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Markets: ‘Discipline is critical right now’ for investors, strategist says

Keith Fitz-Gerald, Fitz-Gerald Group Principal, and Wes Crill, Dimensional Fund Advisors Head of Investments Strategists, join Yahoo Finance Live to discuss how the market closed Monday, the Federal Reserve's Jackson Hole conference, and the outlook for stocks and bonds.

Video Transcript

- Here's your closing bell.

[BELL RINGING]

All right. That'll do it for this trading day on a Monday, the last week of summer really under way. Let's check out the closing action On. The markets. Been a bit of a rough one. As you can see, a lot of red on the board, as the Dow drops a half a percent. The S&P down 27 points. And again, as you see with the rising rate environment, once again the Nasdaq tech heavy leading the losses, down more than 1%.

For more on the broader markets, Wes Crill, Dimensional Fund Advisors head of investment strategies and vice president, and Keith Fitz-Gerald, Fitz-Gerald Group principal, are with us. All right. Good to see you both. Wes, let's start with you. Are we still feeling the effects of Jerome Powell's words at Jackson Hole? And how long will they resonate on the markets?

WES CRILL: Well, I think it's a good reminder that when you have a volatile day in markets, it's a sign that markets are doing their job. That's a big principle for us, which is when you see price volatility, that's market participants taking into account new information, which they got on Friday, changes in expectation, which is relevant for that. Now, the flip side of that is it's important for investors to be disciplined, to stay invested for the long haul.

That's something we see in markets, where if you're not around to capture the stock market's return when it appears-- I'll give you a really good example. If I go back to 1997 and I invest $1,000 in the Russell 3000, OK, if I keep that through the end of 2021, that $1,000 grows into a little over $10,000. If I had missed the best five days in the market, my profit drops down to $8,600. So we always preach discipline at a time like this despite the market volatility.

- Keith, what do you think? Are you looking at the market any differently than you were, say, ahead of what we heard from Powell last Friday? Because it certainly looks like the market-- at least the market's reaction to this-- has been a little bit worrisome?

KEITH FITZ-GERALD: Well, it has. But Wes makes a very, very important point. Discipline is critical right now. And Wall Street wants you off key. They want you making emotional decisions and flying by the seat of your pants. So I looked at Powell's remark as, you know, he's closing the barn door after the horses ran. I can't place a lot of credence in where he goes forward. So I want to stick with the companies, the quality, the liquidity, the things that really matter scientifically to what produces higher returns. So looking at today's action, about par for the course. Computers realigning. Indexes rebalancing. Investors, fortunately, didn't run away. So that's a good thing.

- So, Wes, when you look at the volatility, which obviously is expected to keep continuing, how far did your outlook go in terms of when we might see a bottom or perhaps a steadiness in the market?

WES CRILL: Well, that's the thing about-- we can't really know exactly when these market premiums are going to be delivered. And I think one of the things we look back to historically is, you know, what are indicators that we can see to enable us to predict markets? And there really aren't any good ones out there. But one thing we can look at is what's happened in previous instances of Powell either communicating new information.

We don't have to look too far back. In fact, we can go back to June. I think we all remember when the rate increase was communicated that it was going to be larger than what many market participants were bracing for. Initially, it had been 50 basis points communicated. And then it was changed to a prediction of 75 basis points.

What you saw was markets very rapidly incorporated this information in treasury yields. They shot up over the weekend by 30 or 40 basis points all along the curve. And so when the actual change in the federal funds rate occurred, there was a very muted impact, if any. And I think that's something for investors to take into account. The information is out now. It has very likely been absorbed into market prices. And so now we look forward, just like we always would, expecting the stock market to deliver higher returns.

- Keith, will they continue to deliver higher returns? Will we retest those June lows? Some are calling for a new low of 3600.

KEITH FITZ-GERALD: I think the first stop is 3900, frankly. That's where the computers are going to balance out. That's when you're going to see some give and take. But that having been said, these kinds of days actually give me great encouragement because, to Wes's point, again, the markets are doing what they're supposed to be doing. You have to have buying and selling for them to work normally. So this doesn't disturb the operational picture of a company like Apple or Costco. In fact, the business case for owning these companies is getting stronger, which means the more they drop, in fact, the better your upside potential becomes.

- Wes, how are you thinking about investment opportunities and your strategy here given the uncertainty that we'll likely see over the coming months?

WES CRILL: Yeah. It's a good question. I mean, some of the bedrock components of our investment approach is, number one, broad diversification, which we think is a great risk control in environments like this. But we also look for characteristics that have been associated with higher expected returns for stocks historically. So smaller caps, lower price book ratio, higher profitability.

The good news for investors is that the profits for these investment styles have been there and not really correlated with either areas of the business cycle for those concerned about going into a recession or even market downturns. We see that these premiums have been there on average even during these periods of duress. So, again, it comes back to our consistent approach. We want to keep the focus on these groups of higher expected returns because, honestly, there's not a really good reason for us to deviate.

- And Keith, in terms of what you're looking at, we saw that you talked about iPhones, when it comes to individual investors, what they should be keeping an eye on. What criteria are you using in terms of where you see the opportunities?

KEITH FITZ-GERALD: Well, we have a slightly different approach. We concentrate on where we think the world is going, not where it's been. So our analysis is very proactive. If we look around at what people are buying and what they're using, nobody's giving up on iPhone despite the fact they're changing their purchasing habits radically. We're looking at medicine, for example, if you go that direction.

We're on the cusp of customizable medicine. The world is not going to stop. You can't put the genie back in the bottle. So vaccine or no vaccine, companies like Pfizer are going to be a great choice. Inflation is very real for most consumers, regardless of what the government does or doesn't say. So a choice like Costco, for example, is some place that is going to only attract customers going forward because they want to make every dollar go further. So those are the kinds of names we're focused on right now and where we see great opportunity.

- Wes, quick last word on that.

WES CRILL: Well, you mentioned inflation. I think we're starting to see a little bit of a curbing of inflation expectations. We see that in the break even inflation rates down to 2.4% after peaking over 6% back in March. So maybe that's where we can end with good news on the inflation front.

- We'll take that. Wes Crill, Keith Fitz-Gerald, thank you both for being here. Appreciate it.