Investors worried about a major downturn in the stock market can rest a little easier, the chief investment strategist at Strategas Research Partners said Friday on the heels of a four-day selloff in U.S. stocks.
“You have time. If you’re looking for the big one, I think you have another year, two years. This might be a correction. I don’t think it’s the big one,” Jason Trennert said on CNBC’s “Squawk Box.”
Ultimately what ends business cycles is inflation, and Trennert does not see prices rising significantly for some time. Further, even if the Federal Reserve raises interest rates this year as expected, monetary policy will remain loose, he added.
“The Fed might tighten, but the Fed is so far away from being tight, you still have negative real interest rates probably, on the short end, by 150 basis points,” he said. “So if the Fed tightens once or twice to try to normalize rates, I don’t see that necessarily as a big long-term problem.”
The stock market normally does well in the initial stages of tightening because the change in monetary policy is happening for good reasons, he said. The economy is improving, employers have to pay more for labor and the cost of capital goes up.
“It’s only in extremis that it becomes a problem,” he said.
The Federal Reserve is institutionally committed to raising rates by the end of the year, despite its assertion that it will only do so when the data indicate the economy can shoulder the change in policy, said Stephen Wood, chief market strategist at Russell Investments.
The central bank is widely expected to begin hiking its federal funds rate, the interest charged to banks for short-term lending to other institutions, intermittently by about 25 basis points.
“I don’t think they’re data dependent right now at all. I think they want to get to 25 to 50 basis points on the fed funds rate. I think September makes lot of sense, and at that point, starting in the fourth quarter, then they become data dependent,” Wood said in a “Squawk Box” interview.
Wood said it would take something “apocalyptic” for the Fed to prolong an initial round of rate increases of 25 to 50 basis point.
Wood noted that Federal Vice Chairman Stanley Fischer recently said the central bank will focus on driving inflation to about 2 percent after it reaches its target on full employment. Wood said that could extend the timeline for a bigger rate hike.
The Fed must also contend with low interest rates in Europe, Japan and Australia, putting additional pressure on the central bank to keep monetary policy relatively loose, he said.
The effects of the European Central Bank’s stimulative bond-buying program is just beginning, creating upside to stocks on the continent, Wood said. Meanwhile, valuations for U.S. stocks are high, despite a positive outlook for the business cycle, fundamentals and sentiment, he added.
Trennert is looking to Japan, where he sees structural change occurring at corporations as they adopt more independent board members and face pressure from activist investors. He said the entire country is potentially a leveraged buyout.
The market has still not woken up to this, and investors remain unconvinced that a country mired in a two-decade recession can generate returns, he said.
“I still find when I run around and talk to institutional investors, no one is buying Japan, or at least U.S. investors are saying, ‘I’m just going to make some other mistake. I’ve gotten burned so many times,'” he said.