Confession Of Augustine: Buy Savior Stocks Amazon, Alibaba And Electronic Arts – Forbes

This post was originally published on this site

I recently spoke to Huntington Private Bank CIO John Augustine to get his take on markets and the economy, and to find out what sectors and stocks he favors now.

Wally Forbes: Thank you for joining me today, John. What is your view of current markets?

John Augustine: Wally, thanks for having me.

Since early February, we’ve seen a noticeable rise in day-to-day volatility of all markets: stocks, bonds, currencies and commodities.

February started with a better-than-expected jobs report and we just saw an even better jobs report on March 9. This is good economic news. But since that time, we’ve had other issues develop that churned up what had been very calm investment waters: trade, central banks and inflation.

Let’s start with trade. It’s the current issue we’re seeing—and starting to form judgments around—that will likely to develop further in the spring. At this time, we give the politics of trade less than a 50% probability to impact a robust global economy. However, we fully recognize this is likely to be a headline risk for markets in the near-term.

After trade, central banks are the second issue we’re watching closely that will develop more this spring and even throughout the year.

We believe the Federal Reserve will raise rates three or four times this year. And the Federal Reserve will slowly—very slowly—contract its balance sheet by having maturing bonds not be replaced. This started in the fourth quarter of 2017 and will progressively increase from approximately $10 billion a quarter to $60 billion a quarter over the next 12 months. The Fed has a huge task of trying to bring down a $4.4 trillion balance sheet down closer to $2 or $3 trillion, without having a negative impact on the economy or bond market. This is something new for the Fed. And now we have a new Fed chair, Jerome Powell, whose first day on the job was when the day the Dow dropped 1,100 points. So, he got a baptism of fire from the stock market, which is not unusual, unfortunately, for past Fed chairs as well.

But nevertheless, we believe that, as Powell has stated recently, the Fed will stay gradual and incremental in its approach to normalize short-term interest rates—let’s say for now, in the 2% range—and then begin to bring down its balance sheet.

Two other central banks around the world will play into the interest rate normalization process as the year develops. The European Central Bank is still buying bonds to the tune of about $30 billion a month. They have a stated goal to end that program in September. We believe that will probably have the biggest impact on longer-term interest rates, not only in Europe but also in the U.S. later this year as we move into the fall and into the fourth quarter. That is something we’ll be watching, and obviously, markets will, too.

Forbes: Very interesting. What’s the second central bank?

Augustine: The other is the Bank of Japan, which is still buying not only bonds but other assets as well. We heard a comment from the head of that central bank, Haruhiko Kuroda, that he is considering ending that bond and asset-buying program sometime in the spring of 2019.

So, the four major central banks in the world—U.S., Europe, England and Japan—seemingly want to start their own form of synchronous activity. First, they want to quit buying bonds or, in the case of Japan, other assets. Second, they want to begin thinking about slowly raising short-term interest rates or, in the case of the Federal Reserve, continue slowly raising short-term interest rates. And third, they want to begin reducing their balance sheets. The Fed is out front of the other central banks in all three of these areas.

We do not believe central banks will want to have a negative impact on the global economy this year. But we do believe they potentially could impact global bond markets later this year by sending yields higher, likely led by the European Central Bank.

Forbes: What about inflation?

Augustine: Currently, our view is that inflation will increase from about 2.1% last year to about 2.5% this year, or slightly above current consensus.