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Market strategist: It’s the ‘year of the bull’ in stocks, bonds, and gold

Heritage Capital President Paul Schatz joins Yahoo Finance Live to discuss market optimism amid inflation, an overaggressive Fed, a weakening economy, and the outlook for a recession.

Video Transcript

INES FERRE: Despite the stock market decline in 2022, some of Wall Street is optimistic on the year ahead with our next guest saying 2023 will be the year of the bull after we saw the year of patience, frustration, and quality in 2022. Heritage Capital President Paul Schatz joins us now. Paul, it's so great to have you with us. We often hear from so many bears about this year and what will be coming up. Give us your thesis for the year of the bull.

PAUL SCHATZ: Good morning. Good to be with you guys again. Look, you come into the year. You've got inflation, an overaggressive Fed, and a weakening economy. Knowing that was also seen, that was all seen heading into 1995, which was the single greatest investing year of the modern era. I'm not calling for a 37% rally this year. But look, we come into the new year. Everyone is lining up to the-- I think we can have a mild recession.

But my argument is that the market went down 20% on the S&P, 30% of the NASDAQ for a reason. It didn't do so because things were great. It did so because the market saw economic weakness. It saw the Fed raising rates repeatedly. You come into a new year. Portfolios are positioned so far to the negative side. It's the third year of Joe Biden's presidency. Since Germany invaded Poland in 1939, we have not had a down third year of a presidency.

Back to back down years have only occurred three times since World War II-- 1974, '01, and '02. The odds are heavily stacked in the bulls' favor. You had the single worst year of the bond-- in bond market history and the longest decline in history. High yield bonds have never been down back-to-back years. I mean, I feel like everyone positioned, like, 1994, like, 1981, for the absolute worst. Who's really left to sell?

BRAD SMITH: And so, Paul, even with the bullish outlook here, there are so many company CEOs, even from the PWC survey and even in statements, business updates, that have started to pour in earlier this year. It's clear that some of the CEOs and their executive teams are saying, hey, we just need to rip the Band-Aid off now and let the markets know exactly what we're expecting and how much it could impact our business.

And so, to what extent do you believe that there still is some downside potential or risk, given the fact that you do have CEOs saying, you know what? We need to be transparent about the risks that are prevalent and present in front of our business.

PAUL SCHATZ: Your comments are spot on. I don't think the conclusion of the CEOs is spot on. Look, at the beginning of 2009, go try to find a single positive forecast from anyone in corporate America. The market went down the first quarter, and it ended the year up 25%. I think CEOs are so scared these days because they're being graded-- it used to be on an annual basis. Now they're being graded on a quarterly, almost monthly basis. So they're trying to set expectations low, plan for the worst, hope for the best, whatever adage you want to use.

And we all see the economic weakness. But it doesn't mean this deep and long recession is coming. I don't think it is. So I take what they say. The most important thing is this. We know we're going to get preannouncements right now through next month. We know we're going to see companies lower guidance.

If the market doesn't hit those stocks more than a couple of percent, I would tell you with highest conviction, the market's priced in whatever mild recession or economic weakness we're going to get in the next three to six months. Again, markets trade on economic activity three to nine months down the road. So the CEOs are starting to feel it-- see it now. But the markets have already seen this play before. And markets are looking ahead.

And I'll say this as well. For the techno wonks out there, you have an absolute surge in the number of stocks going up versus down to-- off the December low. And now you've got the up volume to down volume, again, getting a little wonky. And all that means is this for the average investor. It's like a rocket ship taking off, right? Once the rocket ship takes off and reaches that escape velocity, it continues on its own.

And that's what these thrusts are in the market. You're going to get-- you've had this explosion higher. And that should continue on its own. Go try to find really bullish people on-- strategists on Wall Street. Everyone's talking about we have to go down to 3,000 or 3,200 first. That's nonsense. And even if I'm wrong on the timing, you could have a 10% decline in the first quarter. I don't think so. I think it's going to be a frontloaded year.

But even if I'm wrong, buy the weakness in the first quarter. Stocks still run 20% from there. I think it's year of the bull in stocks, year of the bull in bonds, year of the bull in gold. Buy all into weakness. You'll be happy in 12 months.

INES FERRE: So-- right, so buying the weakness, tell me, what are you looking at? I mean, what should investors be buying? What stocks, what sectors do you feel will outperform?

PAUL SCHATZ: Well, for sure, the market's telling us right now, if you look at leadership right now, the market's telling us that if you want to take a little risk, I like semiconductors this year and biotech. I'll be alone on my island. That's OK. I like being in the vast minority. But the market's told you already, financials, materials, technology, the risk on sectors, one sector that I'm not extremely excited about, this year's energy. It had two monster years in 2020 and 2021.

And I think it's time to pull energy off the table, pull staples and utilities and the defenses. Put them aside maybe second half of the year, maybe 2024. But I think you've got to stick with the risk-on sectors and indices, small caps are leading. A lot of good things are happening if people just open their eyes, look at the data in the market, and not look at the-- listen to the narratives out there. It's easy to spin a narrative on Wall Street.