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If there is a market pullback, it's 'absolutely an unqualified buying opportunity': Heritage Capital's Paul Schatz

Paul Schatz, Heritage Capital President and CIO, joined Yahoo Finance Live to discuss the DOW hitting 30,000 and his market outlook for the end of the year.

Video Transcript

- Paul, your overall take, as we welcome you into the stream, as we now have Dow 30,000, and we could have a record close today.

PAUL SCHATZ: Always good to be with you guys. So there's really a dichotomy that has formed in the market. You've got the market's foundation is super strong. And that's beneath just what we see on the Dow and the S&P and the NASDAQ. We see more than 80% of all stocks that trade on the NYSE are in uptrends. So that's certainly a positive.

We see all the stocks on the NYSE also are making new highs, and the new highs are expanding. That's also a positive. And we see leadership has really broadened to almost a point where you say the rising tide is lifting all boats. So those are, intermediate-term, very healthy. The dichotomy part of that is sentiment is a little frothy. People are a little giddy.

We've seen a record level, all-time record level of flows into equities. That is unreal because over the last decade, we've seen people leave equities and buy bonds. So it took a long time, but you're seeing investors pour into stocks right now. And historically, they don't have the greatest track record, so sentiment surveys are a little greedy. But listen, the sentiment surveys can be early, and that would just tell you, if you do get a pullback, it's absolutely an unqualified buying opportunity.

- Paul, how should we be thinking about this 30,000 level, though? From a psychological standpoint, I guess, how important is a milestone like this for investors?

PAUL SCHATZ: I think it used to be a whole lot more important before the days of social media. I don't-- you know, I think those big funky round numbers like 20 and 25 and 30,000, they're great for that one-day headline, but I think with social media and how in tune everyone is with the markets now, I think it's not even a footnote. I think investors, bottom line is there was a seminal change the likes of which we have not seen in 20 years.

And I don't want to overstate it, I don't want to create hyperbole, but we have not seen this kind of shift in small caps, in value really since 2000. And I don't think it's a fleeting moment. I think, on balance, it's here to stay for days, weeks, months, and probably years. And that's the probably-- that's the most important takeaway, is that the market pivoted on October 30th, and I don't think it's going to look back from that change in leadership.

- Can you clarify for me, when you talk about the market pivoted October 30th, you're talking about to small cap, and yet we still see some of the gigantic big tech, large cap companies are still off to the races.

PAUL SCHATZ: I-- my friend, I'm going to push back a little bit and say, so if the rising tide lifts all ships, the likes of Amazon and Google, what I call the Fab Five plus stocks, they can still go up. We made a very big call in the end of August that the stocks you mentioned, those mega cap tech stocks, they peaked on a relative basis. They may still go up, but something else is going to lead the next leg higher.

And I subscribe-- small caps are going to pull back at some point relative to the Apples and the Amazons, but I'm going to say firmly that, just as firmly as I said at that 18,000 we're going to 30,000, this small cap rally, which has been sniffed out so many times in the last 12 years, this one's here to stay. It's a broadening. So investors who still get stuck will stay in Apple and Amazon and Google and Tesla. You may be happy, but those who venture elsewhere, and I subscribe small caps, will be more rewarded.

- So Paul, I'm going to put you on the spot here a little bit. You called 30,000, you said, when the Dow was just at 18,000. So now we're at 30,000. You sound very bullish, just in terms that there's nothing that seems to be stopping this momentum anytime soon. How much higher do you see the market getting in 2021?

PAUL SCHATZ: So Seana, if you put a lens on and we're back to February of 2020, and you said, OK, back in February, you know, we're 28,000, 29,000, and now we're at 30,000 today, you'd say, oh my god, we've gone almost nowhere, right? But we went all the way down to the low 20s, and now we're back up again. Depends on what lens you're looking at.

We have a model that-- that's what I forecast. I don't think-- it's not my opinions, it's not my feelings, it's what our model says. If we get five closes above 30,000, our next target will be 33,000 for 2021 as the next stop. I don't want investors to get so hopped up on a number of Dow 30 or 31 or if we pull back to 28,000. We should have a pullback between now and the middle of December.

Maybe it's a 2% or a 5% pullback. There should be a pullback. That's the one you buy for running into the new year. Investors, just be careful, as we saw in January of 2018, even with good, strong foundations, frothy sentiment will eventually have a short-term punishment effect.

But so-- the market's trading like this is Q2 of 2021. Q2 of 2021. The market has totally looked beyond COVID. COVID is a thing of the past for the market, on balance. The market sees the vaccine. It sees the full reopening trade. It sees people on cruise ships. You-- I may not go on one, but market sees it. It sees people in movie theaters and restaurants and getting back to normalcy.

So market is a great discounting mechanism three to nine months down the road, and that's why you're seeing this kind of action. And again, for the next couple of quarters, we're going to get stimulus. The Fed is still there. Janet Yellen, the dove-- queen dove of all doves is coming in to be our Treasury Secretary. There's going to be a lot of support behind the markets for at least a quarter or two.

- Paul, when you talk about the markets being on a cruise ship, they're also on airplanes. JetBlue, American Airlines, United, I'm looking right now, United and American both up over 8% today, on top of what American did yesterday, up 8%. Paul Schatz, Heritage Capital president, it's always good to see you. You can always push me around, Paul. It's OK.

PAUL SCHATZ: Thanks, guys.