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10-year yield is up on inflation, market strategist says, but also on ‘more economic strength’

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LPL Financial Chief Market Strategist Ryan Detrick joins Yahoo Finance Live to discuss the rise in the 10-year Treasury yield, the market and economic outlook, and how cyclical sectors are poised to outperform.

Video Transcript

ADAM SHAPIRO: Ryan is LPL Financial chief market strategist. It's good to have you here. I'm glad I got the smile out of you. You obviously like Bill Murray. I want to get right to something you pointed out, which is that when we start to get these higher rates, it's usually bullish for stocks. Put that into context for the investors who are thinking, I got to do something.

RYAN DETRICK: That's right, Adam. Thanks for having me back. I like Bill Murray, but I like you, too. I mean, I was smiling at you also there, you know, so. But yeah, I mean, what have we heard the start of this year? The 10-year yield had that big jump last week. We know big cap tech sold off. The market in general was a little weak. But when you look back since the mid '90s, Adam, we found seven different cycles where the 10-year yield went higher for a long time, right? What did stocks do during that? The S&P 500 has been up every single time. There have been some 30% and 40% gains on the S&P 500 in these periods of a higher trending 10-year yield.

So, yes, everyone's saying, oh, the two-year yield's up because everyone's worried about inflation. We don't buy that. We think the 10-year yield's up because it's seeing, yeah, maybe a little more inflation, but also more economic strength. And what have we seen when yields go up? Well, bonds usually don't do as well. It probably means the economy's stronger. It probably means stocks do well. I mean, it's scary when you see all the scary headlines. When you break it down like that, a 10-year yield generally going higher probably is a good thing for stock investors here.

EMILY MCCORMICK: But Ryan, just to push back on that a little bit here, isn't there still a valuation concern for some of these growth stocks, these high flying equities that we've seen over the course of 2020, 2021 now as well, when it comes to having these higher interest rates and higher discount rates when you have these companies valued on their future cash flows?

RYAN DETRICK: Yeah, Emily, I can't disagree there. You know, at LPL Research, we're more even weight as it pertains to technology. Clearly, technology is that one group that's still a little pricey, and higher yields do hurt, you know, the future value of potential earnings. But again, what's been doing well? I know that other guests talk about this, right? Financials, energy, industrials, those things that do a little better with the steepening yield curve and are still cheap.

I mean, look at banks, all right? Banks literally are like breaking just now, breaking above where they were in 2007. I mean, you can't say those were overvalued. They haven't gone anywhere for 15 years. Technology has done this amazing run. So we still like the cyclical value area. There are some frothiness in tech, but boy, oh, boy, NASDAQ just had nearly a 10% correction. I know it bounced from Monday. But all of a sudden, some buyers are stepping in. So there's always values out there. We just like cyclical value a little bit more. It's not as pricey to us.

ADAM SHAPIRO: Help us understand, though, and I'm going to zero in on something you as a market strategist can help maybe calm or alleviate the fear that we have. I'm looking at WTI. It broke 83 bucks a barrel today. And I'm hearing, you know, it's almost like I can go back to 2008. They were talking about oil, $140 in peak oil, and their fear. Fear is never a good place to make a decision when you're making an investment, but I can't ignore that Brent broke 83 bucks, WTI has broken 83. How do we digest that?

RYAN DETRICK: Yeah, well, it's not just those. Look at other areas of commodities, right? I mean, copper, nickel, zinc, aluminum, a lot of these commodities in general. Look at the Barron's cover over the weekend, talking about the commodity boom or commodity bull market. So, yeah, eventually, crude gets a little too high, but I'll tell you, 83, like you just pointed out, it was 145, right, this time 14 years ago.

So the way we look at it is the consumer is really strong, right? Trillions of dollars in savings or money markets, 4 and 1/2 million people quit their jobs in November. Are they quitting because they're bored, or are they quitting because they have confidence they want to go start something new? We think it's more of that. So there's confidence in the economy. There's money on the sidelines. Yes, higher prices, more inflation, the consumer has to pay more. It's really that simple. But they can withstand it.

And let's just talk about investments just for a minute here, right? Energy makes up, like, 3% of the S&P 500. I think there's 22 energy stocks in the entire S&P 500. That's scarcity, right? If you think about demand and scarcity, those are the areas you probably want to be investing in. And it makes sense not as-- if crude keeps working higher like we think it could, energy in general, I know it was up 50% last year, so it's had a heck of a run. But energy still could have an outperformance this year, in our view.

EMILY MCCORMICK: Ryan, when we think about catalysts for the markets for this year, the Fed has definitely been in focus a lot in the first couple of trading days of 2022. But we're also in a year with a midterm election cycle. And based on your research and the data that you pulled over previous cycles, how does the stock market tend to respond when we have this occurring on the political side during a trading year?

RYAN DETRICK: Yeah, Emily, the bottom line, a midterm year, at least going back to 1950, is the most volatile year. We see as much as a 17% correction peak to trough during midterm years. November 2018, we had darn near a bear market, right, right into the Christmas Eve lows in 2018. So for whatever reason these midterm years tend to be volatile, yes, you get the excitement of the new president, maybe his new policy, and then things get a little tougher, right? You actually get a lot more rate hikes during the second year of a presidential cycle as well.

So we're in that range. We're starting to hike, more volatility. Hey, after literally a double from the December 2018 lows, maybe we could have a 10% or 15% pullback or correction this year. But the good news, one year off the lows, the S&P is up 33% on average. So you've got to be aware, you know, you've got to pay to play, right?

And it's going to be painful sometimes, but usually, if you can withstand that, by extending into that third year of the presidential cycle, that's when the president wants to get reelected. This isn't about Democrats or Republicans. It's about getting reelected. And usually they pull levers to get things going. So just investors need to remember that it's going to be volatile, and it's the way history has worked historically.