Fed may not be ‘willing to see the market fall,’ strategist says

Summit Global Investments CIO Dave Harden joins Yahoo Finance Live to discuss whether the market volatility amid the Russia-Ukraine war will alter the Fed's decision to hike rates in March and the outlook for oil.

Video Transcript

- Want to stick with the markets now and bring in Dave Harden, CIO at Summit Global Investments. Dave, what do you make of this market action? You know, I feel like I'm asking every guest every day whether or not this market's about to capitulate. Any belief that perhaps we're near the end of the selling?

DAVE HARDEN: I don't think so. I think that we haven't quite seen that flush that maybe is needed to really call it a bottom. And this-- the Russia-Ukraine situation obviously intensifies those concerns. So I think it makes it harder for the Fed to know what to do. You've seen that 50 basis point really go away, and now 25, maybe.

So I think there's a lot of Fed speak. It's very active. Definitely increasing the chance for a possible mistake from a Fed policy perspective. So I don't think we're quite there. Definitely a lot of volatility still ahead.

- You say a quarter point perhaps, maybe, from the Fed. Do you think that the Federal Reserve holds off on raising interest rates until there is some clarity coming out of Ukraine?

DAVE HARDEN: Well, I that it was very interesting on the eve and throughout the day of the first invasion last Thursday, we had so much Fed speak about taking some of that off the table. I think, in some respects, I call it the Fed put or what have you, there's a little bit of nervousness about letting the market just do its thing and fall. So I'm not sure if the Fed is really willing to see the market fall.

And so if this gets worse, if it seems to drag out longer, the reality is that conventional wisdom is to ignore things of this nature. They're very short-term. The average downfall, even going back to Pearl Harbor is only-- Pearl Harbor-- Pearl Harbor is about 4%.

So the reality is that we typically ignore these. But with the Fed, with everything that's going on, inflation is still red hot, the reality is we have to give this more significant downside risk possibility. So I do see more volatility and fluctuation, and a lot more chance that the Fed doesn't do as people expect. And that uncertainty is a problem.

- You know, another big problem for the Fed, as well, is the soaring price of oil, which we know is inherently inflationary. We now have WTI near an eight-year high, at about $104 a barrel. And some are saying it could go even higher. What do you do with the energy space right now? Do you expose yourself to a little bit more of it? Do you take some money off the table?

DAVE HARDEN: I think you-- I think you do have some more exposure there. Even with the release of reserves today, it really didn't even touch the price. Those reserves are about four days' worth of reserves. So I think oil still has some room to grow. Oil's kind of your defensive right now. We're overweight energy. I think you need to be diversified in this space and be careful where these energy reserves are at.

So exposure to Eastern Europe and exposure to kind of that area you want to be very cognizant of, but energy in general and exposure to oil I think is a very good play. So to me, I don't think it's the time to cut your loss-- you know, take your gains, so to speak. I think it's time to let those run a little bit longer, until the market settles down some more.

- And what's your exposure, Dave, to high tech growth stocks? They were getting beaten up prior to the Ukraine war, and down-- now the NASDAQ down another 2% today. Do you see prospects being good for this sector, at least in the short term? And do you stay there, or again, do you take some money off the table?

DAVE HARDEN: I think most money's already been probably taken off the table if you look at their returns. I mean, we're underweight there by a good amount, maybe 7% to the S&P. And the reality is that you have to be very selective with exposure in that space. So some of the cloud names have been very much beaten up, way, way oversold. So Adobe's a good name that we own. So you have to be very selective in that space, where you're going, what you're buying, and where their exposure is.

So there's definitely some value there to be had. I think growth is not dead, but you just have to look for growth at a reasonable price, if you will, the old saying, or growth that has high profit margins, very high cash flow. So we want that on the balance sheets. And so look for those type of companies, I gave you one, like Adobe.

- Yeah, I like that. Folks-- our listeners always like when guests give specifics. So tell me how else one might sort of fortify their portfolio at the moment, perhaps play defense.

DAVE HARDEN: Well, I think, like I said, you have to, I think, favor value, particularly energy over growth. I think defense is the new offense right here. So there's some picks in staples and discretionary, like Target today. I mean, it's no wonder they've done well. Their earnings have grown. They said the outlook was wonderful.

But getting into energy specific, look at Chevron. The P/E is about 13 on Chevron. It has a higher yield, about 4%. Gas prices seem to be continuing to go up. And from an ESG perspective, their recent announcement to acquire the Renewable Energy Group, REG, hey, it continues to move into this low carbon business. It speaks to Chevron's energy transition strategy. I think that's a really good play.

If you're going over into the health care, I think McKesson is a great deal. Its P/E is only 11, so you're getting good value with McKesson. Ticker that is on MCK. Beta, there's low beta, 0.83, but the earnings are very solid. Bottom line, double digit growth here. Top line outperformance, as well. And you know, so as long as there's somebody else developing drugs, they're distributing it. And I think that's a really good play.

If you come out of that and you want to play a little bit into NATO and Germany, making money and spending on defense, I think Lockheed Martin's your play. It has a lower P/E, around 16. The beta is less than the S&P, at around 0.9. Has a decent yield, about two and a half. And I just think this increased military spending is not stopping today. No matter what happens over there in Eastern Europe and how quickly it ends, I think there's a lot of talk about this is a longer term play, and worries about the Cold War, et cetera. So I think that's a great thing.

And something to avoid is, let's face it, I think Zoom is out. So, you know, this is a high P/E still, 32 P/E. It does have a lower beta. That might tempt some people. But the reality is that's a volatility trap. I think that's something you want to stay away from. I think they've announced already their earnings are declining, lower than expectations. And so this is-- with all the numbers from COVID and everything else, I think the Zoom play is over.

- Yeah, it was a pandemic darling, though. That's for sure. Dave Harden, CIO of Summit Global Investments, thanks so much for your insights today.