Investors ‘have to be patient’ amid big tech sell-off: strategist

Quincy Krosby, Prudential Financial’s chief market strategist, joins Yahoo Finance to discuss the move in bond yields and the big tech sell-off.

Video Transcript

JULIE HYMAN: And we've got a 10-year yield just below 1.6%. Let's talk about that interplay right now.

Quincy Krosby is joining us. She is Prudential chief market strategist. Quincy, it's great to see you. At what level is that 10-year a problem? We have seen definitely a little bit of volatility right around that 1.6% level as investors try to figure out, is there inflation, is there not inflation, what is this going to mean? How are you thinking about that yield and what it means for your equity investments?

QUINCY KROSBY: Well, you know, on the 10-year, it sounds odd. It's difficult to visualize, if you will. But it's still in negative territory when we look at the real rate. So the question is, how much longer, how quick is the move, the jolt higher?

We remember what happened on that Thursday in February, the end of February, with the seven-year Treasury auction. The move higher was so dramatic. That's something the equity market doesn't want to see.

So we can have the 10-year yield move higher if it edges higher along with economic data becoming stronger and stronger and the economy, especially the labor market, healing at a quicker pace. What the equity market cannot deal with are these jolts higher. And you could see it. It just discombobulates the equity market.

Now, to be sure, if we reach a point in the 10-year Treasury that affects mortgage rates dramatically and we see a slowdown, a viable slowdown in the housing market, that's going to indicate that the economy is suffering from a higher yield. Mortgage rates go higher. The cost of capital is higher. Auto loans are higher. But it comes early.

Now, mind you, we could have a spurt right now in the housing market, as the fence sitters say, gee, mortgage rates can be climbing. But the point is, it is the level and it is the pace of that move. So what level is it difficult for the market? Well, obviously, it'll be more than 2% because we've had 2% in the past, and the economy actually did well.

But again, it is when you start to hurt consumer discretionary, housing, anything associated with the interest rates that affect everyday life. Then you know it's hurting the overall economy. And it's going to hurt the market.

BRIAN SOZZI: There we have the opening bell on Wall Street. State Street ringing the bell. And friend of the program Lori Heinl up there at the New York Stock Exchange. Always good to see and talk with her.

Quincy, I do want to ask you about the selloff in tech stocks. Is the selloff overdone here?

QUINCY KROSBY: Well, even on Friday, we were going into correction territory. And you saw that when the 10-year just dipped down below that 1.6%. We started to see money coming into big tech. There are buyers wanting to come into big tech. Those are strong companies. But remember, they were the favorites when we were looking for growth and uncertainty enveloped the markets.

So I think that you've got investors waiting for those valuations to come down in big tech. And I think you're going to see investors coming in. But right now, again, with the stimulus package and the expectations that we're going to have the infrastructure package earlier while the Democrats maintain control, it's going to put pressure on the 10-year Treasury. It's going to push it higher, I think, because I think the Democrats want to get that through very badly. And it could be a big package.

So money is going to go out of tech. It is going to fund the other sectors which have been damaged. And at the same time, it brings the valuations down. So it isn't as if it's either/or. Big tech can definitely sit with the reflation trade but at a lower valuation. And that's, I think, what we're seeing.

Investors are going to come in and get those companies that are going to remain strong, that are going to be powerful after the pandemic ends and we normalize the economy. But you have to wait and be patient. I think Friday was an indication. But it is becoming oversold if we have another selloff today. We're very close to oversold conditions by any metric.

MYLES UDLAND: Quincy, it's Myles here. And we could talk about how much this rotation goes or doesn't go till we're blue in the face. But thinking about the backdrop for it, we're really talking about economic growth and the strong backdrop there. Do you think that maybe investors are still underappreciating the upside risks on how strong the economy may end up being this year and how that might transfer to 2022 even?

QUINCY KROSBY: Well, you take a look at the five-year breakeven. You look at the euro-dollar futures. Investors are actually looking at higher yields at an earlier period. And even the Fed raising rates by 1/4 earlier than their timetable. But there's inflation, and then there's hyperinflation. And what is happening in the market, the tug of war is between there'll never be any inflation, we're going to go back to disinflation or deflation once the effects of the stimulus package ends, that you still have slack in the labor market.

Well, what's changing is an idea, a notion that perhaps the labor market heals much more quickly. We forget that Janet Yellen was head of the Fed. She's also a PhD labor economist. Her mantra was, we need to go big. We need to go big with this package. And she even said, I'm looking at it. And I'm thinking if we get the big package, we could actually have the labor market healing much faster than projections, i.e., from the new Fed.

That may be the case if, again, the campaign for vaccinations continues on pace and we start to see Americans coming out of our shells. Human beings become very used to situations. You work remote. You live alone. You get used to that. But what happens when the economy does open and you feel safer?

We are normalizing. And along with that, rates are going to normalize. And again, it's not hyperinflation versus a head fake. It's probably something in between.

JULIE HYMAN: Quincy, great to get some time with you today. Thanks so much for your perspective. Quincy Krosby is Prudential chief market strategist. Appreciate it.