One Man’s Opinion: Is The Federal Reserve Likely To Defer Rate Hikes Since Inflation Has Remained Weak?

The recent turmoil in the markets caused by Portuguese lender Banco Espirito Santo almost looked like a mini panic as a lot of investors jumped the gun assuming another credit crisis has hit Europe, said Brian Jacobsen, Chief Portfolio Strategist at Wells Fargo Advantage Fund. However, it may well turn out to be a good buying opportunity as markets are likely to witness a rebound from here, he noted.

Asked what is fueling investor confidence, Brian said after the latest selloff, people realized soon that banks in the euro zone are not as bad as they thought. The situation in Europe is a lot better than it was two years ago, or even one year ago; and when people realized that and came to their senses, markets quickly recouped losses. The fundamentals, i.e. business earnings in the US, are continuing to grow. The continued upward trend of corporate earnings is stoking market confidence, he observed.

Latest data show 16 out of 25 companies beat earnings estimate so far this year. Asked if the earnings season will be able to maintain the strike-rate, Brian answered in negative. Analysts’ expectations were too lofty in terms of a rebound in the second quarter because of the sharp decline in the first-quarter GDP (minus 2.9 percent). The negative GDP print didn’t really translate into a downdraft for corporate earnings, which is a little surprising.

There probably will be a few misses here and there, but in general, earnings in the second quarter are likely to be 10 percent higher, which should be supportive of the markets. So any dip is a good buying opportunity now, he explained.

Asked to comment on prospective buys, Brian said information technology in the US and globally is looking attractive. IT has not been keeping up with rest of the market and presents some good growth opportunities. Also, the industrials story is looking attractive; in the US and specifically in the euro zone and the emerging markets.

In industrials, even as some of the valuations look elevated, some surprisingly strong growth numbers are likely to come out of the eurozone once the banks starts to contribute to growth this year because of the European Central Bank’s policies. That could accrue benefits to shareholders not only in the eurozone, but even in emerging markets, he observed.

Asked if investors should factor-in an interest rate hike by the Federal Reserve, Brian answered in affirmative. A change in expectations will certainly create volatility in markets. Any time a Fed official opens his/her mouth and changes the date of lift-off for when the Federal Reserve will raise its rates; it’s going to create volatility. That’s why there could be a pick-up in volatility in the balance of the year just based on those shifting in expectations.

But, if push comes to shove, the Fed is likely to err on the side of caution and postpone when they need to raise rates. Inflation is not a concern in the US right now as it has remained below the Fed’s target rate of two percent. So it’s unlikely the Fed will raise those rates any-time soon, he concluded.

You can watch the video here.