Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, appeared on Cheddar News to share his investment insights on the expanding labor market, the Fed, high-performing industry sectors and the Russia-Ukraine war.
Read below for a full transcript of the conversation.
Speaker 1:
Joining us now, Christopher Wolfe, Chief Investment Officer at First Republic Private Wealth Management. Now stocks flat for most of the session before rallying in the final moments. So what are your biggest takeaways from today’s market activity?
Speaker 2:
Well, I think end of quarter, it’s a position squaring and a lot of other kind of trading activities typically dominate the quarter. So I don’t take too much away. I think the big surprise is that this is the first down quarter in a long time. That’s number one. And number two, it’s been a big reset — the reset of expectations about what inflation looks like, about what the Fed’s gonna do, how fast they’re gonna move. And ultimately that reset of expectations is starting to be built into stock prices.
Speaker 1:
So stocks posted their worst quarter since the pandemic crash of 2020, but March was also the first positive month of 2022. So which trend do you think serves as a better indicator of how this quarter will go?
Speaker 2:
The second quarter. So that’s a tough call. I think both are indicative, but I think the second quarter is gonna be pretty tough. So the first quarter is probably indicative of what the second quarter is gonna look like. A lot of noise, a lot of volatility as the Fed adjusts policy. Keep in mind that in just a couple weeks, we’re also gonna get first quarter earnings guidance for many companies and they don’t have a lot of incentive right now, given the pressures on inflation, to announce, “Everything’s gonna be awesome!” for the remainder of the year. So that’s not necessarily a bad thing, but I think we’re gonna have a more tempered quarter. And that information vacuum we’ve been in the last two months will go away. But I think the result is just gonna be a pretty noisy second quarter as well.
Speaker 1:
Now, before we get to that data, the Labor Department released 431,000 jobs. Everything’s looking pretty good there. So do you think investors had this priced in, or do you think stocks will be taken higher?
Speaker 2:
I think investors haven’t priced in all the news yet. I think what’s going around the street right now is the Fed now has a green light to hike 50 basis points in their next meetings, two times. ’Cause I think investors are looking at the Fed being maybe a bit behind the inflation story here, it’s been more persistent that has been expected and we’re likely to print maybe even a seven and half or an 8% number are going into the April period. So I think the call for the Fed to do a bit more for our markets is gonna rise as the summer progresses. So them getting ahead of it, meaning maybe one and maybe potentially two 50 basis point hikes is what we’re gonna see. That’s part of the rationale for a pretty noisy quarter.
Speaker 1:
Now, like you said, new quarter means new earnings. So what sectors do you think are gonna be performing the best? Which one do you think investors are really gonna keep their eyes on?
Speaker 2:
I think there’s a couple of them actually. So interestingly enough, the first quarter might be indicative of the second quarter for some sectors. Think about energy, for example, anything energy or commodity related did extremely well. So while the U.S. market on balance didn’t do that well, the Brazilian market did extremely well. The Chilean market did extremely well. Oil prices were up, almost every commodity, well, except cattle, almost every commodity was up as well. I think the story of inflation and the scarcity imposed by sanctions on the back of the Russia-Ukraine war is an important one that will last into the second quarter, for sure. So that, I think, indicates to us that there’s still room for some of these commodities to continue to do well. Energy as a sector in the U.S. market looks relatively good. After the big wipeout in tech, it may be time to also value hunt there, so we’re still bullish on tech. And then lastly, interestingly enough, healthcare has just been through the ringer, and particularly biotechnology, since November of last year. I think there’s starting to be some bottom fishing opportunities in this area. And we recently upgraded healthcare from market neutral to an overweight position in our equity portfolios.
Speaker 1:
All right, next week we’ve got some Fed minutes coming our way. Do you think investors, as a whole, think that we might see a more hawkish approach or no?
Speaker 2:
You know, the economy is in great shape right now. There’s more jobs than there are people looking for jobs. You know, that kind of is the story with not just the job market today, but it’s ultimately part of the new calculus we think that the Fed has to incorporate. I think investors are gonna have to adjust their expectations. The bond markets pricing in maybe more hikes than the Fed has indicated, so the Fed’s probably gonna catch up to that. Given this persistence of inflation story, that’s gonna upset the apple cart of equities a little bit in this quarter and you probably have to be more careful in the sectors you own. Some of the ones we just talked about I think will probably continue to do well, and investors haven’t built in all of the expectations for maybe higher-than-expected oil prices for a longer period of time, as an example, or starting to look for some of those value areas. Interestingly enough, increasingly in tech and healthcare.
Speaker 1:
So we’re already a month in, more than a month in, when it comes to the conflict over in Ukraine. Do you think it investors now with this new quarter are pretty seasoned on what to expect every time there’s a headline that comes out?
Speaker 2:
Oh gosh, the whip saw and the kind of which way the wind blows effect has just been rattling markets, but let’s make a couple of statements. I think if there were ceasefire or any kind of resolution in the near term, the equity market rallies probably pretty hard. There’s a lot of folks that are very nervous that there are other implications for the war. And certainly there are, whether it’s related to agricultural commodities, keep in mind, Russia and Ukraine are exporters of about 25% of the world’s wheat, as an example. I think if there were a resolution, we’d see a pretty strong rally, but that would immediately shift investor focus to “What are the fundamentals?” And this inflation story while we’re seeing it in the headlines is also starting to affect companies. It’s creeping into their cost structures in the form of higher wages.
Speaker 2:
That’s a good thing for wage earners, not a good thing for companies, but we’ll take the good thing for wage earners. But it’s also showing up in other areas, higher energy costs, higher what are called input costs, means that maybe margins are gonna be more under pressure this year. And I think that’s the story for the remainder of 2022 is margin pressure. And you gotta be more selective and look for the areas where there’s less likely to be less margin pressure in 2022, the places where we probably will see it are more in the consumer areas as one example.
Speaker 1:
So weather’s getting warmer, but there seems to be the most jobs available in the leisure and hospitality business. As an investor in those sectors, am I worried that there’s so many jobs that are open, or am I happy with it?
Speaker 2:
Well, it’s a double-edged sword, unfortunately. You’re worried because ultimately you need to have workers in order to make the services come alive. You know, if you need people on cruise ships, you need people in hotels, etc. But at the same time, for the folks that do come into those places, the cruise ships, the hotels and whatnot, the reality is the cost structure for these businesses will also benefit by not having to pay or are not paying, because they can’t fill the jobs, higher wages. So it’s like I said, a double-edged sword. I think really the issue is the longer-term trend here. Assuming that inflation can come under control later this year, maybe early next year, you get to a place where if these companies are, the laser sectors, repricing their business a bit higher on the back of the higher wages that we’re seeing. There’s a lot of savings out there. There’s a lot of pent-up demand post-COVID. I think you could be on a longer trajectory, but right now I think it’s better to watch and wait in these sectors.
Speaker 1:
All right. Book the cruise in January. Christopher Wolfe, Chief Investment Officer at First Republic Private Wealth Manager. Christopher, always a pleasure. Thank you, sir, for coming on the show.
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