Market strategist to energy investors: 'Take some profits'

Sofi Head of Investment Strategy Liz Young joins Yahoo Finance Live to discuss energy stocks, inflation, volatility, China cutting the time for its COVID-19 quarantine policy in half, and the outlook for investors.

Video Transcript

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BRAD SMITH: The energy sector has been a rare bright spot of the S&P 500 so far this year, but global slowdowns and increasing fears of recession. Will there be a rush for liquidity in the form of profit taking here? Joining us now to discuss is Liz Young, SoFi head of investment strategy. Liz, great to have you here with us this morning. You might be in the camp of thinking that it's a good time as ever to take some profits on energy. Do you anticipate a material amount of positions will kind of dash for the exit here?

LIZ YOUNG: Yeah, you're right. I think I'm in the minority, thinking that it's time to take profits on energy. But here's the story. What I fear is that people have made quite a bit of money already on this energy trade. And when we're looking at stocks that are so tied to the price of a commodity, those commodities can change course on a dime. And when they go down, they can fall fast, depending on whether or not it was a shock or some type of headline that brought them down.

So what I'd like to see investors do is take some profits. If they've been invested in that energy trade and they've benefited from it over the previous few months, it's OK to start taking some profits and ready that money to deploy into other trades that could do [INAUDIBLE] half of this year.

JULIE HYMAN: Liz Young, by the way, quick side note-- happy birthday to you.

LIZ YOUNG: Thank you.

JULIE HYMAN: I know that you had a birthday recently.

LIZ YOUNG: I did. I did.

JULIE HYMAN: So as we talk about these energy stocks, one of the interesting things that you point out in your blog post is that they don't necessarily always track right along with oil prices, right? And that's, I think, something that people may have forgotten because they both directionally have been going up thus far this year.

LIZ YOUNG: Right, and that becomes the intricate part of this argument, right? So when you look at energy stocks or any kind of stock that's tracking a commodity or dependent on a commodity, they're not going to be in lockstep with the moves in that commodity price. Energy stocks in particular this year, you have to make a decision, as an investor, what your objective is. There are probably a lot of energy companies that are still going to be able to raise earnings guidance through the rest of the year or even raise their dividend, given the elevated prices of energy that have occurred over the last six months or so.

So if you're somebody that's looking for income from those stocks, it's OK to keep holding those positions or even look to add to those positions. I'm going to assume that a lot of people are looking at stocks right now and are upset with the price appreciation they've seen over the last year and are looking for more price appreciation potential. So with energy being really the only sector that's still up year to date over three months and six-month periods, I think that there are a lot of other sectors that are offering price appreciation potential, given their valuations and given the pain that they've already seen.

BRIAN SOZZI: Liz, we're about to get-- and happy belated birthday, of course, from me as well. We're about to get a lot of economic data this week-- PMI, GDP, you name it. What do you think the bulls would like to see? What do they need to see just to keep this rally going?

LIZ YOUNG: Well, I don't know that the rally is something that's sticking right now. I still think that we're going to see volatility through July because of the economic data that's going to roll in. And keep in mind that the economic data is the last thing that we see turn, because a lot of it is backward-looking. We get it on such a leg. There's not a ton of high frequency economic data. So we're going to see the economic data come in disappointingly. But it's going to happen after it's already occurred in the economy.

Some of the things that we still need to see rollover are things like PMIs. So keeping in mind that a PMI above 50 signals expansion, PMIs below 50 signal contraction. I still think we're going to see some of those PMIs hit contractionary territory because we are certainly in a slowdown right now. Whether or not we want to use the word "recession" is really just a matter of definition at this point. But we're definitely in a slowdown. So some of that activity data needs to come in.

You also want to see some of the labor market data soften. So the number of openings that we have probably need to come down before we really feel like, OK, we've hit kind of the pit of this slowdown. And we can start recovering on the other side of it. And home prices are the last thing. Now, home prices have started to increase at a slower rate, but they certainly haven't come down off of that 19%, 20% growth level. So we need to see home prices come down, too.

BRIAN SOZZI: So, Liz, once should this data surprise to the downside, how do you think the market will react?

LIZ YOUNG: Well, I think some of it is going to be confirmation that it's actually occurring, but what we really need to get is that Q2 GDP number, which we're not going to have until the end of July. So that's when we confirm whether or not we were actually in a recession. I think the market reacts, obviously, before we get a lot of this economic data. So some of it will be confirmation. But what I think the market is going to have a hard time with is when earnings season starts in July. And we likely get more and more revisions downward from a lot of companies for the rest of the year.

The other thing that the market does not like to hear is layoff announcements. And we're starting to hear those trickle in from different parts of the economy as well. So that digestion phase is going to take a little while. And I think that there are some more bumps to come, which is why I believe volatility lasts through July.

BRAD SMITH: For anyone that is profit taking from energy, where are you kind of advising for them to reinvest, other sectors that they should be keeping their eye on?

LIZ YOUNG: Yeah, that's a great question. So when you look at what I think could happen in the second half of the year, if we have inflation actually come down off of its peaks and if we start to string together a few months of month over month declines in inflation, and if we have the Fed say, OK, you know what? It's working. Everything is cooling off. Maybe they take their hikes from 50 down to 25. We just feel a little bit of a slowdown in that tightening process. Then you could see a cyclical bounce.

And where I would look for that bounce is the places that have gotten hurt the hardest that maybe didn't deserve to be hurt in this. And that would be things like financials. Even small cap, if you look at small cap value, they've hit really lows and valuations that they were at back in 2008, 2009. So some of those spots could bounce off of those really depressed levels of valuation. And obviously, some of the growth stocks that have gotten hit hard could come out of this on the other side as well.

Lastly, I would say consumer discretionary still probably needs to take a little more of a hit on earnings. But after that pain is felt, some of those consumer discretionary stocks could bounce off the bottom as well.

BRIAN SOZZI: Good words of wisdom. Liz Young, SoFi head of investment strategy, always good to see you. We'll talk to you soon.