JD Durkin: Welcome to the show, Veronica Willis. She is Global Asset Allocation Strategist at Wells Fargo. Really nice to see you here today.
Veronica Willis: Thank you for having me.
JD Durkin: Okay, so talk to me about where you see Fed hikes going from here. We’ve got two meetings left, including October 28th. Do rates still need to go, in your view, a fair bit higher from where they are today?
Veronica Willis: Yeah, I think we’re expecting rates to go up. Four more hikes, probably one more this year and then three next year. So we’re thinking that October will be skipped. And, you know, that’s what the market’s feeling comfortable about after today’s PCE inflation data.
But we do think the Fed still has a little bit more work to do before inflation gets back down to their target.
JD Durkin: Yeah. Of course, we were just talking about at the top of the broadcast, PCE, always the favorite, the preferred gauge of inflation. What else are you seeing across other inflation metrics? Look at CPI, the PPI wholesale inflation print. All these things important to the Fed’s decision-making.
Veronica Willis: Yes, absolutely. You know, they like that core PCE, but they’re looking at all of these other metrics of inflation. So rental inflation, they’re looking at, you know, the services inflation, and all of these are still flags, which is the reason that they needed to hike rates at the last meeting.
JD Durkin: What do you think is most responsible for inflation’s state of stickiness right now? We know the oil benchmarks are certainly on the radar of the FOMC officials. What else is weighing on those numbers?
Veronica Willis: Yeah. You know, I think energy is the biggest catalyst because of the trickle effect that it has for everything else. So all along the supply chain, prices are moving higher.
And so it’s not just that energy number for inflation that’s high. It’s everything else that’s impacted by those higher energy prices.
JD Durkin: I know you still prefer equities over bonds, even given where yields are, and they continue to climb higher. The 10-year, another big move up today, six basis points. The 30-year back to a multi-decade high. What keeps you as bullish as you are on equities in this environment?
Veronica Willis: Yeah, it’s really the earnings story. So we think that earnings are going to continue to be good this year and earnings good in 2027. And that’s really going to drive up those equity prices.
You know, we like equities over fixed income, but don’t completely abandon that fixed-income portion, especially on the short end of the curve, where there’s a little bit less concern, less duration risk when yields and prices move.
You know, utilize that short-term fixed income, but we do still like equities more.
JD Durkin: How are you thinking about large caps over small caps, especially in an environment where now we’re contending with higher-for-longer interest rates once again?
Veronica Willis: Yeah. So there’s the interest-rate story, and then there’s a lot of market volatility, a lot of uncertainties that we’re dealing with.
And so we like, you know, the large-cap space over small cap right now because those companies have stronger balance sheets, and we think that they’ll be able to be a little bit more resilient through a lot of the uncertainties and a lot of the market volatility we’re probably going to see through the end of this year.
JD Durkin: If I’m not mistaken, you’ve moved to more of a neutral stance on tech overall, but you’re not entirely walking away from the AI trade itself. Where do you see some maybe cheaper ways to play it right now?
Veronica Willis: Yeah, absolutely. So, you know, we’re neutral on tech. So that’s still a sizable weighting when you’re thinking about the large-cap equity space.
But right now, we think it’s really interesting to play the AI theme with industrials and with materials, two sectors that are really important for that data center buildout and a little bit better valuation than tech right now.
JD Durkin: Also, you’re overweight commodities, and you see gold continuing much higher, a fair bit. What is the case for gold from here, especially on the backdrop of everything else that you and I have been talking about?
Veronica Willis: Yeah, I think it’s really tied into that uncertainty story. So there’s geopolitical uncertainties, which we think are going to boost those gold prices and be good for precious metals overall.
We’re expecting a little bit of a stronger dollar, and I think that that’s going to be a little bit supportive for gold. It’s going to be a little bit of that flock to safety for gold prices.
And I think gold, precious metals and commodities overall are a really great place to be diversified right now.
JD Durkin: I’ve got under a minute left. Any other big catalysts on your radar, Veronica, between now and the end of the year that you think the rest of us should be paying a little bit more attention to for Q4?
Veronica Willis: Yeah. You know, I think the market hasn’t started to pay attention to the elections much, but we’ve got elections coming up here in the U.S., and that’s going to cause a little bit of market volatility.
There’s going to be some uncertainty about potential policies, and I think that we’re in for a little bit of a ride here through the rest of this year, especially with those elections coming up.
JD Durkin: Tuesday, November 3rd will be here before we know it. Veronica Willis, Global Asset Allocation Strategist at Wells Fargo.
This is your first time on the show, I believe. Is that right?
Veronica Willis: I’ve been on before, a few years ago.
JD Durkin: Oh, okay. Well, it’s nice to welcome you back in that case. And please come back anytime. You crushed it. Nice to see you again soon.
