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Be cautious but not too negative on markets: Joe Fahmy

Yahoo Finance contributor and Zor Capital Managing Director Joe Fahmy spoke with Myles Udland and Rick Newman about his outlook on the markets during the coronavirus pandemic.

Video Transcript

MYLES UDLAND: All right. Welcome back to Yahoo Finance Live. Miles Udland here in New York. We're joined now by Joe Fahmy of Zor Capital. Joe, it's been a while since we've talked to you, man. Good to see you in these interesting circumstances. I guess I'd just start with what you're making of this market right now, how you're thinking about a market where everything kind of felt like it changed overnight, and maybe now we've had some time to let at least some of the dust settle.

JOE FAHMY: Yeah, no, thanks for having me on and great to see you. I wrote an article for you guys, for Yahoo Finance. It was about two weeks ago, and I was basically trying to say that, you know, it's OK to be cautious, but not to get too, too negative on the markets. And I was saying that I was fairly optimistic overall for a couple of reasons.

First and foremost is the market's a discounting mechanism, meaning it tends to trade on what's going to happen six to nine months from now. So I was just telling people to be open-minded, that it's possible that the market has possibly discounted and priced in all the negative news already, and just to be open-minded to that.

MYLES UDLAND: And you know, Joe, I remember talking to you back in '15, '16 about the idea of we're entering a new leg of the same kind of post-crisis bull market. And that really, thinking about it from '09 to whatever point in time we were at was misunderstanding the market. So I think there's been so much conversation now about actually, '18 to now was a cyclical bear market, and this is just the end of that period.

I mean, are you thinking in periodization right now, or do those kind of distinctions not really do much for you in terms of framing what's happening in this moment?

JOE FAHMY: Yeah, that's a great question. I think people should be more concerned with-- it depends on if you're a trader or you're an investor. Be more concerned with, you know, whether we're in an uptrend or a downtrend. And if it's a longer term time frame, people could say we're a big huge uptrend. If you have a shorter term time frame, this could be a rally within a bear.

But I don't get too concerned with those specific characterizations of the market. I just look to try to follow what the big institutions are doing, what individual stocks are doing. And that was another thing I mentioned in that article is that a lot of stocks, surprisingly, snapped back pretty close to all-time highs or new highs in a lot of the growth areas. So that's what I'm using to judge the health of the market, versus getting caught up in all the macroeconomic stuff.

RICK NEWMAN: Hey, Joe. It's Rick Newman. What are stocks anticipating in terms of earnings? I mean, we're barely getting into first-quarter earnings, and that's not even gonna be the worst of it. Those are only gonna partly reflect the coronavirus meltdown. Second-quarter earnings still three-plus months away. How much bad news can the market take from earnings?

JOE FAHMY: I mean, that's great. I think it's just sector-specific. So I noticed a lot of software names coming back pretty hard. I noticed a lot of biotech names, medical products, semiconductors that have a little bit more stability where they have solid backlogs and so forth. Your question's great about there's also a lot of unknowns in the airlines, in the cruise ships, in some of the beaten-down sectors, the hotels, that are gonna get affected by this in retail.

So I'm trying to more focus on the strength in sectors that won't be as harmed or you know, business as usual, where they can still operate pretty well, especially in something like software, versus the ones that are pretty obviously gonna get hit. Now overall to the markets, that's the big unknown to what kind of number you throw on the S&P as far as earnings to give the S&P a proper multiple.

RICK NEWMAN: So Joe, is it fair to say that the market anticipates a meltdown in the sectors that are getting hit the hardest, but it might be a real warning sign if we saw negative earnings surprises in tech, for instance, or semiconductors, or some place that seems to be less sensitive to this?

JOE FAHMY: Yeah. I think the market already has priced in-- I mean, any company that comes out with a negative warning or they're going to discontinue guidance, I think pretty much, everyone's expecting that. I think the key will be any sort of guidance they can give, you know, for the remainder of the year. And I think in the next three to four months, we'll get an idea, a better picture of that.

MYLES UDLAND: And you know, Joe, it just sounds to me like I hear you saying, basically, the strong names that got us here are the names that are probably gonna get us to the other side of that. Does it seem to you like, just given the way this shock came in, that those areas that had been outperforming and the areas that had big strong secular growth stories, that's probably where to look as we look 12, 18 months down the line?

JOE FAHMY: Yeah, that's a great point. I mean, yeah, of course things are gonna get hit short term, but there's still tremendous growth in many software, and let's say, medical products and semiconductor. Let's pick those three sectors because they've popped up the best. There's a lot of growth in there. Of course, they're gonna get hit short term.

But when you have companies growing 20% to 40% top and bottom line, when we recover, there's still a lot of people moving to the cloud and chips, as we know, go into pretty much everything. So those are the sectors that I'm gonna be focused on that probably will rebound the strongest.

MYLES UDLAND: All right. Joe Fahmy is the managing director of Zor Capital. Joe, great to talk to you. We'll talk to you soon. Stay safe, and hopefully, we'll meet you in person sometime soon.

JOE FAHMY: All right. Thank you.

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