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The market has exited the recovery phase of the economic cycle: 1879 Advisors Vice Chairman

Jim Bruderman, 1879 Advisors Vice Chairman, joins Yahoo Finance to discuss cryptocurrency, meme stock frenzy, and outlook on the overall market.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets and bring in Jim Bruderman. He is Vice Chairman at 1879 Advisors.

Jim, thanks so much for being with us. I want to stick with these meme stocks for a moment before we break out into the broader market. You just heard Emily talk about sort of a new family of meme stocks now, as the Reddit traders look to other stocks outside of the AMCs and the GameStops. How has that been impacting your business? And are you hearing from clients that they want in on these stocks or they want nothing to do with them?

JIM BRUDERMAN: Well, you have to look at the component, the percentage that these stocks make up of the entire market. And it's really minuscule. And while it's really important to the day traders and to the Robinhood types out there that, you know, that seem to have still a little too much time on their hands, most investors are not even remotely interested, except as perhaps a curiosity.

They're certainly not a part of our portfolio. From that standpoint, it's intrinsic value that drives our investment decisions. And you know, as you see in the downgrades of things like Wendy's. Maybe it's a great company, but if it's far exceeded its short-term price target, the intrinsic value is not there. So we just don't see a lot of long-term value in those.

What I'm curious to see is as these meme stocks kind of rotate into Aethlon or into Wendy's and so on, what's happening to GameStop? Will they tire of those and will those go back and find something closer to their intrinsic value? You know, ultimately we think they all do and we're staying away from them.

KRISTIN MYERS: So Jim, what you're saying, I have to then therefore also ask you about cryptocurrency. Because some of the things that you're saying, we've heard a lot of folks saying about Bitcoin, about Ethereum, and especially about Dogecoin, which is a meme cryptocurrency. Do you guys have cryptocurrencies as a part of your portfolios? How are you approaching a Bitcoin or Ethereum or some of the others?

JIM BRUDERMAN: We're not. Again, it comes down to intrinsic value. I'm from the camp that these assets don't have any intrinsic value, and quite frankly, I view it as a little bit of madness of crowds, similar to tulipmania in the 1600s. The good thing about tulipmania is at the end of the day, if you got stuck holding a bunch of tulip bulbs, you had a really nice garden. With these e-currencies, I'm not sure what people will be holding if and when everything falls apart.

ALEXIS CHRISTOFOROUS: So Jim, let's talk about what you are holding, what you do like right now. I know retail is among them. Where within the retail space are you looking? And also curious if you still like financials? Is there more room for financials to run, especially if we're going to start seeing interest rates move higher later in the year?

JIM BRUDERMAN: Well, let's start with financials. If interest rates do move higher, then that could be the wind at the backs of financial. But with the stall that we've seen in interest rates, and really more critically, with the stall we've seen in forward earnings growth for financials, you know, I think they've at least gotten ahead of themselves and they may really have seen their day at this point. Key driving that is, I think, the stalling of their net margin, or their net interest margins, which, as their deposits have swelled, and their loan portfolios or new loan origination hasn't kept up, their margins are simply not-- they don't continue to be attractive.

Now that could change. You know, there's a lot of strong balance sheets there. But unless and until, you know, unless and until those people start borrowing again, start burning off those cash deposits that have swelled recently, you know, I think it's overplayed a little bit.

Looking at retail, on the other hand, we think that retail hasn't yet fully seen its day, especially with regard to leisure and hospitality, which, you know, over the summer, I think as people get out, as people are truly in that post-COVID mindset, have a lot of spending and have a lot of socializing and have a lot of shopping that they'd certainly like to catch up on.

So in that space, we like Global Payments, for example, which has been fantastic at signing up new merchants. And as card swipes pick up and as international travel picks up, companies like that we think are going to do really well.

KRISTIN MYERS: So Jim, we were just talking with Caleb Silver in the last hour. And he was telling us about how investor anxiety has been rising just over the last couple of months. To that end, what do you see as some of the biggest risks right now to equities, especially in the back half of this year?

JIM BRUDERMAN: I think top of everybody's mind right now is inflation. And we think that's kind of an overblown risk. The market has certainly exited the recovery phase and is clearly entering the growth phase of the economic cycle. But that cycle, that part of the cycle tends to be a wall of worry type of cycle. You know, so every little bit of gains is hard fought and everybody's looking for the next catalyst to bring things down. That's especially true given where multiples are today.

So the biggest risk, I think, is the fear of inflation, given that we already have high multiples could weigh on could weigh on investors' minds. And that's why I think the markets have paused this week and are really looking for data on CPI tomorrow. Again, longer term, I don't think inflation is a big issue. Certainly we're going to see a little of it. We're seeing it in wages already. But is that sustainable? And I don't think the demographics really support that.

ALEXIS CHRISTOFOROUS: So you are of the thinking that inflation, if and when we see it, will be-- well, we're already starting to see it-- but is going to be transitory, the way the Fed believes it to be?

JIM BRUDERMAN: That's the word everybody's using. And I don't have any immediate reason to disagree with the Fed on that note. I also think that worst case scenario, with all the recent talk of raising taxes, there's certainly enough, there's certainly enough potential brakes to slow things down and keep them from overheating. So while a small level of inflation is probable, and the Fed would argue sometimes a little bit necessary, I think that runaway inflation that people are worried about is simply not going to materialize.

KRISTIN MYERS: So Jim, you were talking to us just a moment ago about where you're seeing some opportunities. I wanted to just point out something that you said in a note. You were talking about the back to normal trade giving way to the new normal trade. What does that mean for you, this new normal trade?

JIM BRUDERMAN: Well, we've had a year since the start of the pandemic, and then some, where we've been chasing chas flow, where we've been chasing opportunities in diverse companies that were doing well despite the pandemic and the expensive companies, that simply blew up, whose markets-- who were closed, whose opportunities to generate revenue simply evaporated.

Now we've been working through that, and we're getting towards the tail end of that with cruise ships, hospitality, entertainment, restaurants reopening, and a lot of demand, tons of demand and tons of hiring in all of those categories. But the consumer hasn't fully gotten there yet and we haven't fully, fully opened, especially on an international level. But we're right on the cusp of it. And so I think there's a lot of opportunity for year-over-year comparisons in some of the sectors that are late to the game that are just ready to pop and just ready to get back to work, I think we've got some excitement and some opportunity to see better than expected performance from some of those sectors.

But once we work through that and once we get back to a, OK, everybody's back to normal stage, then the question is, well, now what's different? And now, what are the catalysts, what are the new growth stocks, and where are the new opportunities going to present themselves? And I think we find some of the keys to that in a lot of the companies that have redefined themselves and that have found a new paradigm during the pandemic.

ALEXIS CHRISTOFOROUS: All right, Jim Bruderman, Vice Chair at 1879 Advisors, thanks so much for being with us.