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‘It’s a good sign that stocks can rally and that bond yields are rallying’: Heritage Capital President

Paul Schatz, Heritage Capital President, joins Yahoo Finance’s Alexis Christoforous to discuss bond yields and inflation outlook.

Video Transcript

ALEXIS CHRISTOFOROUS: So stick with the markets now and bring in Paul Schatz. He is president at Heritage Capital. Paul, good to see you here as we both kick off a new trading month on Wall Street. Why do you think stocks are rallying with such gusto today? Is it really all about bond yields falling back a little bit?

PAUL SCHATZ: No, it's definitely not. I mean, Friday, you know, if you look, though, just the last 15 minutes on Friday, that was one of those kind of head-scratching, curious periods where, weather stocks soar or they collapse, it was a very-- it was in a very narrow breadth of stock. So I think that what part of this up is that the computer program kicked in on Friday. Stocks dropped, you know, a percent 2% in 15 minutes.

Part of this rally is just that, is just returning to equilibrium. Additionally, look, we had some volatility last week. This pullback, if you want to call it that, saw the indices down 4% to-- in the NASDAQ intraday, I'll stretch it out-- maybe 10%. So this is really just-- again, you're kind of back to a month or two ago where, OK, bond yields rallied.

Can we survive? Yes. The markets don't like anything that goes straight up or straight down. If the bond yield rise was more moderate, stocks would not have skipped a beat. So I think it's really just to people taking the weekend, taking a step back, and saying, OK, the last 15 minutes, we fell 1% or 2% That was kind of fake. Let's put some money to work. It's a new month. We know we're going to get inflows.

I think it's more of the same. They're expecting more money in the market. You're getting more money in the market.

ALEXIS CHRISTOFOROUS: Well, when do you think we might actually see stocks move higher and bond yields move higher too? What's it going to take to make that scenario happen, Paul?

PAUL SCHATZ: Well, you're starting to see it today. I wrote about it over the weekend. I didn't think it was going to come the first day I wrote about it. But it's a good sign that stocks can rally. And bond yields are rallying. That's a positive. Is it going to happen over a period of time? Probably. Again, bond yields can go up. That's OK.

They can go from 1/2 a percent, to 1%, to 1 and 1/2 percent. But the market does a lot better, it can adapt and adjust, when bond yields do it in a more measured pace. The market is not like the Marines. They don't quickly adapt and adjust to battle. So I think it's happening. I think bond yields reached a point. The rally in yields is going to Peter out, if you will.

Maybe we go from going straight up to a more measured two steps up, one step back. And I actually think the time to buy bonds, short term, it's kind of in this zone. But I think there'll be an intermediate-term buy on bonds for the second half. It's one of our themes of the year, that you're going have to halves in the bond market. This is the tougher half if you're a bond investor.

ALEXIS CHRISTOFOROUS: Yeah, I want to talk more about your themes here for 2021. You say it's risk on for the first six to eight months. And then you say flip that. Walk me through that.

PAUL SCHATZ: Sure. Coming into the year, there's no secrets. We had a new president. We knew that in November. We do know that when parties change hands, and we have a new president, at least, early on, the stock market is generally pleased. Things are going to change a little bit. We know-- this is a bit unusual with this election in that Biden ran on, I'm going to pump more stimulus, more relief into the markets.

And the Fed said-- we all know the Fed's not changing course. I heard it last week. Stock pundits became bond market mavens. It's all nonsense. The Fed's not going to change course. No shot this year. So to me, it seems like everything is being pulled forward. The market's trading on what's going to happen two, three, perhaps even four quarters down the road. And the market's expecting all this stimulus, expecting more spending.

So I think, as we get along into the year, we're going to have great economic news. The comps are going to become amazing. Think about that as we look at comps from last February, last March, last April, last May. And I think that's why we're rallying so much. Look what's rallying.

Again, one of my themes, first half of the year, cyclicals, meaning banks, and semiconductors, and energy, and transports are our biggest position. What's kind of lagging? Some of the growth-- clearly, the old stodgy utilities, staples, rates, that's a second-half-of-the-year story. Why is it a second-half-of-the-year story? Because it's going to be a play on the growth in the economy slowing come 2022.

That's why we'll go back to bonds second half of the year. And that may be July or August. But I think owning bonds, owning staples, owning utilities in REITs. Second half of the year, let's enjoy small caps, and value, and all these cyclical stocks that are really just taking off.

ALEXIS CHRISTOFOROUS: Paul, real quick, are you factoring in a rise in inflation any time soon? And are you hedging with, let's say, commodities, or, dare we say, Bitcoin?

PAUL SCHATZ: So the short answer is, yeah, we started putting on inflation positions almost-- I was about to say almost a year ago. It's March. But it was about 9, 10 months ago. We started getting involved in commodities. We already have a large commodity position in the ETF, GSG. I anticipate we're going to hold that.

We own DBA, which is another-- it's an agricultural commodity. We're going to continue with that. I don't think it's-- inflation didn't just don't pop out of the bottle on 2021. It started percolating in the middle of 2020. That genie is out of the bottle. And that's why you own cyclicals in value. Value in cyclicals will do better as inflation is picking up, not down. So the long answer is, yes, we're sticking with our inflation place.

Your Bitcoin question is no. I have not yet been able to model Bitcoin. I'm sure there are smarter folks out there who are doing it very successfully. In order for us to engage in any security, I have to be able to model it and put some kind of downside parameters in. You got to be able to play defense. At least we do.

I have not been able to do that with Bitcoin. So for now, I'm watching it and applauding others who have done it well.

ALEXIS CHRISTOFOROUS: Right, we are all watching it, for sure. All right, Paul Schatz of Heritage Capital, thank you.