Johny Fernandez: So we're seeing stocks lower to open the new trading week. The 10 year yield hitting 5% for the first time since 2023. A slew of macro risk factors coming into play on this Monday. We have crude and Brent both above $100 a barrel. We have yields as they continue to surge, and the Fed is expected to hike on Wednesday.
And on top of all this, AI leaders are calling for the industry to slow the pace of the frontier. So joining me to discuss this and more is Edison Byzyka, Chief Investment Officer of Credent Wealth Management. Edison, welcome to the show.
Edison Byzyka: Happy to be here. Thank you.
Johny Fernandez: All right, Edison, there is a lot to unpack. So ahead of this week's Fed meeting, we received August consumer and producer prices last week. So what did that tell you about the fight against inflation?
Edison Byzyka: Inflation is going to be a dominant theme over the next six to 12 months at best. And when I think about inflation from a why is it here? Is this acceptable? Does it make sense? One of the things that we probably don't talk enough about is the fact that the economic backdrop that we've experienced over the past 12 months, and how inflation is responding, added to the geopolitical risks.
It makes a lot of sense to have inflation where it's at. It makes a lot of sense to have consumers that have actually still that pent up demand post COVID. We're seeing it to the scale, the labor market where it's at. So inflation to me is a natural consequence of the positive policies and the positive structure of consumers over the past three or four years.
When I think of the next three or four months at best, I think inflation, Johny, is absolutely here. We are not going to be deviating much from it. And I think the Fed is going to have a much harder time through year end to try to combat inflationary pressure than ever before, especially leading up from 2022.
Johny Fernandez: Yeah, Edison, that's really interesting. And I want to kind of also pivot a little bit to the energy costs and talk a little bit more about that, because energy costs drove CPI higher last month.
So what impact are you watching for from the U.S. Iran war on oil prices, and how long could that take? Because obviously we've seen pretty much every day some new headline about this war.
Edison Byzyka: The geopolitical tension that has caused kind of that impact, inflation from the war has certainly been a left field outcome that we did not anticipate coming into the year.
With that in mind, one of the things that we're paying a lot of attention to is what's happening in the trucking business as a function of goods transfers across the country.
A lot of great indices out there that track that tonnage from the Department of Transportation, and we're just now starting to see the lagged impact that higher oil prices, especially diesel prices hitting above $6 a gallon, are having on transportation.
And the thing to note here is that the real negative impact was not going to be felt until probably six months later, and that there tends to be this lagging factor that trickles down and cascades from the transportation of goods, the consumption of goods, to how inflation is actually impacted.
Short of there being a resolution to the Iran conflict through the midterm election cycle here, which is going to take us probably through the end of October and November, it's going to be very difficult to make a solid argument that inflation is going to subside or have it be a positive narrative, to whatever extent that means, through year end.
So for us, again, the geopolitical tension, we have hedged that from an oil standpoint. We have hedged it from an inflation standpoint because we don't see that panning out in a positive way to the consumer, at least through the first quarter of 2027.
Johny Fernandez: No, it's definitely going to be interesting to see how that plays out in 2027. And so another thing that's making headlines this morning is the AI trade, because we're seeing the AI trade take a hit today amid warnings from top leaders.
So what are you tracking when it comes to the price of tech items thanks to the accelerating data center buildout?
Edison Byzyka: Looking at the activity today and seeing the broad sell off, two things really stand out.
Number one, there is a lot of noise out there, and seeing these particular names, whether it's Nvidia, whether it's Microsoft, whether it's Meta, Google, you name it, act in such a way simply because of the cautionary tales that are coming out from the AI leaders.
And seeing those stocks behave the way they're behaving simply tells me that there's appetite for risk off in those names. You're probably not enough to cause this notable downturn in the market. That could be here as a function of just a composite, seasonal composite through the midterm elections.
Number one thing I'm tracking is how is this impacting implied volatility in those names, and how is this actually impacting analyst earnings expectations heading into the earnings season.
Right? That earnings season is going to drive the narrative. I think here in the very short term, these are fantastic buying opportunities, that buying the dip mentality, and not necessarily because there's going to be exuberant gains in the future, but simply as a function of cash flow and earnings that are already baked in via the guidance.
It's very difficult to make an argument against those individual components. And it also leads me to believe a lot of the analysts tracking either the macro backdrop or even these individual equity names have not actually fully understood what that impact is going to be to earnings quite yet.
Meaning I see that as a bigger positive than a potential negative here through year end. So certainly volatility is here. Great buying opportunities for those that can stomach some of the intraday volatility.
Johny Fernandez: Yeah, that's definitely going to be interesting to see how that ends up playing out throughout the rest of the week.
So let's talk a little bit more about the Fed and the labor market, because the Fed also looks closely at the state of the labor market. So where do you think the jobs market stands?
Edison Byzyka: The jobs market has been a shining star. I mean, it's everything that's been happening, I think, over the past six to 12 months.
And one of the things that, you know, going back historically and tracking how higher interest rates have impacted the economy and stocks and so on and so forth, within the construct of that narrative, you do start to see fundamental cracks in the labor market, whether that is subpar wage growth or even declining in that sense, whether you see suboptimal new nonfarm payrolls.
We've seen quite the opposite in that the labor market has been fairly sustained in a very healthy way.
But most predominantly, if you look at the manufacturing data on the labor market and kind of those individual payrolls, it's staggering for what that relative improvement has been.
And as we look at the next three to six months, the reality is that we're probably going to see a lower labor force participation rate. Maybe we start to see some of the uptick in wage pressures, but none of that screams a slowdown.
The reality is the fundamentals remain very well intact. And seeing how earnings are expected to come in here in the third quarter, and if you add on top of that the seasonality of the labor market in the fourth quarter, it's very hard to build a negative sentiment profile heading into year end, notwithstanding any major geopolitical issues that may arise with the Iran conflict at this point.
Johny Fernandez: That's definitely interesting. And also, let's talk a little bit more about later this week, because the Fed is expected to raise this week by 25 basis points.
So do you see that happening, and what's your outlook for the central bank for the rest of the year?
Edison Byzyka: I've been a very kind of loud proponent that bonds carry more risk than stocks over the past 12 to 18 months, and we have certainly hedged and benefited from that narrative.
What I'll tell you is that the interest rate increase probability here, which currently, as of this morning, stands at roughly 91% for Wednesday, September 16th, for that increase to occur.
I am very much in line that it's going to happen now. If it doesn't happen, I would start to question the validity of why it's not happening.
Because, as I mentioned earlier, we're coming off this exuberant economic backdrop that has very appropriately behaved the way policy is expected to, the way that consumers have actually panned out, and how the labor market has supported this notion.
To not have an interest rate increase implies that all this data has been for nothing, for lack of a better term, meaning it hasn't been as impactful to economic growth. And that's simply not the reality. Everything points to the contrary.
So for me, an increase in interest rates here in September actually implies a verification, or rather a stance, that the economy is behaving the way it's supposed to. And to me, that is a very healthy sign of this business cycle.
If it happens, I do think there will be a short term pause through this midterm election cycle in the equity market before we start to see that seasonality in late November through December, kind of seeing that uptick in the broader equity markets.
Johny Fernandez: Awesome. Well, Edison, to wrap up really quick, so how is all this factoring into your equity and fixed income positioning?
Edison Byzyka: We've been drastically underweight duration within fixed income. Duration for us has been roughly in that two to three, three and a half year max positioning on that front. And we are very much favoring the short end of the curve.
There's going to be tremendous opportunity in bonds, I think, over the next three to six months, and I would be the first to allocate to something like a 20 year Treasury allocation structure via ETF and individual Treasuries, should there be meaningful information coming out post midterm elections.
But I would say no action until after that happens.
On the equity front, one of the things that the volatility profile isn't telling us today is that the average stock and that stepping away from a market cap weighted structure to focusing more on individual names from a bottom up standpoint outside of the tech sector, that is, there's tremendous value there.
So from our allocation standpoint, the biggest pivots we have implemented are stepping away from market cap functions, looking more into equal weight functions and trying to capture that widening of that breadth in the broader equity market.
Because since mid June, there's been tremendous value out in that space outside of growth and outside of the mega cap tech.
Johny Fernandez: Awesome. Well, Edison, thank you so much for your time and for joining us here on Market Movers: Midday. Appreciate it.
Edison Byzyka: Thank you so much.
