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Equities are hard to 'lean in materially' amid elevated volatility: Strategist

Horizon Investments Head of Portfolio Strategy Zach Hill and Schwab Asset Management CEO and CIO Omar Aguilar join Yahoo Finance Live to weigh in on recent market volatility, bond yields, and why investing in equities may be a challenge right now.

Video Transcript




RACHELLE AKUFFO: Kicking off the start of a new month and a new quarter here. Let's take a look at how the major indices ended the day. We saw rallying from the jump. We see the Dow there ending up 764 points, up 2.6%. The S&P 500 enjoying similar gains, up 2.6%. And the tech-heavy NASDAQ, though, up 2 and 1/3 of a percent. So usually that's the strongest one, but sometimes, as we see today, a bit of a laggard though.

Well, let's bring the rest of our market panel in to break all of this down. We have Omar Aguilar, Schwab Asset Management CEO and CIO, and Zach Hill, Horizon Investments Head of Portfolio Strategy. So welcome to you all. Zach, how would you characterize the optimism that we're seeing in the markets right now?

ZACH HILL: Well, I think it's important to take things in a broader context. Volatility is really high, and we've had three straight weeks of weakness across both equities and fixed income. And so we're not surprised to see a little bit of a bounce here.

The question for us is, does it sustain or does it not? And as we look forward, we might be in a little bit of an upward trajectory for the near term. But we still think kind of that defensive positioning is the way investors need to be over the medium term right now.

SEANA SMITH: Omar, what do you think? Do you agree?

OMAR AGUILAR: Yeah, it's not surprising that you will have a little bit of a relief. This happens in all periods of time, especially as investors continue to feel the uncertainty of what may happen. You know, I think what is important to realize is that, in many cases, the equity market volatility right now is sort of like following what we see in the action in the yield market and the currency market.

So all the volatility that we have seen lately, a lot of that has been driven by the lack of stability of yields and the currency volatility, especially with this strong of the dollar. So a lot of what we see today, you know, if you see yields dropping dramatically on the 10-year as well as weakness in the dollar, and obviously that provides a little bit of a relief and a hope that things will probably start to stabilize.

DAVID BRIGGS: No matter what we hear from the Fed, Zach, it seems everyone wants to price in a pause, if not a cut. Is it overly optimistic?

ZACH HILL: Yeah, I mean, we've been in the no pivot camp for a long time now. And I think it's just really important to contrast this Fed with the Fed that we've seen, really in the post-GFC era. The don't fight the Fed mantra still applies, but it means something different today than it did in 2015 or 2019 or in 2020, quite frankly. And so we continue to be positioned around that higher for longer idea and looking to exactly what Omar is looking to, the real kind of driver here is interest rate volatility.

And so that's-- we're paying much more attention to that than what's going on in the equity volatility space. And despite the fact that yields are higher and they're much more attractive than they were to start the year, or really than they have been over the past 2 and 1/2 years, it's really hard to lean into that materially when volatility is elevated, as it is today in core sovereign bond markets in the US and globally.

RACHELLE AKUFFO: So, Omar, how is this informing what you find attractive in this market? And what are you staying away from?

OMAR AGUILAR: That's a great question. I probably think that despite everything that we're going through and the level of uncertainty that we're going through and the changes that we see across markets, you know, what it used to be-- and we talk about it for a long, long time-- the so-called TINA, There is No Alternative to equities, it is pretty much over. And I think that's good for investors in general because now when you look at the snapshot of where we are today, you know, given the opportunities you have across the board, there is a lot of misallocations and a lot of misvaluations that you can actually take advantage for.

So what we normally tend investors to do is try to continue to look at your long term, try to look at the overall volatility of risk. There's areas that things are mispriced. There are things that are in disarray. That is a good opportunity to just create and rebalance your strategy, so areas, for example, on the long-term treasuries or the credit market.

High-quality credits continue to be fairly strong. The credit market is one of the areas that has not been as affected as the rest of the market. So there is a lot of good opportunities that you see beyond the traditional risky assets. And, of course, when you look at equities, we'll get to a point where things will be relatively attractive.

SEANA SMITH: Zach, earlier you mentioned that defensive positioning. I'm guessing you're favoring value over growth. But more specifically, what do you like?

ZACH HILL: Yeah, that's correct. Value over growth has been the way that we positioned really all year. We're also tilting towards high-dividend paying stocks and just lower volatility stocks in general that tend to outperform when equities sell off.

On the sector level, one of the things that we've liked all year and continue to like it-- and-- and I'm not just saying this because it's up big today-- but energy has a lot of things going for it, 10-plus years of underinvestment, continued tensions that are ongoing in Ukraine, and the fact that we're going to stop releasing from the SPR here in a couple of weeks. And that's a pretty material amount of additional supply to the market. And so that's how we're thinking about things on the equity side right now.

DAVID BRIGGS: Omar, broadly speaking, stocks have rallied every year since 1942 after a midterm election. Will this be any exception?

OMAR AGUILAR: I would probably think that overall the uncertainty coming out of a midterm election usually is very good for equities. I think in this particular year, it will probably be-- have to be a combination of what the economic data is. And I will probably put that into context because while we are in the middle of the Fed tightening cycle, usually those inter-rate hikes tend to last probably around 18 months before we can really see the economic impact.

And we're probably in that phase where, whether it's the labor market data, whether it's the housing market, whether it's the manufacturing data like we had earlier, you know, those are actually going to create more volatility. So I would probably think that the combination of the midterm election past, as well as the combination of data that is a little more consistent will probably be the drivers of a market rally towards the end of the year.

RACHELLE AKUFFO: And, Omar, just to follow up on that, obviously, we started that transition from goods to services as the pandemic sort of started to ease. How do you see that playing into the economic outlook that we're going to see?

OMAR AGUILAR: Yeah, it's all about how sticky is the inflation. We clearly are in this space where we know that goods, services, and prices will drop. We will actually think that that part of the inflation that was a lot of that driven for the supply chain disruptions, you know, that is inflation that we think is going to come down pretty quickly. And that will probably help a lot.

We're already seeing some of that with inventories being pretty high in certain parts of the market. However, the service sector is still in that process of knowing that it's going to take some time to just get into the system. We still see significant amount in increases on wages, and also on rents and other areas that tend to be a little more sticky. So that part is probably going to take a little longer and is probably going to affect consumers probably more towards the first part of next year.

So the bigger question mark-- and, again, it goes back to the fact that labor market is a lagging indicator, and it's going to take some time for that to translate into softer data that will give the Fed pause so that the market feels comfortable that the cycle is over. So it all comes back to-- started the cycle. The inflation is still pretty high, and it's coming down, but it's not coming down as fast as probably officials wanted to see. And then as we go through the next phase of the cycle, it's really more how fast can this translate into an economic data that will make central banks feel comfortable that they can pause.

SEANA SMITH: See how long we're going to have to wait for that. All right, Omar Aguilar, Zach Hill, thanks so much for joining us.