Truist Co-CIO Keith Lerner appears on Yahoo Finance Live to discuss the market and what we should expect with inflation in 2022.

Video Transcript

JULIE HYMAN: Up till now we've still had people spending. We haven't seen pushback against these price increases, at least not yet. That is what we're hearing from economists. It's also what we've been hearing from some analysts who watch the Food industry, for example. Just one more thing I want to mention. We do have the University of Michigan preliminary December confidence numbers those are coming out at 10:00 AM.

And there we will get more insight as to how these inflation numbers are feeding through to sentiment. We don't know how they're going to feed through to spending yet, but we know that we have been seeing definitely some hits to sentiment from higher prices. Let's talk about how it's feeding through into the markets though. And for that, we bring in Keith Lerner. He is co-chief investment officer at Truist.

Keith, it's good to see you here this morning. We got stock futures rising on this. It seems as though these numbers, while they're hot, while they might be painful for some consumers, there doesn't seem to be anything in here that derails the outlook for the Fed. Is that good news for equities? How are you reading these numbers?

KEITH LERNER: Yeah, well, first, good morning. When I heard the headline number, and you said 1982, 1982 was the start to a big bull market, obviously different times. But when you think about the market's reaction, why it's up today is kind of what you hit on is that markets are all about how numbers come in relative to expectations. And this wasn't a surprise.

And then as you think about the Fed, the market already is pricing in about three Fed rate hikes next year. So I think the market is already braced for this. And if you just get what the market's expecting, then it shouldn't be a big surprise in the markets acting accordingly. People were concerned about even a hotter number.

That said, I do think as we move into next year, this is going to consistently add to the volatility in the market. Everyone's going to be focused on the CPI numbers and inflation numbers and how quick the Fed is going to do or go-- how-- the pace they're going to go out. So I think this will continue to inject volatility into the markets.

BRIAN CHEUNG: Hey, Keith. Brian Cheung here. When you take a look at the individual components in this CPI report, what was something that caught your attention as to whether or not we should expect these high prints to remain through X amount of months in 2022 because a lot of people focused on Owners' Equivalent Rent, kind of taking a look at whether or not that can be stickier. 0.4% was the increase month-over-month. Is that alarming or not as bad as you would expect from that report?

KEITH LERNER: So I think it's about in line, but I think that is going to be one of the stickier components. I think we're going to have some places like rents that are likely to be sticky throughout next year. And then, we'll see some other areas of this reopening in some of these supply bottlenecks start to come down.

Overall, I don't think it was a big surprise. I hadn't seen the stat that Brian talked about on the food and poultry. That was interesting. And the raises that you talked about earlier, I think that doesn't seem right when we look at job openings or at a record. There's a lot of demand for labor. It's a tight market.

So I expect wages-- I think wages and rents are the two areas that are going to be somewhat sticky. Our view into next year is that the inflation numbers will likely stay somewhat high. We're likely-- probably saw to peak early into the year and gradually move down, but still stay above the pre-pandemic levels. But that's also consistent with above economic growth. So it's not just all negative part of that inflation is caused because there's so much demand in the overall economy still.

JULIE HYMAN: And let's talk about spending a little bit. I was just mentioning that we have not yet really seen any kind of effect on consumer spending or push back against these higher prices. Do you expect that to continue as we head into next year as well and that to be potentially supportive to stocks?

KEITH LERNER: Well, when we think about inflation, and let's think about the wage component, which again were soft in this report, but I think that's a bit misleading. It's a double-edged sword. So we have inflationary pressures, but people are also earning a lot more, especially at the lower income levels. Their wages are increasing.

And those folks tend to spend the most of their money. So that should continue to support the overall economy. And there's still a lot of excess savings cumulative that have saved up. Again, at this point, since there's still these supply constraints, I think consumers will go ahead and take the higher prices.

But next year, these things should ease somewhat, especially as we see an easing in some of those supply bottlenecks, which we think is likely to happen in the first half.

BRIAN CHEUNG: Keith, let's go back to the market's focus here as we head into the new year. What do you think is going to be the major theme in terms of volatility? Because, look, the last week and a half has been quite the rocky road for investors. Got to have a thick skin from what was going on. Do you expect these pullbacks that we've been seeing periodically, especially with the possibility of more variants in the future to be as deep or as frequent as we've been seeing just over the last month?

KEITH LERNER: Yeah, well, the first thing for next year-- our big theme for next year is, we're still positive yet realistic that from a bull market perspective, we think it's going to extend. Stocks look attractive. But we're going to certainly moderate. We think somewhere in the 6% to 12% range is realistic.

And then, going more specific to the question you asked on pullbacks, historically, the average kind of biggest drawdown you see in any year is about 14%. And the biggest drawdown we've seen this year has only been about 5%. That's abnormal. What we're telling our clients is be braced for more frequent and somewhat deeper pullbacks relative to this year.

And that's actually more the norm than the exception. And a big part of that is what you mentioned, the variant. There's going to be variants. I think we'll adjust to that. But just as you take away some of this really excess liquidity, that's also likely to lead to more periodic pullbacks. But that's not necessarily just a negative. That provides tactical opportunities both on the upside and the downside. So I wouldn't be necessarily nervous about it, but I think investors should be braced for it.

JULIE HYMAN: And Keith, in that positive yet realistic outlook that you put together one of the charts that caught my eye was one that posited we're not in a bubble here in terms of stocks but looked at the longer term trend and where we are and then our viewers can see that on the screen at this point. Talk us through what this chart tells you as to what we can see in terms of longevity of a rally here, even if it's a rally with some pullbacks.

KEITH LERNER: Sure, well, the first thing is we've had the strongest start to a bull market in history. And the question becomes, is anything left? And our answer to that is yes. But we're also realistic that gains moderate quite a bit. So the chart you're looking at it looks at the long-term trend since 1928.

And after being below trend, now we're slightly above trend. But what's important to recognize is during bull markets, you tend to stay somewhat above that long trend. Now, that does tell us, for especially longer-term investors like 5 and 10 years, that gains will certainly be somewhat lower. But it just tells us that we're in a moderating phase of the bull market.

But I would also say this is far from a bubble. In 2000, we were well above that trend. Back in 1929, well above that trend. Today, we're slightly above. And again, I think that's perfectly normal. And what you should expect after we've had such a sharp rebound. But again, we think this bull market extends partly because we think the economic expansion still has several years and stocks rise about 85% of the time during economic expansions.

JULIE HYMAN: And Keith, finally, I want to ask you about something that's in the news today. That's another potential market indicator. And that's insider sales of stock. Now, there have been some high-profile individual examples like Elon Musk, of course, but collectively, the "Wall Street Journal" crunched the numbers and found that 48 executives have collected more than $200 million each from stock sales.

And that's about four times the average number of insiders that we had seen in the previous four-year period. Sometimes, insider sales are seen as a bearish signal. How should we be reading this kind of data?

KEITH LERNER: By itself, I think it is a negative. No one sells because the stocks are screaming "buy." But it also reflects that we've had the strongest start to a bull market. And don't forget a lot of these sales happen before this month when there was a lot of uncertainty around tax policy. And there was-- the market had anticipated that capital gains was going to increase.

So I think that's also part of it. But again, I think on-- in context, it reflects a market that's moved up a lot some of these stocks, especially some of these technology stocks up 100%, 150%, 200%. Some of these insiders are taking some money off the table and probably diversifying that. So I think it makes sense, but also tells you we're not at the beginning phase of this bull market either.

JULIE HYMAN: Right, exactly. Keith, good to see you. Thanks for being here this morning. Keith Lerner of Truist. Appreciate it.