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‘We’re going to go strongly to new highs in Q4’: Heritage Capital President

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Paul Schatz, Heritage Capital President, joins Yahoo Finance to discuss the latest market moves, fourth quarter expectations, and outlook on the debt ceiling.

Video Transcript

ALEXIS CHRISTOFOROUS: Want to get back to the markets now and bring in Paul Schatz, President at Heritage Capital. Paul, good to see you again. What do you make of the market activity so far this week? I mean, the fact that we're not actually building on yesterday's losses, that has to be a positive, right?

PAUL SCHATZ: Good afternoon. Good to see you. I don't think I would say it's necessarily a positive. I think this is part of what I'll call the bottoming process. Look, we haven't had even a 5% pullback, Alexis, since October of last year. It's going to be a year. So, I keep saying, I keep writing about it, this feels a lot worse than it actually is because we haven't had much volatility since last October and then last September. I think we're in that process. We're going to be down 5%, I think, maybe on a closing basis, maybe it happens by early mid next week. But remember, all the reasons why we're going down, nothing is new, right?

You've got debt ceiling, and the government shutdown, and Evergrande, and inflation, all known things. None of these are going to befall the bull market or cause recession. These are short term. There's always some kind of short term thing the market focuses on to get a pullback going. We've got it. I think it's one you buy with both hands in the next week or so. And I think we're going to strongly to new highs in Q4.

ALEXIS CHRISTOFOROUS: Really? New highs in Q4? OK, so, what's going to take us there? Is it going to be tech turning it around? Is it going to be the reopening trade? What gets us there?

PAUL SCHATZ: Yes and yes. Couple of things. One, I think way too many people have gotten way too bearish on growth peaking, and lower than expected earnings, and GDP coming down. I think actually growth re-accelerates. I think you're going to get a shot of GDP to the upside. I think earnings are going to come in better than expected.

And most important for investors, the most important takeaway is this, for the last, what, five months, the rally has narrowed. And if you owned tech, you did fine. If you owned some of the other stuff, you may have struggled a little more. I think from the bottom we are about to forge, the rally is going to broaden, more participation, more economically sensitive stocks and sectors are going to go up. It won't be just tech, it'll be a much broader rally. And I think we get this rally well into 2022.

ALEXIS CHRISTOFOROUS: All right, well, I don't mean to be a party pooper here, but if in three weeks the government doesn't get its act together and we do default on our debt as a nation for the first time ever, I mean, we heard Secretary Janet Yellen warn lawmakers yesterday, it could be catastrophic and a self-inflicted recession. Something we absolutely don't need right now during a national-- a global pandemic. So, how does the market react if we do indeed default on our debt?

PAUL SCHATZ: So, technically, when I read about this online, because I wasn't there, but technically, there have been some questionable defaults in the past. One, we're not defaulting. The Democrats or the Republicans, one party is going to lose. They're going to make a deal right before. I feel confident about that. The fact that you've got Yellen, and Powell, and Jamie Dimon, and everybody else saying the sky is falling, I'm sorry, it makes me laugh.

If we were really going to default, that's not what would be happening right now. So, a chance of default, I would put at less than 0.001%. And if it happened for 12 hours, so be it. It's not going to. But I think we go through this cycle. I mean, how many times are we going to learn that as much as Congress wants to beat their chests and talk party politics, in the end, no one wants to get saddled with a default.

Now, people wouldn't mind if they close the government for a while, but we're not going to default. Someone's going to win. Someone's going to lose. They're going to raise the debt ceiling, and we're going to move on. And this is what-- you get these pullbacks when they don't have any real bearing on GD-- I heard-- I saw, you know, the market was going to go down 1/3 to 50%, and GDP gets, you know, well below zero. I mean, it's all nonsense. No politicians, it's politically untenable for politicians to cause any kind of calamity, catastrophe, insert whatever word you want.

It's not going to happen. We've seen this show before. We know how it ends. Investors should turn off that line on TV and online, and figure out what sectors. Look at energy on a pullback. Look at banks. Definitely look at technology and industrial. Think it's crazy that, you know, interest rates have gone up a little bit on the 10-year, and all of a sudden, you go from loving Microsoft and Apple to now hating it because the 10-year is up from 115 to 153. So, people are going to look back in January and say, oh, man, I missed such a great opportunity. I was too hung up on the government. I mean, come on, folks.

ALEXIS CHRISTOFOROUS: Right. I mean, Kevin O'Leary is sort of echoing what you're saying right now. We had him on the show yesterday, and he said, all that stuff in Washington DC is just noise. He thinks the economy is healthy right now. So, before we let you go, what are you buying? What were you buying, if anything at all, yesterday during the big sell off?

PAUL SCHATZ: One of my rules. So, I don't buy a ton in the middle of the sell off. I will wait until we get some stability. Had we opened lower today, I would have been in there with both hands. But I do think there's a pretty good chance the market makes some marginal new low. S&P, that sub, you know, roughly 4,300. The Dow, it was 336 or so. Industrials, love. Technology, love. Energy and banks, on a pullback, love. So, those would be on a sector basis. Oh, I'm sorry. And we did-- I'm sorry. I was wrong. We did buy some more small cap value yesterday. So, that was one of the things I did do end of day.

But I think you got to buy what you always wanted to own and you didn't because the markets have been so strong. And you don't have to-- you know, so, if you don't want to own Apple, and Amazon, the popular stuff, there's plenty of more idiosyncratic, more unique companies, like Davida's, one of my-- I always get Davida. That's one of my favorites. It kind of beats to its own drum, and think you've got so many good reasons. You can pick up some metals and mining stocks now. They've been absolutely bludgeoned. I think this is going to end up being a super opportunity. People will be really disappointed that they got scared away because of, you know, government noise and nonsense.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Paul Schatz, President of Heritage Capital.

PAUL SCHATZ: Thanks.