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Economic outlook: second half of 2021 will be ‘like a party’

Yahoo Finance’s Akiko Fujita and Zack Guzman break down today’s market action and outlook with Ryan Payne, President Payne Capital Management.

Video Transcript

ZACK GUZMAN: Meantime, we also had Jay Powell talking about the potential look at the Fed around stablecoin, saying that they're carefully looking at if the Fed should issue a digital dollar. He had his own issues to be discussing there, though, in front of Congress outside of just cryptocurrency. He's kind of trying to weather this sell-off that we saw this morning. We saw that a bit relieved maybe by what he was saying around the Fed being more and more accommodative in this recovery.

For more on the sell-off, though, that we did see in the broader market, I want to bring on our markets guests here in the back half of the show. Ryan Payne is president of Payne Capital Management, and he joins us right now. Ryan, welcome back. What do you make of this sell-off? Because you were talking to us a bit about kind of that rotation away from tech, seeing that again today with some of those big names that had enjoyed the run-up. Perhaps Tesla as an example here, off about 5% in today's session.

RYAN PAYNE: Yeah, I think what you're starting to see here is, I mean, this is a trend that's been happening for a while. I mean, if you look at big tech specifically, it really, really topped out at the end of the summer. If you look at the big five, you start looking at Microsoft, Amazon, Google, Apple. You know, those type of stocks have really-- they haven't done much since we've had this reopening of the economy trade. I mean, since November, when that first really, really good vaccine news came out, tech has really lagged here.

So this trend has kind of been building for a while. And I think the greatest irony-- and I love investing because it is always kind of ironic-- is last year, we had Tesla join the S&P at, like, top dollar price, and now it's coming down from that price. And you had Exxon leaving the Dow Jones, and now Exxon is outperformed significantly what most stocks in the market have done. So that rotation is real. We talked about it before.

And you just start thinking about this year versus last year. Tech last year was in the perfect environment to do better than, like, any other sector. If you look at the big five, the revenue growth was, like, 18% last year. Meanwhile, the other 495 stocks in the S&P had negative revenue last year. But now we have the opposite. It's going to be really hard for tech to beat that extremely high hurdle this year, whereas things like energy, financials that just got their teeth kicked in last year, have a much lower hurdle to beat this year. And the earnings growth there is going to be phenomenal.

So money is going to go where the relative earnings are the best. And it's not going to be in tech this year. It's going to be in that reopening trade that we've talked a lot about.

AKIKO FUJITA: So, Ryan, what does that mean in terms of where you position yourself in the space? Do you stay put without adding to your position, or do you start to be a little more selective in the tech names that you have in your portfolio, looking at-- for the sector by sector, if we can say within the tech sector. Software, for example, the cloud-- I mean, is that the area to put your money in?

RYAN PAYNE: Well, right now, software stocks trade at 44 times revenue. Not profits-- revenue. So I have to think that that segment of the market specifically is probably fully valued, maybe overvalued at this point. I mean, take a stock-- you know, if you look at, like, Amazon, for instance, I mean, literally-- and which is not a software stock, but Amazon last year literally had $20 billion worth of profits. They dealt with their profits. It's going to be really hard to do that again and go to, like, $40 billion in profits.

And a lot of these software stocks, the same thing. You have, like, 44 years, probably more than that because now I'm talking about profits, of revenue priced in. So I just think at this point, like, yes, have exposure to tech in your portfolio. If you already have it, dial back on it. We always have some tech in our portfolio.

But you have to be really careful here and make sure that you're not overconcentrated there because the problem is tech, the S&P 500, which is a tech fund in drag, doesn't really benefit from that reopening trade. And again, that's where all the earnings are going to be the best this year, and essentially, that's where markets are always going to look for. Their slave to earnings is where profits are going to be the best.

ZACK GUZMAN: Where do you like the relative risk-reward, then, in that reopening trade? Because there's a lot of different ways you could play it, right? You could play some of the more speculative plays in cruise lines. We've heard people going after those. You could play casinos. You could play airlines. I mean, what's the best way to do it, though? Because, you know, as we've seen before, sometimes the expectations on the return to normal might get ahead of itself.

RYAN PAYNE: No, it's a good point. And I think there's probably more volatile to own things like cruise stocks, right? If you look at their chart, they have been going up, but it's extremely volatile to own those stocks. Same thing with airlines here. But invariably, all those stocks are going to do well at the reopening. I mean, small caps in general, which are just more sensitive to what the economy is doing small caps have been outperforming dramatically what large cap stocks have done this year.

That's probably a longer term trend because valuations, they are just so much cheaper. I mean, even airlines, when you start looking at profits out to 2022-- and that's where investors are looking right now because stocks invariably are forward looking-- like, you're getting to pretty reasonable multiples. So I think if you can ride the ups and downs here short term, that's probably going to be a pretty good return on your money.

The other big trend here is that weakening dollar, right? The dollar was so strong for the last decade. If you didn't own the US last decade, you basically lost, right? You had to own big tech the last decade, or you lost. But now the dollar's been weakening significantly since that first stimulus package we had last March.

And, since then, what that does is it pushes up your foreign investments. Anything in other currencies is doing really, really well here, and again, very cyclical companies as well. International companies tend to be more cyclical. Emerging markets are commodity based. And commodities are going through the roof right now, if you start looking at commodity prices.

So having international in your portfolio, like, you've got to have a global portfolio for the next decade. You're going to miss the boat. Whereas the last decade, you didn't really need to have international in your portfolio. But that's really where the opportunity is right now.

AKIKO FUJITA: Ryan, if you look at the moves over the last few days, we've also seen some jitters come through from the rapid rise in yields on the 10-year, as well as the 30-year. How are you reading those moves right now? And is there cause for concern in terms of what that signals for the overall market?

RYAN PAYNE: Yeah, I think it's three things. Number one, interest rates going up is very bad for bonds. So if your own bond funds here specifically, it's a very bad investment to own. So you got to be really careful how you own your fixed income here. That's very critical. Number two, I mean, they're just printing so much money. Money supply is up, like, 26%. That's the most since 1943. That's a lot of money in the system right now. And it's not just in the US. It's global right now. And that absolutely is going to continue to cause inflation.

But I think you gotta keep in mind here, too. Like, at the second half of the year, guys, it's going to be like a party in the economy. And I put a pullout on my Instagram story today saying, do you think we're going to party like it's 1985 when we really partied, or is it going to be like, no, we don't want to go outside anymore?

And overwhelmingly-- you can check out my story, you can vote-- people are saying, I want to party, I want to go out, and I want to live life, like, on a crazy level. So there's going to be a lot of money chasing, fewer goods, because you're going to have more money in the economy, and that's what causes inflation. That's a huge longer term trend.

And the way to play that in your portfolio, again, is you got to be careful with those bond funds. You got to own commodities, which are already up big. Energy's up 20% this year, lumber up 50%, corn up 30%. I mean, they're all going up. And again, it's also why you have to own those cyclical stocks. They perform the best when you have inflationary pressure.