Tim Pagliara Discusses Stock Market Reactions and Investment Advice Amidst Market Fluctuations

Interviewer (Speaker 1):

Turning back to the major averages, joining us now is Tim Pagliara, Chief Investment Officer of CapWealth. And Tim, what is your reaction to how markets closed today?

Tim Pagliara (Speaker 2):

Well, I think it was good. It was a little bit of relief. The markets have had to digest a lot of action from the Federal Reserve this quarter and it's affecting everything from mortgage rates to how they value stocks.

US Market Stability Amidst Ukraine Conflict

Interviewer:

So you've said that the ongoing conflict in Ukraine makes the US market a safer bet for investors than the European market. Why is this?

Tim Pagliara:

Well, we're the stable source of everything in the world. We've got the best regulation, we've got the best national security, we're self-sufficient in oil and gas, and our supply chain issues are minimal compared to the rest of the world. So the US is going to continue to be the safe haven place to invest and save going forward.

Advice for Investors in European Markets

Interviewer:

Now, does that mean that you believe investors in European markets should sell? Or what are you advising?

Tim Pagliara:

Well, when they allocate capital, they're already allocating to the United States. There's a reason why there's no real estate development projects in Ukraine. They're here in the United States. There's money from South America, from Europe, from Asia. 15% of all the commercial real estate last year was purchased by the Chinese. So that is a trend that even started and was very strong before the Ukrainian crisis.

Impact of Fed Policies on the Mortgage Market and Economy

Interviewer:

Now you said you expect the Fed to continue with the planned policies it has outlined. What impact do you think this will have on markets and what should investors know?

Tim Pagliara:

Well, let's talk about the mortgage market and that gives you the best insight as to what is happening. In 2020, the average mortgage was 2.75%. At the end of 2021, it was 3.25%. It just crossed over 4.7%. So the Federal Reserve was the largest purchaser of mortgages. So they slowed up purchases, they've stopped purchases, and then this week they announced that they were going to start selling mortgages. So all of a sudden, the largest customer is out of the market and they're raising rates at the same time. So you're going to see the mortgage market and the housing market slow dramatically. That impact will ripple through the rest of the economy as well. And it will start to bring inflation down as supply chains open up and they reverse. It's the reverse of the pandemic. They're pulling back everything that they put into the economy. We have 40% more money has been printed since February of 2020 that existed prior to that.

Investing Amidst Inflation Concerns

Interviewer:

Now you've also said that investors with cash on the sidelines should consider investing in the market to guard against inflation. Can you tell me more about that?

Tim Pagliara:

Absolutely. My good friend Ron Barron spoke this morning about this. If you look at the last 50 years, inflation has run about 4%. And historically, the best way to protect yourself against inflation is well capitalized, big companies that have products and services that Americans need where they have pricing power. And that pricing power allows them to continue to increase their earnings and profits and that shows up in good long-term results for investors.

Expectations for First Quarter Results and Company Health

Interviewer:

Now, what are your thoughts on what we might see when first quarter results start to come out in the next few weeks?

Tim Pagliara:

I think that there's a lag. So I expect first quarter results to be good. There will be some inflation pressures that will have an impact on earnings because like you were talking about earlier, Rent the Runway, they've got higher costs, they haven't been able to pass those along yet. That has an impact on earnings and profits. But by and large, American companies are still very healthy, the economy is still supercharged, and I think we're going to go through the rest of this year in better shape than what people anticipate.

Key Sectors to Watch: Housing and Real Estate

Interviewer:

All right. My last question for you, Tim, is what sectors are you keeping an eye on?

Tim Pagliara:

Housing's the main one.

Interviewer:

Yeah.

Tim Pagliara:

20% of the United States economy is housing. We have to keep that moving. The Senate and the House can do a lot by getting Fannie Mae and Freddie Mac recapitalized and released from conservatorship so that they have the capital to make up the slack from the Federal Reserve not buying and actually selling the mortgage-backed bonds that they accumulated since February of 2020.

Future of the Housing Market Amidst Rising Mortgage Rates

Interviewer:

So what do you think happens when the housing market reaches that point where mortgage rates are so high that buyers are scared off from buying and sellers are no longer getting people walking through their house?

Tim Pagliara:

Well, housing prices will start to moderate. The supply will get better. And builders, let's face it, they've been getting fat in the last year, year and a half, while there's been more demand than there has been supply. So they may not have five people bidding on a house, waiting for them. It may go down to one. And so a lot of the speculation that's been in the market, in the housing sector will start to subside as the supply comes up. And it will naturally go up because of the affordability problem with rates going up as much as they have, as quickly as they have.

Interviewer:

All right. Tim, Chief Investment Officer at CapWealth. Tim, it's been a pleasure having you on. I appreciate your expertise and sharing it with us.