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Markets adjusting to upcoming Fed rate hikes and 'Cold War 2.0': Sizemore Capital CIO

In this article:
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Sizemore Capital Management CIO Charles Sizemore joins Yahoo Finance Live to discuss the market adjustments occurring between Fed rate hikes and the Russia-Ukraine conflict, past historical examples, inflation, cryptocurrency price volatility, and airline stocks.

Video Transcript

EMILY MCCORMICK: And for more on today's market action, let's now bring in Charles Sizemore, Chief Investment Officer of Sizemore Capital Management. Charles, thanks for being with us this afternoon.

It's been another volatile day in markets, echoing what we've seen over the course of the past several weeks with stocks down and energy prices soaring. What do you think investors are still struggling to price in at this point?

CHARLES SIZEMORE: Well, remember, as bad as it looks today, we're only down about 12% from the all-time highs. So we went into this year with incredible optimism. And there was really a scenario where the market was priced for perfection. So really anything short of perfection was setting us up for some trouble.

Now, whether it was the Russian invasion of Ukraine or it was something else entirely, something would have upset the apple cart here. So right now, the market's still struggling the price in what the effects of the Fed's rate hikes trajectory will be. That risk hasn't gone away.

And then on top of that, they're having to price in the beginning of Cold War 2.0. What does that mean for globalization? What does that mean for already frayed global supply chains? So there's a lot to digest right now, and it will likely be weeks or months before the market really figures this one out.

So given the facts that we have on the ground right now, given what we know about where the Fed may be heading, what we know about the geopolitical situation, how much further do you think the S&P 500 could potentially fall from here?

Well, go back to 2018. The fourth quarter of 2018, we had that near bear market where the S&P nearly touched a 20% decline. That was based primarily on fears of the Fed's tightening at the time. So I would say something like that scenario is very, very plausible, not unlikely at all. Could it overshoot?

Absolutely, it could overshoot as well. But I wouldn't really try to play this as a tradable rally until we were down probably another 5% to 10%.

BRAD SMITH: You know, it's interesting-- you mentioned Cold War 2.0 and of course, at this time, we've even had some of the most well-known investors out there-- Bill Ackman in an interview earlier today-- talking about basically that we're already in World War 3. And so with that in mind and the historical context of how markets have performed in previous times of geopolitical conflict and tension that has prompted either military operations or at least some sense of alarm, how do you expect the markets to react, or continue their reaction in this case, in the face of what you're calling a Cold War 2.0?

CHARLES SIZEMORE: We don't have a lot of historical examples. If you go back to the Cuban Missile Crisis, for example, that was a blip on the radar that had very little impact. The Russian invasion of Hungary, similar scenario-- very limited impact. What we're looking at today, though, is the possibility that this undoes a couple of decades worth of globalization.

And what does that mean? That is a recipe, potentially, for stagflation-- at least over the next couple of months at least in that sort of short to medium-term horizon. So that's really what investors are struggling with right now-- trying to price in that possibility of stagflation.

- So then when you look at the publicly traded companies that are unwinding their business from Russia and the reaction to those who are choosing to stay doing business there, how soon could we see this impacting earnings and share prices? And how do you adjust your investment strategy on this?

CHARLES SIZEMORE: Oh, you're going to see it-- in the next round of earnings releases, you're going to see forward guidance that's starting to leak this news out. We may not actually see it in the hard numbers for another quarter or two, but companies are going to start-- they're going to start tipping-- they're going to let us know what's coming.

So I do expect news on that very soon. As for what to do about it, do you run for the hills? Do you go bury yourself in that proverbial bunker in Idaho? Probably not. Do you keep a bit more cash on hand? Absolutely.

There should be some tradable rallies down the road here. So you definitely want to keep some cash in reserve for that. Otherwise, stay diversified. Keep some exposure to stocks, particularly stocks that should do better in an inflationary environment. Have some exposure to commodities, for sure.

They're doing fantastically well this year. That had a lot of momentum even before the Russian invasion that this really only accelerates that trend there. To the extent you keep bonds, I would probably keep the duration short-term on that. But otherwise, just stay balanced.

- And you mentioned some of the trends that you were following before the Ukraine crisis. And in your notes, you included emerging markets in general being cheap before this fallout. And you're saying they're even cheaper now and still in freefall. Which countries, then, offer the best opportunities? And how should investors approach investing there?

CHARLES SIZEMORE: Sure. I would stay with the commodity producers. A country like Brazil has been cheap for a long time. It's still cheap. It's not going to be expensive tomorrow.

But if you wanted to sort of trickle into that, I think that would be a good opportunity-- just sort of average in slowly over the next few weeks. I think sticking with those commodity-producing emerging markets is going to be a good trade for the rest of this year.

BRAD SMITH: Is there any sort of crypto allocation that you would be looking at right now considering the move lower we've seen in US dollar prices of Bitcoin, Ether-- of course, two of the most popular in terms of the market value in the market cap that they carry-- but even some of the altcoins as well?

CHARLES SIZEMORE: We keep a small allocation to the large cryptocurrencies. It's funny, cryptocurrencies were really a sign that we were really reaching that bubble froth phase of the market cycle. When you started seeing really dodgy cryptocurrencies, they always had cute puppy dog faces-- I don't know what that was about-- but that was really a sign of excessive market optimism.

And so, thankfully, some of that has been squeezed out. You know, two months of intense volatility has gotten rid of some of that speculative froth, which is good. So I would be a buyer of the larger, more mainstream cryptocurrencies at current prices.

EMILY MCCORMICK: And speaking of getting rid of some of the froth that we saw at the beginning of the year, how are you thinking about tech stocks? I mean, you heard Jared Blikre at the top of the show talking about Facebook Meta platforms down about 50%-- losing 50% of its value since mid last year, the NASDAQ composite down 18% for the year to date. Is now a time to be a buyer here, or is there still more volatility ahead for the tech names?

CHARLES SIZEMORE: I think the answer to that is yes and yes. I think this is a decent time to wade into it, maybe average in. But there will also be more volatility. And part of it is no one really knows how to price in what the effects of a Cold War-type scenario will be.

When you had so much revenue generated from ads and that may be curtailed or under a lot more scrutiny going forward, who is paying for these Facebook ads? Who is paying for Google Ads? There's going to be a lot more scrutiny there.

And so that is this unknown factor in terms of their future growth. That isn't priced in yet, and it may be a while. So until that's priced in, expect volatility.

BRAD SMITH: There is something that is being immediately priced in, and it's kind of this reflexive move that we've seen in airlines and companies that are going to be hit the hardest as a result of oil price rises and how much of that impacts their operating expenses as well. If you kind of set a long-term time horizon, how would you be looking at some of those sectors?

Are you, as some of our guests last week were even saying, are you putting together a shopping list? Or are those where you are still looking for molarity in this situation before, perhaps, moving or repositioning into some of those names?

CHARLES SIZEMORE: Well, airlines are a fine example. This is a sector that got absolutely obliterated during the pandemic. They've really struggled to put their businesses back together. And then this happens.

I will say this-- the pandemic experience forced those companies to get lean, it forced them to cut costs, it forced them to really prove their mettle, if you will. So I actually think that is a nice, ripe hunting ground. I would be making a shopping list in transportation, tourism.

These sectors still have really good tailwinds behind them. This little bout of all-- this little war scenario notwithstanding, you do have you still have that post-COVID yearning to go somewhere, to do something. So this summer will probably still be a great travel year. We will see a nice bounce there, but expect volatility for the next several months.

BRAD SMITH: Charles Sizemore, who is the Sizemore Capital Management Chief Investment Officer joining us here this afternoon-- Charles, we appreciate the time and insights.