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Prepare for a Correction Due to Inflation and DC Uncertainty: Federated’s Phil Orlando

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Longtime market bull Phil Orlando is giving a 10% correction warning.

Federated Hermes chief market strategist warns that uncertainty surrounding fiscal and monetary policies will prevent the market from breaking out of its recent rut.

“There might be another shoe to let go in the next five weeks or so,” Orlando told CNBC’s “Trading Nation” on Monday. “We see how events develop and evolve here.”

Orlando went under surveillance in the middle of the summer. He saw signs that a 5-10% air pocket was materializing, and he estimated it would hit stocks from August to October. His concerns ranged from higher than expected inflation to variants of Covid.

These risks still exist, according to Orlando, but Washington policy is now preparing stocks for a major setback.

“On the monetary policy side, inflation has been much higher than the Fed and the administration prophesied,” he said. “We believe that inflation is more persistently higher. This will lead to a change in monetary policy by the Federal Reserve in terms of reducing and increasing their interest rates much faster than they had to us. originally announced. “

He is also worried about a possible change at the head of the Federal Reserve. President Jerome Powell’s term ends in January. The expiration gives President Joe Biden the ability to change a person appointed by President Donald Trump.

Orlando also lists debates by lawmakers over the debt ceiling and billions of dollars in infrastructure spending as the main headwinds in the market.

“It’s a very critical week,” he said. “All of these talks are very volatile, so any combination of these developments in Washington could be ripe for another drop in stocks.”

Orlando cautions that the backdrop makes growth trade, which includes Big Tech, particularly vulnerable.

“If we’re correct that there’s a 5-10% air pocket due to some of these events, the tech stocks we think could be disproportionately affected,” Orlando said. “Maybe that would be a 10-20% move down.”

Instead of technology, it would focus on buying stocks linked to the economic recovery and having pricing power over weakness. Orlando is particularly fond of energy, financials, industrials, consumer discretionary, materials, small-cap stocks, and international developed markets.

“There’s a tremendous catalyst for driving their earnings and growth forward, and they’ve fallen quite far behind tech stocks – growth stocks -” he said. “There is a catch-up trade coming.”

Despite Orlando’s short-term correction warning, he has higher expectations for the end of the year. The Orlando S&P 500 year-end target is 4,800 and its 2022 year-end forecast is 5,300.

On Monday, the index slipped 0.28% to close at 4,443.11.

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