A long-time market bull is tempering his outlook due to inflation.
Federated Hermes’ Phil Orlando expects the Federal Reserve will lift interest rates six times over the next two years to tame massive price increases from vehicles to shelter to food.
“Our best guess is that we will see two quarter point rate hikes out of the Fed in the second half of next year, and perhaps another four quarter point rate hikes over the course of calendar ’23,” the firm’s chief equity strategist told CNBC’s “Trading Nation” on Wednesday.
Orlando, whose has $634 billion in assets under management, is concerned about the latest inflation numbers. Both personal consumption expenditures and CPI are accelerating at their fast paces in three decades.
The Commerce Department reported last week prices for personal consumption expenditures or Core PCE increased 4.1% in October from a year ago. The inflation gauge, which is most relied on by the Fed, does not include food and energy.
The consumer price index or CPI also rose rapidly in October. The Labor Department’s index, which tracks what consumers pay for goods, includes food and energy.
“Given the surge in inflation that we’ve been seeing lately, it wouldn’t surprise me frankly if the Fed accelerated that pace of tapering,” he said. “Once the tapering is done, we’d expect to see some rate increases.”
That’s what could take Wall Street by surprise, according to Orlando.
“The Fed has been, I think to some degree, talking a good game along with the Biden administration in terms of the temporary or transitory of inflation,” he said.
“They’re going to remove accommodation at a reasonable pace over the next two years or so in order to try to get their hands around inflation and see if they can get that genie stuff back into the bottle,” he said.
In a rising rate environment, Orlando particularly likes stocks within the energy, materials and industrials space due to their ability to recoup rising business costs, raise prices and boost margins.
“What we’re doing is trying to invest in the companies that are navigating this situation in a reasonably good shape,” Orlando said.