Fed: 'We expect tapering to create more volatility,' equity analyst says

Bruderman Asset Management Equity Analyst Akshata Bailkeri joins Yahoo Finance Live to discuss the rise of inflation, the Fed, and the stock market outlook for 2022.

Video Transcript

- Let's talk about where we stand right now at this moment in time, and let's bring into the stream Akshata Bailkeri. It's good to have you here. And she is Bruderman Asset Management Equity Analyst. You know, when we talk about inflation-- and I should point out Netflix just announced they're raising the price of their standard plan.

Fortunately in this house, we've finished "Emily in Paris." That aside, when we look at inflation and the Fed, which should we as investors be more concerned about, raising interest rates or the speed with which they roll off the 8.8 trillion?

AKSHATA BAILKERI: I mean, honestly from our analysis and expectations, we expect the Fed tightening to really create some market volatility at the outset, but more widespread volatility not really likely until the end of that tightening regime. For us, we expect tapering to create more volatility in general than the first couple of rate increases in general overall.

- Akshata, looking at this morning's economic data, retail sales fell by the most in nearly a year in December. Consumer sentiment is at the second lowest in a decade according to the University of Michigan. And that's after two hot inflation prints out earlier this week. Where are we now in the economic recovery? And what does this mean for investors?

AKSHATA BAILKERI: I mean, you can't talk about these retail sales without talking about the elephant in the room. The Omicron variant definitely is one of the main factors kind of affecting some of the lower sales levels. You know, it's more contagious than previous variants that we've seen, and even though some of the people get more milder symptoms in general.

And there is a very strong negative correlation between virus cases and personal consumption expenditures. And that's really affecting some of this retail spending. Personal consumption expenditures make up about 66% of overall GDP, which recovered quite a bit last year. But they have a negative correlation with this virus. So if Omicron continues to peak, we will still be seeing some of that negative pressure on retail.

- What would you say to investors who are looking at the big picture? We have consumer sentiment falling at lows we haven't seen in several years because of a fear factor that may not actually represent the true facts on the table. But that aside, if you're an investor looking at this thinking, you know what, I will always be safe in health care, is that the way to look at this? Or in that sector should you be considering something else?

AKSHATA BAILKERI: Health care has been really interesting. We had the JP Morgan Health Care Conference this week. There were a lot of interesting takeaways. We've seen a lot of the large pharmaceutical companies outline their strategic priorities. And some names like AbbVie, J&J, and Merck kind of highlighted some of their growing pipelines to replace their blockbuster, be it Humira or Keytruda, that have more impending loss of exclusivities coming up.

So some of those were very positive notes to deal with. And in medtech, we've also seen some appetite for M&A. So that's a space that investors to keep an eye on, because especially J&J, as noted, they're interested in and developing that area for themselves and looking at smaller M&A deals that can really support them in that endeavor. So it's at play some areas of change that could be good opportunities for investors to keep an eye on.

- And when you think about these three main areas of health care, you mentioned the large pharmaceuticals, medical devices, and of course, managed care providers, Where do you see, perhaps, the most opportunity if you can rank and pick one of these out amongst the rest, considering the backdrop that we still have with the coronavirus?

AKSHATA BAILKERI: I mean, there's opportunity in all of these spaces. When we invest, we look at long term secular trends in general. And one of the spaces that you wouldn't expect is animal health. Animal health has done phenomenally. People are getting pets. People want to make sure their pets are healthy and stay with them for a long term. And as we move more into hybrid models, people want to make sure that their pets can stay with them.

So names like Zoetis, or even Merck, that has a very large animal health division, are real beneficiaries of this overall secular trend. And within overall larger pharma, we see AbbVie, for example, one of the stronger names, has RINVOQ and SKYRIZI as two drug candidates to kind of replace Humira's loss of exclusivity.

So that's been really great, and Organon, which is a spin off from Merck, that focuses on women's health, another great growing area with fertility being a space that there's a lot more investment in, and a lot more trends that support people needing to use fertility treatments.

- Realizing your specialty is equity, I am curious, will you be paying-- well, you will be paying attention. I know you will. But what will you zero in when we get the statement later this month from the first FOMC meeting? Are you looking for lift off in March? Or are you going to be looking for something else in that statement?

AKSHATA BAILKERI: I mean, when we're looking at that, we expect that the initiation of the top would be probably around in March. It's come down from that July estimate. The Fed seem to be responding to these inflation pressures. And we have already seen many people come out saying, you know, we're expecting these interest rate hikes as well. But that left out, at least, are we expect to be around March. And they'll respond accordingly. That's what we believe.