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Markets have become addicted to growth: strategist

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Interactive Brokers chief markets strategist, Steve Sosnick, joins Yahoo Finance to discuss the sectors to watch ahead of earnings season and the factors contributing to retail investors being dormant in the market lately.

Video Transcript

[MUSIC PLAYING]

- As we mentioned, we're setting up for a mixed open this morning. NASDAQ Futures pointing to a higher open, S&P Futures a little change. Dow Futures pointing to a lower open.

We talked a lot about the expectations for earnings this week. Let's talk about the other big set of events. And for that, we'd bring in Steve Sosnick, Interactive Broker chief market strategist.

I know you're watching earnings also, Steve. But the other sort of I guess duo of big events is CPI, which comes out tomorrow. And then later in the week, we're going to hear from Fed Chair Jay Powell with his semi-annual testimony to Congress.

How do you think the markets are setting up here? We still have yields. They're not sub 1.3%, but they're still pretty darn low. So what's the sort of sense you're getting about expectations?

STEVE SOSNICK: Well, this is the problem, Julie. First of all, it's great to see you. But the problem I have right now is you can make a case for anything. Because the sentiment is so stretched in so many different directions. So if we get a hotter than expected CPI and PPI number, do we then say, well, it's transitory, it's peak inflation, the fed looks at PCE deflator anyway? So what's the difference?

There's any different way you can strike this. Or, of course, we can look at that number and say, wow, that is hot. And it's a problem. And right now, where you have this uncertainty and bonds lead the inflation response, I think you can pretty much credibly come up with any scenario for any type of number that comes out. And because it's so crazy sentiment, it's so driven by sentiment at this point.

- And Steve, just given those uncertainties, what are some sectors that you would gravitate to or away from headed into earnings season?

STEVE SOSNICK: Well, I think right now, the momentum is definitely into the mega cap tax. And Myles alluded to it earlier that the math doesn't work about the indices. If those stocks are going up, they have-- it's inevitable that they drag the rest of the index with them.

And so I hate to keep saying that these are your market leaders, but that's the sector you have to watch, because that's really what's driving the bus at this point. You've got 50% of NDX, you've got 25% of SPX. If they're moving, everything else is moving along with it.

If they rally, they take the market with it. And that's kind of what we saw this morning when the S&P Futures were lowers. But NDX futures were higher. You knew that the SPX was going to have to sort of drag itself up to sort of unchanged where we are now. And that's pretty much-- I hate to just keep piling on these stocks, because they're so piled on already, but that's really going to have to be your bellwether going forward.

- And then we saw the opening bell here on this Monday morning. Duke Energy bringing about down there on the floor of the New York Stock Exchange, a virtual bell ring we have seen. Of course, many in-person events we'll see more, I'm sure, through the balance of the week.

But Steve, let's just stay on this idea of the big tech leadership and also just the way that it has come back in favor as we've seen rates come down. It's been such an interesting six, nine months where it was value, cyclicals, I mean, financials and energy, two the best performing sectors in the S&P for the first half of the year. And I just wonder how you think about it maybe in the context of investors, to some extent, picking up where we left off.

This was the 2019 trade, right? Multiple expansion on big cap tech. And it seems that if we're looking at the other side of this recovery and we're assuming we go back to a 2% growth trajectory, this is where your best hiding out.

STEVE SOSNICK: Well, this is where it becomes sort of a self-fulfilling prophecy, right? I mean markets have become addicted to growth. And so that's the place where you can sort of reliably look to growth. And of course, this is notwithstanding any regulatory stuff that could upset the apple cart, because that's a whole discussion into and of itself.

But let's say in the short term, what confounds me a little bit is that what's become this great relationship between the mega caps and the bond market. It's essentially evaluation argument, right? We're saying that if you're valuing stocks, you're valuing the present value of future cash flows, whether it's dividends, or cash flow, or earnings, et cetera.

And so the lower the number-- the lower the denominator, the lower the rate unless in 10-year yield as an appropriate long-term discount rate. The lower that rate the higher the evaluation you can support. And I think it's fascinating that even though, by any measures, these are extraordinarily, highly-valued stocks, what's making them rally is evaluation argument.

So it's sort of self-fulfilling. It's like, OK, we've got all these stocks. The bond market is friendly to our long-term evaluation prospects. So we can more or less just say, this is great, because we can just stick on whatever evaluation we want on top of these things.

And that's why we've become so market-dependent. I do think it's also a bond market-dependent. I also do think it's reinforced by algorithms. Because quite frankly, if you and I can spot a trend and any viewers can spot this trend, there are algorithms that have spotted this trend, and they're trading off.

- Now, Steve, I've been asking a lot of folks on the street this. I'll put it to you. Where do you think all the meme or retail investors have gone? They've been a little dormant the past month or so. What ultimately gets them back into the market or more active than they have been in the past few weeks?

STEVE SOSNICK: That's a tricky one, Brian. I think what we saw earlier on was sort of a rotation between crypto and memes. But now, they're kind of both unexciting. I'm not going to put it any more distinct than that. They've both been sort of-- they're uninteresting money for last few weeks.

I said earlier on that I think one of the problems for the meme stocks was people were going to have other things to do. The whole craze arose because you had people stuck at home, you had the advent of free trading and market access that they never had before, and then you sent them all money. So it was this logic.

And also people were craving some sense of community. And to certain number of people, the Reddit forums created that sense of community. I think, right now, people are getting back in the community. The flow of money has large-- you flow of exogenous money has largely end or stopped. We've seen that.

People have jobs. People are going back to work. If you're back at work, you're not day trading nearly as much, at least if you're doing your job properly. And I think this is all contributing to sort of-- I'm not going to say it's passe. Because every time I-- every time I declared it passe or over, it comes back, as quoted in a publication this weekend, saying that they're like cicadas.

The meme trade sort of go away, and then they come back some period later out of dormancy. But I think this is what's going on. I think people have other things to do with their time and money, and there have been tremendous winners. But there was a certain faddishness to it.

And I think those who were doing it because of a faddishness have moved on. And there are-- but that is not to say that it is strictly a fad. This is not to say that it doesn't-- there's no logic to this continuing, whatever logic there was internally. But I think that's my best encompassing idea of why it's kind of just petered out of it, petered out of it.

- So if they're cicadas, I wonder what the molting stages. And what about when they all die at once and start to stink? We'll have to parse all of that in another time, Steve. Thanks for being here. Steve Sosnick, Interactive Broker chief market strategist. Always good to see you.