The market isn’t as ‘overbought’ as investors think: strategist

Simeon Hyman, ProShares Global Investment Strategist, joins Yahoo Finance Live to discuss how markets are faring amid the pandemic and July’s weak retail sales.

Video Transcript

MYLES UDLAND: We've certainly been discussing a lot on the consumer over the last handful of days. We got major retailer earnings out this morning, also yesterday morning. We'll also get more in the next 24 hours, get that retail sales figure out yesterday before the bell as well.

To talk about all this, let's bring it Simeon Hyman. He's the global investment strategist over at ProShares. Simeon, thanks so much for jumping on this morning. Let's just start with how you are thinking about the state health of the US consumer at this point given that kind of rush of data we've seen just in the last--

SIMEON HYMAN: I think the frame that you were putting out over the last 10 or 15 minutes on air was a good one because it is a little bit of a clash between the health of the consumer, and I do think the consumer is in a pretty good place, and the expectations of the retailers. So far today date, if you break up retail into the brick and mortar and the online piece, the selective ProShares brick and mortar retail index is up 40%. That's double the S&P 500. Maybe that sort of bounce back went a little bit too far at this point.

Whereas the online retailers took a breather, with the online retail index actually down 10% year to date, now at a discount of 30% to 40% to the consumer, discretionary, and tech sectors. So the expectation thing is moved around with regard to the retail space. But the consumer does appear to be in pretty decent shape.

You know, the headline yesterday was this, you know, 1.1% month over month decline in retail sales. But it was a 16% increase year over year. And remember, by the time we got to a year ago in July, sales have stabilized. So it's not like that's quite reversing the lows of, say, March, April and May. So I think the consumers perhaps in a little better shape than people were giving credit to with some of the immediate reactions yesterday.

BRIAN SOZZI: And they were coming up against the opening bell on this heavy day of retail earnings. SS&C Alps advisors ringing the opening bell, celebrating their third anniversary of the Alps clean energy ETF. Well, that sounds like anti-big oil to me. Simeon, let me stay on this retail trade, though. Do you think these types of reactions we're seeing, two really strong retail earnings and outlooks, does that reaction-- do you think that spreads to other sectors in coming days?

SIMEON HYMAN: Well, let's look at what we've seen from a couple of places. First, another piece of the consumer concern that we've seen is from Sentiment. That Michigan numbers came out and disappointed, and that's exactly the kind of thing that could spread a little bit of bearishness, as you're indicating.

But if you dig into what's been driving that, I would argue it's two things. One, certainly the Delta variant, and it's very hard to predict where that's going to go. But the other piece is, of course, inflation, which is worrying people a little bit.

But if you dig into the CPI number that we saw, that also got kind of headlines for a frothy number. There was a decline in real wages that got people's attention and got people concerned about the consumer. But if you dig into that number, it was a 4% nominal increase offset by an over 5% increase in inflation year over year.

I would submit that the 4% on wages is going to be a lot stickier than some of those transient elements and that the consumer, from a real wage perspective over the next several quarters, is probably in a decent place. It does mean that there's probably still enough inflation to put a drag on bonds. But with respect to risk assets, again, I would suggest that consumer is in a better place than perhaps people are thinking given some of the news flow over the last 10 days.

JULIE HYMAN: Hey, Simeon. I want to ask you about the role of stimulus because one of the explanations I heard for that drop off in retail sales month over month in July had to do with the fact that stimulus was ending. There has been some chatter about the child tax credit maybe picking up some of that slack going forward. But how are you thinking about stimulus and how important a contributor it could be?

SIMEON HYMAN: I think it comes back to employment. And that's the real key here. The stimulus is only temporary even if we keep tacking on a little bit more and a little bit more as a couple of more quarters go by.

But as the-- I think the Fed is right in focusing on unemployment. And of course, it was an incredibly strong number that we had employment this time around. And of course, that's pointing to the kind of improvement that the Fed's been looking for towards perhaps tapering next year.

So I think it's less about stimulus and a little bit more about employment. And the thing that we of course haven't talked about is earnings. The one thing we know about the retail numbers coming in because they're always one month lag from the rest of the earnings season is that means we're at the end of the earnings season.

And earnings of in 17% ahead of expectations. So that's bringing down the PE. We're now trading at just about 21 times 2021 earnings.

And that's not a really outlandish number in the context of a sub 1 and 1/2% 10 year. It wouldn't even be outlandish with a 2% 10 year. So that, I think, is really important information. And think about this.

A lot of people have been focusing on the recovery of the S&P 500. I took just a couple of minutes to put this in a little bit of a longer term context. The return on an annualized basis of the S&P 500 this century is about 7%. That doesn't sound so frothy.

By the way, the aggregate bond index has returned about 5% annualized this century. That's a very normal number because in a long term sense, that would equate to about 4% on a 10 year and 100 basis points of spread. That's really normal. So to think that equities only return 200 basis points over bonds, we keep forgetting that we've had two huge corrections this century so far. So maybe things aren't quite as overbought as perhaps some folks have been thinking over the last few weeks.

MYLES UDLAND: Yeah, and Simeon, I just want to come back to that idea on the multiple. I mean, this was something that I was writing about at the end of last year as we started to see this idea of multiple compression for the S&P overall come in as a major story for 2021. What does that say to you about the maturity of this part of the cycle? You know, typically early in recoveries, you get some multiple expansion. I mean, is this a cycle that's moving in warp speed, I guess as it were? We're only in the beginning of year two of a new bull, and we're already seeing the willingness to pay up for those earnings sort of come out of the market a little.

SIMEON HYMAN: Look, it had to be on warp speed because the drawdown was in warp speed. I mean, we've never really seen anything like this. This is the classic external shock that everybody learns about in their freshman economics classes. So this was clearly going to be at some sort of warp speed.

The thing that I think gives a little bit of comfort is the fact that there is still capacity in the economy. You know, there was a little bit of an upside surprise in capacity utilization yesterday. It went up to 76.

But anything below 80 doesn't really show too much inflationary pressure. So that would indicate that there's a little bit more room to run here. But of course, those multiples on a trailing basis had to be sky high, you know, given the shutdown of the economy, and they had to come down quickly right away. But at this point, if you drew a scatterplot of PEs against the 10 year treasury, you actually-- it's almost hard to do once you get this low. But you almost conclude that the market might be even to the extent of 5% or 10% cheap if you did that scatterplot.

MYLES UDLAND: There you go. Not a lot of people out there talking about a market historically cheap, but there's-- I sympathize with this view, Simeon. I hate the old breakout the Shiller PE and tell me it's too high because I think that oversimplifies, you know, a lot of stuff that goes on. But we'll leave it there.

We'll table this conversation for next time. Simeon Hyman, ProShares global investment strategist, appreciate the time this morning. We'll talk soon.