Andrew Smith, Chief Investment Strategist, Delos Capital Advisors joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Andrew, we have just walking us through some of the moves we're expecting in DC, but I'd love to start on some of the data we got today, particularly on initial unemployment claims, because you've pointed out that as good as the data has been, you don't expect much of this to last. You think the volatility is going to kick in again. Walk me through what you're seeing on the horizon.

ANDREW SMITH: Most definitely. So what we've started to pick up in the tea leaves that we're reading, is that we've been in this recovery story, this V-shape recovery. And leading economic indicators since the March to May lows of last year has really started getting too lofty. And we are expecting volatility to start ebbing and flowing a little bit more dramatically, as we've seen over the last five trading sessions.

And we think that now it's leading economic indicators beginning to kind of reduce down or slow the momentum. Even though we're still growing, it's just not going to continue to be that thrust that was so strong and so positive. That leads to different sectors outperforming, leads to different asset allocation, and of course, a renewed bout of episodic volatility that we have to contend with.

ZACK GUZMAN: Yeah, and Andrew, I mean, on the inflation front, we're just looking at oils' moves today. Our market watcher here, Jared Blikre, noting that it's the biggest jump we've seen on crude since November after we got those bullish updates in terms of what OPEC Plus is planning to do there. But how does that maybe play into what the Fed's thinking might be regarding where prices go here? Because it seems like if you have inflation running hot, I know that they've said they'll be accommodative beyond just the normal 2% target here, but I mean, at what point do you say that can't hold up?

ANDREW SMITH: Yeah, that's kind of our biggest risk to our investment thesis. Again, we think the recovery story is intact. And we've been talking about rising inflation costs given the massive amounts of monetary stimulus that's been thrown into the pipeline. But what's happened, is that these commodity prices are hitting multi-year highs, some decade highs. We know that new home prices are at 12-year highs. We know existing home inventories are very low, which is putting up rent pressures.

So we see inflation really [INAUDIBLE] through the system. So this morning's initial jobless claims being worse than expected on top of rising consumer prices, hurts consumer discretionary, hurts our pocketbooks when we go to the grocery store, when we have to go put gasoline in our cars. And so it ends up becoming a situation where the Fed needs to be a little bit more hawkish or a little bit more coming out to the table and saying, hey, we are monitoring this.

Because what happens, is markets sees what policy errors. We've seen this time and time again. So if the Fed really continues this stance of no, we're going to let inflation run rampant and crazy, and our models suggest up to 2 and 1/2 and 3%, if that happens quicker than we think, the Fed will definitely create this error, and thus causing market volatility.

AKIKO FUJITA: Andrew, how much of that do you think is going to be sustained though? There seems to be a consensus, inflation is going to tick higher. But the debate really is over whether that's going to be a temporary move or something that's a little more sustained. Which side you stand on?

ANDREW SMITH: Yeah, so we're leaning more towards the sustained side of this. We have been in a multi-decade period of low inflation, low interest rates. And we think that there are some secular and structural shifts that are occurring right now because of demographics, because of the nature of technology, that we see rising costs of goods from the industrial recovery that we've had so far.

And so while I think it's not as transitory as most people are expecting, we don't expect hyper inflation by any means, but we definitely think that we are going to be trending higher. We'll have periods where it will slow down, but the rate of change is definitely in positive territory. And we think that's going to last for a multiyear period.

ZACK GUZMAN: All right, so it sounds like you're moving away from consumer discretionary, some of those other sectors. We've seen tech get hit as we think about reflation and that side of the trade. What about energy here? Because that wasn't necessarily on your list, or maybe it is. I mean, talk to me about where you see value moving forward, if that is to become the story of 2021.

ANDREW SMITH: Yes. So we've actually been very overweight cyclicality, which was energy, financials, industrials, and materials, and we think maintaining overweights into those cyclical sectors still makes a lot of sense. But what we've seen so far, is that the momentum factors, or so those hyper tech companies, the stay at home names that have done phenomenally well during COVID, those don't do well during rising real rate environments. And that comes because of growth and inflation.

So we expect growth inflation to continue, which we do, we think momentum names are still going to struggle and that the value trade is still alive and well. Value has been almost a low beta inclusion in an investor's portfolio relative to momentum or relative to pure growth factors. So I think it's a balance of understanding what are your low betas that help us get through volatility, but also maintaining exposures within our cyclical components of the markets.

ZACK GUZMAN: Andrew Smith, Chief Investment Strategist, Delos Capital Advisors, appreciate you coming on here to chat with us today.