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Investing: 'Think like a value investor' in current market, strategist says

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Interactive Brokers Chief Strategist Steve Sosnick joins Yahoo Finance Live to discuss stock futures, the buying dip, inflation, and the outlook for investors.

Video Transcript

[MUSIC PLAYING]

BRAD SMITH: Welcome back to "Yahoo Finance Live," everyone. It's been a volatile few months for the markets. Investors showing concern that rising inflation could impact economic growth. Our first guest today says that now might not be the time to buy the dip. Let's welcome in Steve Sosnick who is the Interactive Brokers Chief Strategist.

Steve, great to have you here with us this morning. OK, so, for all of what we've heard on the previous dips saying-- and some investors out there-- saying this is the dip to get in on. Why is now not the dip to get in on?

STEVE SOSNICK: Good morning, Brad. Well, first of all, we've come a long way off the bottom of this dip. And so, the way I want to look at it is basically, buy the dip is dead, but long live buying the dip. What I mean by that is, I think it became a reflexive strategy among many people, and a very good one actually, because it was almost foolproof.

When the Fed was pumping money into the market-- into the system, not necessarily into the markets-- when they were pumping money into the system and when there was fiscal stimulus, there was this constant flow of money. So, really every dip was a buying opportunity.

Now, if you're a believer in don't fight the Fed, what is the Fed doing? They're talking about taking money out. So, that means that buying the dip is not a foolproof strategy anymore. There will always be dips that are good trading opportunities. But what I'm implying here is, don't just close your eyes and buy the dip, because it's a dip.

BRIAN SOZZI: Steve, let's just-- the blunt reality here has to be this. Has the Fed lost control of inflation to the point now where you have President Biden writing an op-Ed in the "Wall Street Journal" that they may have to lift taxes to bring down inflation? I don't understand that math. How big a headwind is talk like that right now to this market?

STEVE SOSNICK: I think we sort of have to separate the politics from the reality. I think as we get into the midterm elections, clearly inflation is the number one problem facing the-- facing-- facing all of us, but certainly the Democrats, and the party in power get the blame, because that's always the way it is. Whoever's in power is-- is seen to be the cause of it. So, he's got to look like he's doing something.

I don't love the idea of just raising taxes, because inflation is effectively a tax on us all, it's just a very subtle and insidious one. And so, I don't know that that's the way to go. But-- but what he's doing with Powell, I think this is-- and the op-Ed, I think this is basically just getting the message out there, hey, we're fighting inflation, this isn't really our fault, and et cetera, et cetera.

BRAD SMITH: Do you think that in this dip that we had seen most recently that there is a flight towards more, either individual stock picking or just looking for high quality dividend names?

STEVE SOSNICK: Oh, absolutely. I think the key-- I think the key here is-- and this is why I kind of said long live the dip-- there are going to be opportunities in here, because when you get these big waves of selling out of the market, what you're going to get in response are good names thrown out-- thrown out alongside the less good ones, the crappy ones. And so, what it behooves everybody to do is think like a value investor.

We saw Broadcom doing this with VMware. VMware got sold out to the point where it represented a great value to a strategic buyer. Obviously, we're not strategic buyers in the size of Broadcom, but what that's-- that's the thinking you have to have is, if you're buying something that's got good solid earnings and good solid cash flows, and I want things that are tangible earnings and cash flows, not just prospects, then you can really start to assess in a good way how-- how you have opportunities. Otherwise, you just don't want to buy stuff because it's down. That doesn't make sense.

BRIAN SOZZI: Steve, should one be selling their winners? If they have winners, let's say they've been out there trading the past three weeks and they have those winners in their accounts, should they be selling those and buying those beat up stocks?

STEVE SOSNICK: There's no one size fits all answer to that, Brian. I think that, to a certain extent, you should always be doing that. You should always be reassessing what's in your portfolio and figuring out what-- what still makes sense and what doesn't. So, that does involve selling-- selling winners or losers and moving it into other-- into other names.

But you know, again, I think that's an ongoing process. And I think that's something you should always be doing. That's never-- that's never a bad idea.

BRAD SMITH: Even as we considering-- continuing to consider where inflation stands, if we've already seen inflation peak or not, considering some of the core PCE data that's come out as well, there's going to be much more of this focus that gets extended even into the midterms. I know we were trying to separate politics from the business side, but the reality is we're going to be hearing more about this, the American consumer is going to be thinking through this even more so going into the midterm election. So, what is kind of the time frame that we should be looking towards to see where inflation actually does peak?

STEVE SOSNICK: That is the million dollar question, Brad. And-- and what I think they're getting very nervous-- and it's a very general "they," is that inflationary expectations are starting to get baked into the economy. You know, wages have been good, but the wage-- wage increases, I should say, have been good, but they haven't been keeping pace with inflation.

And once you start to get into this inflationary mindset, that is the thing that the Fed really wants, and-- and the Fed and the federal government really get scared of, and this becomes the question. I think we're at an inflection point. It doesn't mean that it's inevitable that inflation keeps going up, but I do think we're starting to see where it gets baked in, and potentially at higher levels than 2%.

Remember, of course, like, when you see the CPI of six, or eight, or whatever, that's-- that's the rate that prices are going up. Even if you see that come down to like 2% or 3%, it still means prices are going up, they're just going up more slowly. And the question is, even if we come off this relatively, I hope, unsustainable rate of price growth, where does it settle back to, and is that level going to be above that 2% target? Seems like it's going that way right now.