One on One with Rod Smyth, Chief Investment Strategist at Wachovia Securities
Wednesday, June 13, 2007
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SUSIE GHARIB: Our guest tonight says if bond yields don't go much higher, the major stock indexes will move higher for the second half off this year. Joining us now to explain, Rod Smyth, chief investment strategist at Wachovia Securities. Hi, Rod.
ROD SMYTH, CHIEF INVESTMENT STRATEGIST, WACHOVIA SECURITIES: Hello, Susie.
GHARIB: Let's begin by getting your analysis of what's behind this burst of buying that we saw today.
SMYTH: I think today's buying, I think your reporters nailed it. We've had two pieces of good news, actually three pieces of good news. First of all, the Treasury bond market hit the 5.25 level and backed off from it so the bond market rallied a little bit. Then we got good news on retail sales and then we got really very stock market friendly news out of the beige book, a reasonably healthy economy and signs of diminishing inflation pressures.
GHARIB: But it seems like we're in a schizophrenic market. One day the market sells off because it's worried that the economy is getting too strong. Another day the market rallies because the economy is slowing down. Which is it?
SMYTH: Well I think the thing that got the market in -- out of its up trend has been the new primary up trend in long-term bond yields, not just in the U.S. but round the world. You know, stock markets need liquidity. When interest rates start to rise, that liquidity is put into question. The big issue for us is what's driving the rise in yields? If it's mostly being driven by expectations of better growth, that's not so bad. If it's driven by inflation expectations, that's all bad. The intriguing thing is the third thing going on here which is I think it's being driven by the asset preferences of a lot of the people like the sovereign state such as China who hitherto have been buying a lot of Treasuries and I think that's starting to buy more stocks and more real assets like commodities and commodity infrastructure.
GHARIB: You really hit on it when you were talking about, you know, is growth good? Is it growth or not and looking at interest rates what's good news and bad news? I mean, is inflation a problem for the stock market?
SMYTH: I think that inflation is not currently a problem for the stock market. That's why, yes, sure, the stock market has been a little volatile in here, but the primary up trend is intact. In fact the news on inflation over the last couple of months has been generally good. Because the economy has slowed so much, the inflation numbers, particularly the ones the Fed watches, have been a little bit better. And even though bond yields have risen a lot, it's mostly been anticipating stronger growth rather than anticipating higher inflation.
GHARIB: So what should investors do? Is this a good time to be buying stocks, putting new money into the markets?
SMYTH: We are in the position of recommending recommendations for all kinds of investors and we run lots of models and lots of real portfolios. In every portfolio, we have both a strategic overweighting for stocks relative to other asset classes and indeed at the moment even a small tactical overweighting. So I think that that's the most important. You want to be strategically positioned overweight to start, but I think in terms of timing, probably as this interest rate thing plays out through the summer, we're going to get more of this chop that we've seen. I think the market's going to pause in here a little bit, but by the end of the year, sure, I think it's going to be higher.
GHARIB: Real quick question, we just have a few seconds left. Will there be a summer rally?
SMYTH: I think more likely we're starting the process of a bit of a summer sell-off and maybe if we get low enough from that point, we're get a summer rally.
GHARIB: Very well, thank you very much, Rod. Appreciate you coming on.
SMYTH: My pleasure.
GHARIB: My guest tonight Rod Smith, chief investment strategist at Wachovia Securities.
