Don't expect inflation to come down anytime soon, says Ellen Hazen, chief market strategist at F.L.Putnam.
“We think that inflation has probably peaked and will be declining toward the rest of this year,” Hazen told Yahoo Finance Live. “The reason for that is that companies have a wide variety of different factors leading to inflation. There are higher labor costs. There are higher fuel prices, higher transport and logistics prices, higher commodities prices, and some of these are going to come off, but they won't come off all at the same time.”
Hazen recently joined the show to discuss personal consumption expenditures (PCE), inflation, market growth, and the outlook for the Fed ahead of its Federal Open Market Committee meeting (FOMC) next week.
Before the Fed begins “to ease off the brakes,” Hazen explains that inflation needs to be “down well below 5%” and “we don’t know how quickly that can happen.” Because of uncertainty and volatility, Hazen states “the Fed is going to stay hawkish through the rest of the year.” The Fed has already begun quantitative tightening (QT) earlier this month, seeking to drain the $9 trillion currently on its balance sheet.
Hazen also said that the Fed coming “to the rescue” is unlikely. “The 30-plus-year bull market in interest rates is over, and from here on in, rates are going to be higher.” The market is expecting as many as 7 rate hikes this year.
To hedge against inflation, Hazen is “looking at companies that have high free cash flow generation.” She cited “food and staples retailing” companies “like CVS (CVS), which generates over 100% of free cash flow every year and is trading at 12 times earnings, with a 13% free cash flow yield.” She said she's also "looking at companies like Broadcom (AVGO), which generates 200% free cash flow to net income.”
For the coming months, it’s unclear when inflation could return to 2%. But in an era of slowing economic growth, "you really need to look for companies that have strong free cash flow generation" Hazen said.