Morgan Stanley Managing Director Kathy Entwistle joins Yahoo Finance Live to discuss economic data, the expected rate hike in March, and the market outlook amid geopolitical tensions between Russia and Ukraine.
ALEXIS CHRISTOFOROUS: Let's stick with the markets and bring in Kathy Entwistle, Morgan Stanley's Managing Director. Kathy, good to see you as always. I'm curious what you are doing with all this volatility we've seen since the beginning of the year. Are you taking advantage of it to do a little bottom fishing? Or are you sitting on the sidelines with some cash? What's your strategy?
KATHY ENTWISTLE: Hey, Alexis. Hey, Karina. Thanks for having me. Alexis, yes, I am bottom fishing. We are looking at these disruptions or dislocations in the market as an opportunity to upgrade clients' portfolios or put some more cash to work with prices that are more attractive than they were just a few weeks ago.
ALEXIS CHRISTOFOROUS: So where specifically do you think things look a little bit more attractive?
KATHY ENTWISTLE: Yeah, I would say over the last few months as I've come on and spoken with you, we've talked a little bit about the growth versus the value side of the market and that dividend-paying value companies should do well in this, like, mid-cycle stage of the market. And that's coming to play out now.
We're seeing that happen right now where a lot of the big growth names that valuations are really high at this point, they have pulled back quite a bit along with the NASDAQ. And being able to pull some of those off a little bit earlier, or at least take some of that off the table and move it into value, has played out well for our clients.
ALEXIS CHRISTOFOROUS: And in terms of earnings season, I mean, we're sort of still in the thick of it-- it's been a very mixed bag. And not a lot of companies are offering guidance. And when they do, they're talking about higher inflation, supply chain issues. Where do you see strength this earnings season? And what areas are you staying away from, if any?
KATHY ENTWISTLE: Yeah. Well, what I would say, too, is clearly, the Fed, we think, is priced into these markets. So everything the Fed is doing at this point we think has just been priced in over the last few weeks. And that's where a lot of the sort of slide in the market has come from. And the big question is, will we slide a little bit more? What's happening?
And we're looking at companies and their earnings, and we're in earnings season right now, to determine whether or not we're going to have a little bit more of a pullback in the market or not. And that's based on what they can do going forward, where their opportunities are. And we've been hearing a lot about inflation. If you think about a 7% inflation rate, that's quite significant when you add it to services, and goods, and the price that consumers have to pay for things.
Back in the fall, it was the retail investor that was holding up the market. And now, their sentiments have sort of turned and they're no longer optimistic about where we are right now. So I think we have to think about all of these things. We do think that the quality, again, is going to do better than growth.
We do think that there are some opportunities in the international developed markets to place some money. And we also think that some areas of the market in the US should remain pretty strong or have opportunities, such as energy, industrials, and tech. You also brought up small caps earlier, I believe, or maybe touched on it.
And I would say small caps got slammed last year overall. And we think if you're a long-term investor-- and again, as we see these prices go down-- those are the times to buy. Like, buy on those opportunities if you can get it a little bit lower cost. It's going to pan out really well for you and your future returns on your portfolio and your overall wealth.
ALEXIS CHRISTOFOROUS: I'm so glad you brought up those small caps, Kathy, because I was going to ask you that next. We're looking at an intraday here of the Russell 2000, and on a percentage basis, it's getting killed the most amongst the majors today. It's down more than 2%. I'm wondering what you-- you're pretty bullish, apparently, on the longer term prospects for these smaller cap stocks. But I'm wondering, in an environment of higher interest rates and higher inflation, at least in the short-term, what is that going to do to these small cap companies and their stocks?
KATHY ENTWISTLE: We're definitely going to see volatility through the first half of this year in small caps and other parts of the market. And that's what we're looking at, though. Let's use that dislocation or that volatility to our advantage and go in and buy the things that we think are well positioned going forward.
We also have been talking about and still believe going into this year, 2022, we're already one month in, stock selection is going to make a difference. So we do want to be positioned where we're actually investing in stocks for the most part versus indices. I mean, indices are always great and it's good to have them as part of the portfolio, but it's going to be the individual companies and how they manage their supply chain, and their digital transformation, and how much they've been able to accelerate or pivot towards the future, and what their product outlook looks like, and so forth.
So it's about those opportunities and just taking advantage of them when the markets get hit a little bit like they're getting hit today. If you look at small caps last year, double-digit losses. And a lot of them got hit quite poorly last year or quite badly last year. And it's time to buy some of those companies that are on sale and the PEs are quite low.
ALEXIS CHRISTOFOROUS: That they are. I would imagine you're overweight US equities, but you tell me. And also with a lot of the uncertainty around this potential conflict between Russia, and Ukraine, and NATO, what are you looking at in terms of European markets right now?
KATHY ENTWISTLE: Yeah. Well, European markets-- basically European markets, we like Japan-- just the typical Asian markets as well. I would say any time we see something like what's going on with Russia and Ukraine, again, the market doesn't like uncertainty. So that's usually where you see some of the volatility and some of the downdrafts in the market.
And if you have a plan or you have an idea of where you want to be in the markets when those areas of the market fall, that's when you go in and buy. And that's where you get the best opportunity. It's a very easy way to upgrade your portfolio and add a little extra return for yourself just by making these very simple moves.
ALEXIS CHRISTOFOROUS: All right, Kathy Entwistle, Morgan Stanley's Managing Director, thanks for joining us here on the stream.