Market volatility shows ‘buyers do see some value in there’: Analyst

Baird Investment Strategy Analyst Ross Mayfield and Garrett Boorojian, WaveCapital Partners Managing Partner and Chief Development Officer, join Yahoo Finance Live to discuss markets closing in the green, volatility, the Fed's interest rate hikes, wage growth, inflation, and recession indicators such as unemployment.

Video Transcript

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- There you have it. Your first closing bell for the month of May. Let's take a look at where the major indices settled on May the 2nd. As you can see there, quite the turnaround, as we've been discussing. All three major indices somehow ending up in the green, after struggling in intraday trading with a lot of volatility.

The Dow, as you can see, that up about a 1/3 of a percent. The S&P 500 up about 2/3 of a percent, up 23 points there. And the NASDAQ there the biggest gainer on the day, up 1.6% at more than 200 points on the day. Well, Dave Schroeder and I are taking a look at this with our market panel now. Let's bring in Ross Mayfield, Baird Investment Strategy Analyst, and Garrett Boorojian, WaveCapital Partners Managing Partner and Chief Development Officer. Ross, I want to start with you. What do you attribute this turnaround that we saw, even as we saw volatility towards the end?

ROSS MAYFIELD: Yeah, volatility skews in both directions, right? So in this period, where we expect heightened volatility because of all of the confluence of factors that we see from geopolitics, to earnings, to the Fed, to inflation, you're going to have big swings like this. We saw it in March. We saw it in February-- big down days. But then occasionally they reverse.

I think at a certain point, you know, buyers do see some value in there. If you're of the opinion that we're not going to enter a recession in the next year, then that 15-ish percent off on the S&P is about you know, where it's been historically. So I think you start to see some value investors kind of start to take some bites.

- Garrett, what do you do on a day like today? Are you putting money to work?

GARRETT BOOROJIAN: Well, that would be a great question for my clients whom I represent. But I represent anyone who are real estate developers, tech entrepreneurs, cybersecurity experts. And I'm pretty sure that they have their own stock portfolios. But what's interesting about the stock market is that it is full of volatility at times, and then sometimes it's stable.

I mean, when you think about how Tesla had a 19.2% drop in its stock last month, biggest drop in its stock since March of 2020, at 21.6%-- I mean, Amazon, this past Friday, was down 14%. Facebook shares were up 19% after its $230 billion market value crash in early February. So I'm encouraged to see on this Monday how both the NASDAQ and the Dow and three, the S&P 500, are all doing well.

- But how do you account for it, Garrett? That's what we can't figure out. We came on the air. The NASDAQ looked like was going to finish in the red. And it finishes up a percent and a half. How do you account for that type of volatility within an hour?

GARRETT BOOROJIAN: I think it's really based upon, Dave, the emotional climate of all these investors. And it really has to do a lot with the news cycle. I think that as the other gentleman mentioned, that it really is based upon the policy of the Fed. I know that on May 4, which is a couple of days from now, it's going to be interesting to see where we're at with the stocks when we see another interest rate increase of a half a percentage point, the second of seven rate hikes this fiscal year, and three projected next year.

So again, the Fed has a lot to do with it. But we also know the external forces of the Russian-Ukrainian. War and I know that Germany and Poland might not be too far behind, having complete energy independence from Russia.

- So then, Ross, with that in mind, obviously, the spread is saying, look, the US economic fundamentals are strong enough to not have to have a recession. What are you looking at in terms of what the Fed can control as, as we just heard, there some of the external factors that they can't? And how do you position your portfolio accordingly?

ROSS MAYFIELD: Yeah, that's the thing. You know, the Fed, they can't make oil. They can't make semiconductors. They can't ease some of the supply chain woes that we're seeing from COVID lockdowns in China, from issues in Russia, Ukraine. The Fed is not in the business of farming.

So what can they control? They can control consumer expectations and business. Expectations and really what they're watching right now is wages, I think. Wages and rents a little bit, but mostly wages. Wage growth is running hot. You know, if you're working, you might not feel like you're keeping up with inflation. But the fact of the matter is that once wage growth becomes really entrenched, it's a lot harder to get rid of than some of these commodity price shocks are.

So I think the Fed wants to raise interest rates, navigating towards that soft landing. Chair Powell has mentioned 1994 as kind of a comp that they like, where there were a couple of big rate hikes in '94. A lot of stock and bond market volatility sets the way for the late '90s bull market run. So I think they're looking at something like that. But the key thing is getting wages under control, getting consumer expectations back anchored around, you know, reasonable expectations for inflation. And we'll go from there. But it's-- the path gets narrower by the day for them. And that's why they're ready to move fast this week.

- Well, Ross, there is an argument out there, though, that maybe the Fed will slow or should slow the rate hikes because of the recent losses that we have been seeing. Do you think that argument, I guess, carries any weight, or is it still too early in the cycle?

ROSS MAYFIELD: I think it's too early. I think, first and foremost, this is about inflation, right? If inflation moderates in the second half of the year because supply chains kind of untangle a little bit or because one of these geopolitical issues gets resolved a bit, then the Fed, you know-- they say they're data driven. They might look at the data and say, all right, we don't have to be so aggressive. We don't have to over tighten and induce a recession.

But we saw that late February, right, Russia invades Ukraine. The blip was days for how many rate hikes you might see this year. It blew past it. The Fed is not concerned, you know, with the economic ramifications of these geopolitical issues.

They're not concerned at this point with the equity market weakness. All of those things play a factor. But they are way behind inflation as far as what the Fed is looking at. You know, with an 8.5% inflation reading, the Fed is ready to go. And they'll watch from here. But that's first and foremost what they're watching. And 8 and 1/2% means they've got to go fast.

- Garrett, most have pulled back on their predictions for recession next year. You have not. Why? And could you see a 75-point hike this week?

GARRETT BOOROJIAN: It's potential. It's potential, Dave. And you think about how since 1950, that we've seen recession happen within two years if the unemployment rate stays below 3% but the inflation rate stays above 5%. And I am very much not bullish on a recession not happening in 2023.

I'm very bullish, is what I'm saying. I'm very bullish on recession happening because the market is overheating. Supply and demand is definitely not balanced. And when you think about some of the external things that are happening outside this administration's control, whether it's anti-competitive behavior, implementing of new antitrust policy that's necessary, combating illegal price fixing-- potential price controls might be in order. It seems sometimes the liberal policy. But the last time price controls happened was under the President Nixon's administration, when he did a 90-day hold on prices. So I'm thinking that if recession-- if the recession does occur in 2023, it's not going to be a surprise to me and probably some of my other colleagues on Wall Street.

- [INAUDIBLE] to value stocks or the growth stocks, where should people be focusing in this sort of environment?

ROSS MAYFIELD: Yeah, I think it is sort of environment--

GARRETT BOOROJIAN: I believe that was a question for me or the other gentleman?

- For Ross.

ROSS MAYFIELD: Thanks for clarifying because I wasn't sure as well. I think where investors want to be focusing at this point is quality. So you can quibble about sector, whether you're pro cyclical, whether you still favor the long-term secular growth. I think there's room for both in most portfolios.

But quality is the name of the game at this point in the cycle, particularly as the Fed starts to raise interest rates. Particularly with inflation proving such a problem for companies, you want to be investing in companies with agile management teams that can manage input cost inflation, that can manage wage inflation. So moving up the quality spectrum, where we're more than two years off of the bear market low now, that the day has come and passed for the lower-quality rally, where kind of everything wins. Right now, you need to be a little more selective. And I think quality-- we like energy and materials.

We think the commodity story still has room to run. But again, I think some of these tech stocks are starting to look interesting. I think if you have a time horizon that's long enough, you want to own long-term secular growth. And that's where we see those opportunities. So I think it's definitely starting to look interesting on a valuation basis after the sell off we've seen this year.

- Ross Mayfield and Garett Boorojian, thanks to you both for joining us today.