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Market strategist: The ‘path of least resistance is down’

ClearBridge Investments Investment Strategist Jeff Schulze joins Yahoo Finance Live to discuss market uncertainty, investor trends, the Fed’s Jackson Hole speech, inflation, and the outlook for the crypto space.

Video Transcript


BRIAN SOZZI: Powell pummels markets. Investors digesting Fed Chair Jay Powell's very hawkish and very short Jackson Hole speech. This much, we do know, however, Powell isn't messing around on bringing inflation down. And stocks don't like his hawkish tone.

Let's dive into this more with Jeff Schulze, ClearBridge Investments director and investment strategist. Good to see you in person. Thanks for coming down.


BRIAN SOZZI: Look, investors lost a lot of money on Friday. Dow down over more than 1,000 points. Markets are under pressure, again, here today. What are some of the moves an investor should be making today?

JEFF SCHULZE: Well, I think it became obviously clear that the Fed removed the punch bowl from the party. And the drunkest asset class out there has been equities. They've been pricing in a dovish pivot, a more softish landing, if you will. And Powell reminded everybody that inflation and bringing that down to more normalized levels is priority number one, even if it is to risk a recession.

So I think you're gonna see earnings expectations continue to come down from here. Multiples rose back up to 17 and 1/2 times forward earnings. Those need to come back down to earth. And I think you're gonna see selling pressure over the next couple of months until it becomes clear whether the Fed can, indeed, pivot and whether the economy can stay out of recession. But I'm seeing downward pressure as we move forward.

BRAD SMITH: So specifically within tech, as we've been tracking that, too-- I mean, even here today as we opened up the trading session, that was one of the biggest laggard sector wise. And that took it on the chin on Friday as well because of that higher interest rate environment-- what that means for the ability for them maintain profits, maintain cash flow, and then invest that back into the business impacting some of their growth as well.

What would you be tracking there? And is it safe to, on even these declines, start to set long-term positions?

JEFF SCHULZE: I think it's a little bit premature for that.


JEFF SCHULZE: Again, looking back to Friday's reaction, you saw big selloff in equity markets. But the 10-year Treasury actually rose a little bit. Fed fund futures remained relatively stable. So if the 10-year Treasury is going to stay at elevated levels because of a more hawkish Fed, I think that means more pain for the tech sector because a lot of their value is derived from lower discount rates. So again, I think it's a little bit premature to go move back into to those areas.

BRIAN SOZZI: But you still-- let me push back on that because we're seeing at least on the Yahoo Finance platform, some of these trades being looked at safe havens. You know, just given all the cash that Apple, Google, Amazon, they, in fact, have, are they safe havens?

JEFF SCHULZE: I think you need to pick your spots. You don't want to go into the Baby FANG stocks, you know, companies that don't have a path to profitability over the next three to five years. I think they're gonna have a very difficult time accessing financing.

But I think the larger mega-cap tech stocks can be all right in this type of environment, especially if we have a soft landing. And if you look at outperformance here over the course of 2022, it's really gone to companies that do have large cash balances, that keep that cash on the balance sheets, that do return of dividends, rather than companies that don't generate a lot of free cash flow. So I think there are going to be areas of opportunities, but again, it's a stock picker's market.

BRAD SMITH: What are the reasonable expectations that we should have for any type of earnings growth? And do we expect that to continue to be pulled back by companies?

JEFF SCHULZE: Well, there's two phases to a bear market. The first one is multiple compression, which we went through in the first half of the year. The second is earnings downgrades. And you're just starting to see earnings move down, looking out 12 months or to 2023. So I think those are pretty rosy expectations.

If you look at the last three recessions, earnings have moved down by about 25% on average. In nonrecessionary environments, they move down about 4%. So if you split the difference, I think earnings expectations need to come down anywhere from 10% to 15% since--


JEFF SCHULZE: --we don't know whether a recession is forthcoming. So I think you're gonna continue to see weakness as you move through the next couple of quarters.

BRIAN SOZZI: If that happens, the bottom is gonna drop out of this market again, no?

JEFF SCHULZE: I think that the path of least resistance for the market is down from here. Until Powell's antipivot speech on Friday, I thought that you probably had a little bit more juice in this bear market rally. But given the fact that is no longer a reality, I think the markets are going to reprice a slow economic environment.

BRIAN SOZZI: So shouldn't you be raising cash?

JEFF SCHULZE: I would be. I'd be selling into rallies until-- in this environment until we can get more visibility on ultimately where the economy comes out. And I don't think we're gonna have that for at least three months.

BRAD SMITH: And so as of right now, we've also been tracking where people are moving away from, highly speculative assets once again. And tracking crypto, to the extent that any of your clients are asking about crypto right now. What do you tell them right now?

JEFF SCHULZE: I think, again, you want to raise capital at this point. I think lower lows are ahead for us. You've seen crypto trade in tandem, really, with the stock market. It hasn't been the inflation safe haven that a lot of investors were hoping it would be. And if the path of least resistance is down for the markets and liquidity is being actively withdrawn-- and let's not forget, quantitative tightening is now going to be doubling once we move into September-- I think that's not an environment that's conducive to more gains in the crypto space.

BRAD SMITH: Jeff Schulze, ClearBridge Investments director and investment strategist. Thanks so much for joining us here on set this morning.

JEFF SCHULZE: Thanks for having me.

BRAD SMITH: Appreciate it.