‘Look out, bond holders,’ strategist says on market risks
Sound Planning Group CEO David Stryzewski and Todd Jablonski, Principal Global Asset Allocation CIO, join Yahoo Finance Live to examine markets closing amid Fed interest rate hikes, the government's debt outlook, and inflation.
Video Transcript
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- Closing bell, a sigh of relief, after what we saw yesterday. That your closing bell on Wall Street. Major averages and the day, we see them up on the Dow, up on the S&P, a bit of a pullback, a bit of a loss on the NASDAQ, but nothing, as I said, compared to yesterday. Now to talk today's trading action, we have Todd Jablonski, Principal Global Asset Allocation CIO, and David Stryzewski, the Sound Planning Group CEO. Good to see you both.
Todd, let's start with you. Given the worst day for the NASDAQ since September 2020, this is welcome relief, I suppose. Put the last two days in perspective. What's your broad takeaway?
TODD JABLONSKI: I think the broad takeaway that many investors could read out the next last several days is that there's a lot of rerating going on, whether it's the rerating of equity valuations, the rerating of interest rate expectations, or the rerating of inflation expectations against tightening happening at the Fed. Putting that whole enterprise together against the volatility of the stock market means the threats of a slower economy, the threats of inflation, and the threats of higher energy prices out of the conflict in Ukraine all sort of coming together to really stymie investor confidence and sentiment.
- David, what do you make of the fact that we didn't get even any type of major bounce off of yesterday's steep declines?
DAVID STRYZEWSKI: You know, it's kind of indicative of where we are in the world right now. We just-- where are we going to end up? What's actually going on? There are so many factors at play here. So there's a lot of pressures right now, of course, from the bear side of things just given all the change that's taking place. And I thought that the statement about the rerating was very important because we are seeing, you know PE ratios, as an example, change. As the cost of debt becomes a little bit higher, it's a little bit more expensive to do business.
And so this is a very, very different move than we have had here, at least in the last 40 years, September 1981 on the debt side. We're now looking at increasing rates in a very significant way. So I'm just even saying, you know, look out, bondholders right now, because had you started out the year with just a simple index fund, you're probably down 10% right now. If you bought a long-term index bond, you're down probably 20%. And that's so far.
And so with all the changes going on at the Fed level, you know, they're-- I think everyone's just sort of waiting with anticipation to see what they're going to do. Although I think that we really have a pretty good indication that we're just on a trajectory here towards greater inflation levels. And so we've got to raise those rates.
- And Todd, as we were hearing there about some of these market headwinds from the US perspective, and you also in your notes talk about in Europe obviously the threat looking a little bit different for your outlook, depending on whether you're in Europe or the US. What's your-- what are your takeaways in terms of what you're seeing from Europe and how we're going to see that play out with inflation and other headwinds?
TODD JABLONSKI: Well, it is decidedly different across the Atlantic. Whereas you still have high valuations in the US equity markets and really global equity markets, there are pockets of better valuation opportunities across Europe. And interestingly, a lot of the worst news appears to be priced in. So we've upgraded our outlook actually for the continent and the UK back up to a neutral just because from a valuation sentiment perspective, we're starting to see a little bit of opportunity there.
At the same time, the risks are different too. There, as you saw in some of the recent news, about energy exports to Poland and Romania. You're starting to see, I think, a lot of increased, of course, risk associated with energy prices and conflict. How that plays out could perhaps afford for a good investment opportunity along the way in the mainland and the UK.
- We talk an awful lot about the Fed trying to execute a soft landing. I really appreciate how Todd put it in his notes, though, because it better articulates the degree of difficulty. He says, David, "the Fed's actually trying to achieve a splashless dive into the pool from the high dive." I think that puts it in much better perspective. So David, how does the Fed do it?
DAVID STRYZEWSKI: How do they do it? Well, they're in a rock and a hard place. I mean, the two big things that they have to defend against right now, inflation and then, you know, this this balance between we want low cost for lending, and we're in a really, really weird position here. Because there's a lot of people out trying to get mortgages. We've got a lot of our economy based on businesses with high debt. And it's been so easy to refinance it.
We're kind of in a rock and a hard place. And I'd say that we're actually even late to the table. The Fed's late to the table on trying to pull some of this back and make some of these changes. I mean, we were actually in such a great and strong, you know, economy. Of course, hindsight's 2020.
But we were in such a strong economy. And that was really our moment where we could have maybe done some of this tightening. So we're a little bit late. That splashless landing that they were sharing with us, that they guarantee, more or less, that there's not going to be a recession as a result of how they're going to raise an inflation-- or interest rates here. So I don't know how they can guarantee that when there's, you know, unprecedented spending, unprecedented balance sheets, unprecedented debt right now.
And you know, we find ourselves-- I don't know-- maybe in the challenge of how do we even pay some of these things? I think it was 40% of the Russell 2000 right now, just based on their EBITDA, would not be able to service their debt today. And so I think that's going to be one of the real big concerns as we go forward is, yes, what do we do with all the debt that's outstanding? How can the Fed accommodate?
What are they going to be able to do? Are they going to be able to offload that balance sheet? I don't believe that's possible just because, you know, Japan may be the better example. They had about 100% GDP to debt in, like, 2008. Now they're looking about 230% today, although they said they weren't going to be increasing it. So what are they going to do? Probably follow more of, like, what Japan has done and. And let's-- hopefully, you know, they can land that-- stick that landing and get the points that we need there.
- Todd, we've got more tech earnings coming out after the bell. For the NASDAQ composite, we are still in this range that we've seen earlier this year, striking once again around 12.5 if you will. And so here on the screen today, yeah, ending just below that. With that in mind, for all the people that were buying on the dips, for all the institutions or the retail investors who were buying on the dips earlier this year, is there anything left to buy on the dips?
TODD JABLONSKI: Well, I think there's still a secular story to buy. And I mean, that's really the highlight of that big-cap tech group again. Now, it's spread out, of course, across several different sectors. But you look at the biggest of the big across the US market, it's more actually than just the perception of movement of long-term rates. And how those discount future earnings do today, that's part of the picture.
But on a go-forward basis today, I think what you have to look at, really, is the delivery of earnings. You know, our research shows pretty clearly that in this decline phase, really, of a cycle, you can't expect too much valuation expansion, especially if rates sort of hover around where they are today. What you can expect, however, is earnings growth and fundamental improvement to drive returns. And that's where these names shine on a secular basis. And I think that story holds together, even as interest rates surprise us, perhaps, with how they can move in the intermediate term.
- Now, David, we did see that in April, that US consumer confidence dipped slightly. At what point do you think we're going to start seeing that showing up in the earnings as we are starting to see with some of these pandemic darlings, as we're seeing quarterly results come out?
DAVID STRYZEWSKI: You know, it's a good question. I'll say-- I'll share with you what I did last weekend. I had a daughter become of age and needed to get a car. So I went out in the middle of what's going on right now and needed to purchase a vehicle for my wife.
And, wow, was that a different experience than I've ever had. So how can the consumer recover? I don't know. We ended up buying the vehicle that was one year old but it was brand new from a golf tournament. So we don't have, like, the normal inventories and things that consumers need, that, you know, it comes down to microchips. It comes down to people being at home. It comes down to just a lot of slack in the systems right now.
So there are some areas that we really need to be focusing on as a nation. And my hope is that we've got that type of a perspective as we're going into elections, as we're looking at our personal budgets. And by the way, look at your own personal inflation budget. And you can look at, you know, what you spent last year versus this year. And maybe that gives you some ideas on things.
But it's so critical right now that the average person is kind of bracing for an end of a cycle, as Todd just had mentioned there. We find ourselves at the end of a very, very long cycle. I hope it really goes well with that splashless entry that we talked about earlier. But ultimately speaking, there are many changes and challenges here that I'm just personally very concerned about.
And the clients that we work with tend to be into or nearing retirement. And specifically, they need you know some more of that conservative money, some of those conservative dollars. So they're not working anymore. They're depending on those dollars to be working for them. And so I guess higher rates right now would mean more available. Of course, the dance is how do you remain invested yet have some of these fluctuations, you know going on on a daily basis?
- And as you mentioned that rock and a hard place indeed. A big thank you to our market panel. David Stryzewski there, Sound Planning Group CEO, and Todd Jablonski, Chief Investment Officer and Principal Global Asset allocation. Thank you so much.
