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Markets pointing to commodity sector for investors

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David Nelson, Belpointe Chief Strategist, joins Yahoo Finance’s Alexis Christoforous to discuss the bond yields resurgence in volatile trading.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets now and bring in David Nelson. He is Belpointe's chief strategist. David, always good to see you. I want to ask you what you make of what's happening in the tech sector today because, boy, oh, boy, the NASDAQ is really selling off, now down about 2 and 1/4%.

DAVID NELSON: You know, we are seeing interest rates rise again, and it's rattled the market. And the procyclical trade is obviously making headway here. And it makes sense. The large cap secular growth, this is where we hid during the days of the pandemic. And now we have a recovery going on. And it's a multiple question because with each step higher in interest rates, it begs the question, do you really want to support those valuations? Because technically, when rates rise, multiples contract. And so, you're seeing kind of a rotation today out of some of these names.

ALEXIS CHRISTOFOROUS: What do you make of the activity we've been seeing in the bond market with those rising yields spooking investors? Have you moved anything around in your portfolio because of it?

DAVID NELSON: Yeah, I have. I came into the year with a slight overweight with financials, and now it's even more so. And it almost begs that you go there because you have this steepening yield curve. And that's the bread and butter of any financial company. Banks live off that. Net interest margins continue to rise. And that's good news for this sector.

The market's kind of pointing us where to go. Financials will be one. I would look at the material sector. Commodity prices are rising. And the good part about the material sector or commodities is that it's only 2% of the S&P 500 index. Even if you double weighted, you only own 5% of that 5% holding there. You're adding a significant amount of alpha there so that rising rates is kind of shifting where we're going to put capital right now.

ALEXIS CHRISTOFOROUS: I know that small cap stocks are holding their own, actually continuing to outperform the broader market. Do you think that there's more room to run there, or have they peaked for now?

DAVID NELSON: Probably more for now. I mean, it's part of the procyclical trade. And therein is the issue here. At one point, you actually pull the trigger and start to take profits in some of these names. If you look at the NASDAQ, look at how far the NASDAQ has gone and how-- what some of the valuations are like in some of these NASDAQ names.

Even today, you've got names in the cloud space. Some of them don't even have a PE multiple. They traded 100, 200, 300, some even at 900 times earnings. And I think investors now, they're looking for growth, but now they can find growth in some of these other sectors like industrials, financials, materials, and others.

ALEXIS CHRISTOFOROUS: You know, David, we've been seeing this inflation trade on for a few weeks now with a big jump in commodities prices. What are you doing with your portfolio with regards to inflation? Do you think that this market has accurately priced in inflation moving higher, as we move further into the year and as interest rates continue to move up?

DAVID NELSON: Well, interest rates are kind of leading the way here. And the good news is that right now, the S&P 500, the earnings yield of the S&P 500 is about 4.5%. All I'm doing is taking the PE ratio and turning it upside down so I can put it in a format that a bond investor could understand. That's still a decent spread above 1.4%, 1.5% in treasuries.

But each step higher demands that equity earnings growth continue to increase to support valuations where they are. The whole argument, the bull trade that we talked about for probably the last several years, is that relative to other asset classes, stocks were still the best game in town. And today, they still are, but each step higher in interest rates is going to challenge that thesis.

ALEXIS CHRISTOFOROUS: What do you make of the tech sell-off? We started our conversation off with that. Is this a buying opportunity for folks who were looking at getting in at a more attractive level, do you think?

DAVID NELSON: Yeah, I do. I mean, I think you got to pick and choose your spots. I can't talk individual names today, because it's a rebalance day for me, so I'll be in that sector today. But for me, it's usually since I usually come into these things fully invested, for me, it's more about rotation. How do I get out of what isn't working and maybe go into something else? I want to upgrade the portfolio with an opportunity like this. I've got two or three names that I'll be purchasing today.

ALEXIS CHRISTOFOROUS: All right, you're going to have to come back and tell us what those are, OK? David Nelson--

DAVID NELSON: OK, I'll do that.

ALEXIS CHRISTOFOROUS: --of Belpointe, thanks so much for being with us.