To The Moon

Principal Global Investors’ Seema Shah is no stock market bull but says the rally that erupted Wednesday may continue until the head of the Federal Reserve steps up and stops it.

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“The market is underestimating the risks out there,” the firm’s chief strategist said in a Bloomberg Television interview on Thursday. “They need that catalyst to remind them, and that has to come from Jerome Powell.”

Stocks extended their gains a day after the benchmark S&P 500 index reached a three-month high. Investors seized on Wednesday’s report showing consumer-price data on inflation in July decelerated by more than expected to anticipate the Fed will slow an interest rate-hike regime that’s pummeled financial assets this year.

A report showing an unexpected decline in US producer prices last month added to the optimism on Thursday. The positive investor sentiment came despite central bank officials, led by Minneapolis Fed President Neel Kashkari, saying the Fed will likely keep raising rates to cool the hottest inflation in four decades.

“You always need to bring the big guns out,” said Shah. “We need Powell to speak. Until he speaks the market rally can keep going. Momentum can take you far. I don’t believe in the sustainability of this rally, but can it go further? Yes.”

Shah said Principal stayed neutral on US stocks “through the summer months because we’re concerned about a bear market rally.” The firm has a defensive strategy on the fixed-income markets, favoring investments such as “US Treasuries and securitized debt.”

But, she said, “Inflation is still a problem. You need to see growth is slowing.”