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Georgia flipping seats blue would ‘cap’ economic growth: Heritage Capital President

Yahoo Finance's Alexis Christoforous and Paul Schatz, Heritage Capital President, discuss the market selloff as coronavirus cases rise.

Video Transcript

- I want to stick with the markets now and bring in Paul Schatz, president at Heritage Capital. Paul. Good to see you, and happy 2021 to you.

Look, it's the first trading day of the year. We don't want to read too much into it. But you all the different phrases-- the January barometer, the January effect, talks about how the month starts could set the tone for the rest of the year. Are you concerned that perhaps today's sell-off is the beginning of something a little bigger?

PAUL SCHATZ: And happy 21 to you as well. I'm not considered. One day of market action after really what was just a hard to describe 2020, doesn't concern me. What concerns me is that, for the past six, seven weeks, we have had literally an epic and historic amount of greed and euphoria.

That's what concerns me coming into 2021, that, at a minimum, best case, the market's going to punish the late comers 4% to 8% short, sharp downdraft. But is it likely that today started it? It's a coin flip.

I think the market came in, people wanted to sell, lock in some gains they didn't want to take last year. I think the first catalyst you have the downside is the Georgia election, which Wednesday will be the first trading day to react to that.

But listen, we have all this greedy euphoria, people poured in. Jared was talking about Bitcoin, which melted up from what 10,000 to 30,000 since September. I mean, the IPOs are coming out. They're mostly money losers, option traders.

You've got so many things going on to counter what is pretty constructive behavior in the foundation of the market that, again, punishing the late-comers, maybe the Dow pulls back to 29,000, maybe a little bit under that, maybe the S&P goes down to 3,550, 3,500, nothing more significant yet.

I think the key would be, we don't want to see people pouring in on the way down. And that's what happened during the dotcom bubble burst. People bought every decline for the first six months. And that's why it kept going on and on and on and on.

- Right, it was the nightmare that never ended. I want to get back to the Georgia Senate runoff, what you just mentioned a moment ago. How much could that be a catalyst for this market? Because up until now, it looks as though investors have been banking on a divided Congress under Biden.

If we don't get that, if the Democrats wind up winning the majority, what is that going to mean for the stock market? And what kind of a sell-off might we be talking about here?

PAUL SCHATZ: You know, I came into work today and my 15-year-old son sent me a meme that said, every time little Yachty releases something, the market goes down. So he said to me, it's not Georgia, it's Little Yachty. I'm a boomer, I didn't know who Little Yachty was. I thought it was a boat in my friend zone.

To your point about Georgia, I think if the market rallies on the Georgia news, regardless of what the Georgia news is, at least for me that's a good opportunity to take some chips off the table. I don't think, regardless of the outcome, if stocks rally on the news, that's a catalyst for another leg higher.

Now, if we don't have divided government, if Georgia flips both seats blue, I'm going to downgrade my thinking for 2021 and 2022. Although we will get more stimulus, because Janet Yellen, the queen of money printing, is going to be treasury secretary, and Jay Powell will likely be gone in, what, a year, I don't think the raising of corporate taxes and individual taxes and capital gains, that's a very hard argument to make that the economy is going to do better just because Congress and the Treasury prints some more money.

So that will-- we won't have a crash, we won't have 20% based on that, we'll get a decline perhaps, and then we'll get another rally. But I do think that will cap what could be an otherwise better scenario over the coming 18 months.

- So you know, you've got an Oppenheimer strategist predicting that if the Senate turns Democrat, we could see the S&P 500 sell off by 10%. We're talking correction territory there, Paul. So do you foresee a drop of that magnitude if that were to happen?

PAUL SCHATZ: So a 10% correction, interestingly, the bull market began March 23rd of 2020. You typically don't see a double digit decline in the first year of a new bull market. Now, we're living in certainly atypical times, so anything is possible.

Would I be shocked if we went down? So my range was 4% to 8%, could it stretch to 9% or 10%? Do I think it's going to 12%, 15%, 20%, I don't.

I do think, if we do get 4% or 5%, even at 10% decline, I do think it's buyable for another rally. On that next rally, that's when I'd be paring back, I'd be reining in risk.

But I don't think that's the case now. The foundation of the market-- just look at the New York Stock Exchange advance/decline line, which simply measured participation in the rally-- all-time highs. And that normally insulates stocks from these big declines.

But a 10% decline these days is what-- it can happen in a week, 10 days. So that would not shock me. I wouldn't curl up in a ball under my desk. I do think that would lead to another new high run. But I think it'd be a much more narrow run than we've seen.

- Let's talk about some of the stocks you like in this new year. And I'm curious if you think small cap stocks, which put in a nice performance last year, are we going to see investors build on that momentum.

PAUL SCHATZ: The short answer, which I never give, is absolutely yes. Look, small caps had a mini-melt-up certainly from the March lows, but more recently post that October 30 bottom. And I think they developed what we call a thrust, like a rocket ship going up. And now I think we're in that pause period.

So I would look to either add to my small caps, take a position in small caps after this decline that I think is coming in the first quarter. And let's remember, and I keep saying the dotcom bubble. I don't think this is a dotcom bubble. But when the dotcom bubble burst, small caps, which had been doormats for quarters and quarters, I think since the middle of '98, small caps began to lead.

I think small caps, maybe quarters 2 through 4 of next year, are the leaders at the expense of mega cap, at the expense of all of these over-owned popular tech stocks.

- When you say next year, you mean 2022?

PAUL SCHATZ: No, I'm sorry. I'm still thinking it's 2020-- 2021, thank you. So Q2 to Q4 for small caps, quarter 2 to quarter 4, small caps lead.

And I think the cyclical stocks, too, they haven't been as bad as small caps. But certainly, material stocks and even energy, I think energy had that thrust off the bottom in that pause phase, they're going to thrash about. And then I think they'll have some more time in the sun, as they've been, gosh, they've been ignored for years.

So I think you've got a lot of opportunities in 2021. It's not just about the mega cap tech stocks that led in 2021.

- One place you're seeing opportunity, Paul, is casino stocks. You actually like Las Vegas Sands right now. I know today we got news that MGM Resorts is looking at buying a British gaming company called Entain. That stock skyrocketed 28%. But tell us why you like Las Vegas Sands?

PAUL SCHATZ: So as I was looking through my list of things I want to buy, things we own-- and we own Las Vegas Sands, full disclosure-- I think, number 1, the Asian economies are much stronger than the economy in the Americas. That's number 1.

Number 2, Las Vegas Sands has a mega position in Macau. And I think, given where the Asian economies are and the reflationary opening trade, I think Macau is poised for some pretty good growth in 2021.

I like Las Vegas Sands. The fundamental story behind it will catch up with price. I think price could have a run to $70 in the first four, five months of the year. That's a pretty good move of $58.

It's certainly not any of these battery stocks that are going up 50%, 100% a week. But I think it's a pretty good move. And I see the downside is relatively tame given where it could go.

- All right, great insights, as always, to kick us off on the new year. Paul Schatz, president of Heritage Capital. Happy new year.

PAUL SCHATZ: You too, my friend. Thanks.