those bottlenecks of COVID, but it's the money in people's checking accounts that is ultimately pressuring the demand. So we see that as a persistent factor, we've been saying 20 to 25% cumulative inflation from the pandemic. We're probably halfway there. We think there's still more to go on that inflation. Uh, and so yes, supply chain's one factor, but it's the money supply is the key factor.

Jill Malandrino:

That's interesting because you would think, okay, for the average American, they have more money in their checking account, that's a good thing. So how can slowing down the increase of the money supply, combat inflation? Don't we want people to have healthy checking and savings accounts

Jeremy Schwartz:

And, you know, you could see the, the, the central banks be in a weird position, the bank of England, uh, one of their, their heads were saying, ‘don't ask for raises, you're putting too much pressure on wages’, that didn't resonate with the average person. We want our wages to go up and, and wages are going up. I mean, that's one of the things about this. That's also going to keep inflation hot is that people are saying, ‘give me a wage increase, I've been seeing the inflation’. And so I think you are going to see more wage pressure that will support, uh, further demand and keep these, some of these inflation pulses coming for the next few years.

Jill Malandrino:

Why are dividend stocks attractive in this environment?

Jeremy Schwartz:

The way people allocate there's stocks, there's bonds, and then other things so commodities and other, other real assets. Stocks are real assets companies, when you see in the earnings reports, companies say they're passing along the price increases. You see it across the economy; people are passing along those increases. And so companies, because they do pass along, the, you got the producer [price index] this morning, goes up, the companies pass along to consumers, earnings, and dividends, and to grow with inflation over time, you go back 60, 70 years, inflation was 3.5% dividend growth on the market was 2% above inflation. Uh, and so you get real growth on top of that. You look at where TIPS bonds after inflation yielding bonds today, -40 basis points. Instead, you could get 3%, on large cap dividend paying stocks, higher dividend stocks that grow with inflation over time. That to us is an attractive proposition.

Jill Malandrino:

So let me throw one more question at you, Jeremy, when do we think inflation is under control? When does the Fed decide it doesn't need to do anymore rate hikes? Is there a specific percent, is there some other data that they're looking at that lets them know, ‘okay, this policy worked out’?

Jeremy Schwartz:

Yeah. I mean their long-term target is two [percent]. They were talking about was below average trend and it could go above average or some time before caught up to the trend. We're getting close to that catch up to their long-term trend, which is why they're going to start adjusting it. So the question would be how quick can they back get back to the 2% levels? And again, we, we think it's going to be some time if you have 7% inflation, should you really be at 1% interest rate? Is that gonna really do it? Not to us. And so we do think it's hiking faster, uh, but they're looking for 2% inflation ultimately as their longer run targets.

Jill Malandrino:

All right, Jeremy, we appreciate the insight. Thanks for joining us on Trade Talks. I'm Jill Malandrino, Global Markets Reporter at Nasdaq.

Jeremy Schwartz:

Thanks, Jill.