Stocks tick higher amid unrest, U.S.-China tensions

Annandale Capital CEO George Seay joins Yahoo Finance’s Zack Guzman to discuss the latest market action amid escalating U.S.-China trade tensions and nationwide protests.

Video Transcript

ZACK GUZMAN: I want to bring on our first guest for today. That would be George Seay, Annandale Capital CEO, joins us right now on the show. And George, just first just want to get your breakdown of what you think we're seeing play out here. Of course, there are some fears, as we see tensions between the US and China grow. Are you in a similar camp here, where you should be revising your expectations for moving forward in 2020 a little bit higher?

GEORGE SEAY: I think we're in unprecedented times, and everyone is just guessing and trying to find the best solution they can. And I think that Goldman and Citibank, which both issued some cautionary verbiage today, although Goldman raised its low-end price target, are just thrashing around in the dark trying to advise their clients well at a time that we've never seen anything like this ever before. And I think the market just doesn't quit.

And one interesting thing about the way the market's behaving right now is that it usually looks about six to nine months out in terms of what it thinks is going to happen. I'd argue, right now, it's looking about two years out, because earnings aren't going to really fully recover till 2022. So the market's confidence in Chairman Powell and the Fed is unprecedented.

ZACK GUZMAN: [INAUDIBLE] you talk about the confidence in the Fed, that was the reasoning behind Morgan Stanley confirming their belief that we could see a strong V-shaped recovery here. When you look at the-- not just-- I guess not just Fed Chair Powell's efforts, but also on the fiscal side, as well, when we talk about what's expected to be coming in that next wave of coronavirus stimulus, of course Democrats want to push 3 trillion through, Morgan Stanley saying that their base case would be about $1 million in additional stimulus.

But when you look at that and the efforts from the Fed, it seems that the market is on the side of enough is being done or will be done in the short term here to counteract the complete fall off the cliff that we saw in Q1 and what we're going to see in Q2. Is it fair to say that that's the case? And if so, that it will come into effect more quickly than, I guess, a lot of people have been fearing?

GEORGE SEAY: I don't think so. I may prove to be wrong, but I read the Citibank note today, and I thought they were spot on that people who are expecting everything to just wake up immediately and it's off to the races again, I think that that's overly optimistic. I think you've got some industries that have been put into an artificial coma for a short period of time, and that it's going to be a little sluggish initially, especially for the obvious ones, retail, restaurants, airlines, travel industry. That's just not going to get right back on its feet again, whereas some other industries will. I think that you could see a pretty quick bounceback in natural gas, for instance. And technologies weathered this storm beautifully. So it's going to be a real mixed bag.

ZACK GUZMAN: Yeah, let's dig further into where you think the opportunities are right now, because you do mention the toughness-- the tough outlook that retail companies are going to be facing because you talk about the return for some of these businesses to be reopening not necessarily the same as customers coming back to the door. And that was the insight provided by a recent S&P Global Market Intelligence survey, looking at the fact that consumer spending might not rebound as much.

67% of consumers surveyed in the report said that their spending is going to be declined over the next 90 days compared to what they saw last year. That's still pretty close in line with the 75% reading we got in April. So I mean, is that rebound to be expected there if we're-- maybe businesses might be coming back, but consumer spending is really what the strength was heading into this downturn. And if it's not there on the other side, if not retail, where are you looking to put money to work here?

GEORGE SEAY: Well, that's a great question. And that's the hard part, and why I would encourage your listeners to be super cautious right now and super, super careful. Not sell out of the market, but not be aggressive in here, as well, because the reality is the market is pricing things very effectively. The strongest companies are getting near perfection multiples and the weakest companies that are threatened with bankruptcy or barely surviving through these times are priced for failure. They're very, very cheap. So if you buy the cheap stocks, you're buying a lack of quality, and if you pay up for the quality stocks, you're really overpaying in terms of the unit of earnings you get for the price you're paying.

I saw the other day that, if the earnings for the S&P falls as much as it did in 2008 this year, that the market's priced at roughly 35 times earnings right now and 19 times earnings in 2022. And that is a super rich price. But the market just doesn't want to go down. It's very stubborn right now.

ZACK GUZMAN: Yeah, I guess that's right, where if they are looking at a longer time horizon, you can make a little bit more sense of the market moves that we've seen in the last couple of weeks here. But with investors thinking in the short term, some of these opportunities out there-- you mentioned energy, some of these other sectors that have been beaten down-- we haven't necessarily seen a full recovery yet in financial stocks.

That seems to be one where there's a lot of question marks around what could happen with future plans at the Fed. What are your take on some of those stocks? Because we see JPMorgan coming back here, but not necessarily as far back as some of those other stocks that did recover almost fully when you look at the [INAUDIBLE].

GEORGE SEAY: You know, that's another good question. People have been calling for a rebound in financial stocks for several years now, and a higher multiple on them. And the reality is their profits are going to be squeezed tremendously the next several years. And if you're going to play financials, you ought to play quality.

You ought to play quality with JPMorgan that you just mentioned, Visa, Mastercard, American Express, Berkshire Hathaway, which is super inexpensive right now. I don't think I'd reach for weak banks that may have trouble if some of their loan portfolio becomes more challenging than expected. And they just don't have the wind at their backs with interest rates where they are today. So you buy quality there, and the rest of the sector you kind of ignore.

ZACK GUZMAN: And let me just wrap with this. I mean, we are talking about year-end targets. You seem to be aligned with Citi here. I mean, we're right now S&P is sitting at 3058, Goldman Sachs basically saying we're going to trade sideways till the end of the year. What's your take, before we let you go, on where we end up?

GEORGE SEAY: Yeah, I'm glad you asked that. I would take-- if you could tell me today I could bank sideways for the rest of the year, I would take it. And we may go back and challenge the all-time highs again, but from a rational perspective, the multiples are so rich right here, they carry a lot of risk with them. So I'd take sideways right now and be happy with that. We've had quite a bounceback considering the extraordinary times we live in.

ZACK GUZMAN: Yeah, no doubt. And again, the scenes playing out this weekend, a lot of people wondering why the market hasn't been reacting. But historically speaking, what we saw play out in '68, not necessarily the case that stocks do trade in tandem with what the scene is out on the streets. But George Seay, Annandale Capital CEO, appreciate you taking the time to chat with us.

GEORGE SEAY: Thank y'all.