‘The markets have rewarded Powell’: Heritage Capital President

Paul Schatz, Heritage Capital President, joins Yahoo Finance Live to discuss the market reaction to earnings season and looking ahead to this week’s Fed meeting.

Video Transcript

ADAM SHAPIRO: --and today. Now let's bring in Paul Schatz to talk about where these markets are going to head. He is the president of Heritage Capital. It's good to have you back, Paul. And I want to talk about something that Alexis mentioned just a minute ago, which is so far, from the companies that have reported on the S&P 500, what is it? They're beating 88% by expectations. A worrywart investor like me has some concern about that kind of metric. What does it tell you and other investors?

PAUL SCHATZ: Well, always good to see you, Adam, as well. First, let's realize that stocks have had almost unabated run since October 30th. So the fact that companies are beating earnings is really a surprise to no one. We didn't get this great surge into, really, the end of June and now into earnings season based on nothing. I mean, the whisper numbers are always higher than what is publicly out there. And companies are beating as everyone thinks. I've said this for 32 years in the business. It's not what the news is, but rather, how a market or a sector or stocks react.

So while the news is all good, to no one's surprise, I'm much more interested in the reaction. It was only one quarter ago where we saw a lot of the tech stocks report blowout numbers. And they would go down on the good news. That's the stuff. So if stocks can rally on bad news, if they miss, that's really telling. If you're going to get some sell-off on blowout earnings, that's also going to be really telling.

ALEXIS CHRISTOFOROUS: So Paul, we're going to hear from those mega caps this week. And I'm wondering if it's time for investors to start rotating out of value and out of the reopening trade, and take another look at the big tech stocks. Is now the time to do that? Is that what you're doing with your portfolio?

PAUL SCHATZ: I don't think at this point, you can make the blanket statement because I don't think the mega growth have all melted up. Now-- and I'm not going to pick on, but you look at Tesla, look at Apple, look at Amazon. You know, Tesla's got to be down from its peak 300 plus points. So that's, what, 1/3 of its value. Amazon and Apple spent six and nine months going sideways and then just broke out above the top of the ranges. Those look different than some of the other reopening stocks, like Nvidia, like Facebook, like Google. So I have a tough time doing all or none.

I would certainly rather be in on a risk reward basis, I'd rather own Apple and Amazon and Tesla. And, you know, I've always been a critic of Tesla. The ones that are the high flying ones are the ones that have no margin for error. And they may just blow out to an unfathomable level, and the stocks go higher. That's fine. But if you're asked on a risk-reward basis, I'm a little more cautious of those.

I've been long energy-- what else? Materials and banks almost all year. And we just started adding back in semiconductors. They've been lagging everything lately. So I think it's, you got to pick your spots. I don't think right now on-- what is it-- July 26, I would not want to make the all or none in either camp right now. I think this is the point because I think also the odds of a pullback are increasing. So I don't want to be in the all or one camp right now.

ADAM SHAPIRO: Paul, you alluded to it, I think, when you mentioned being in energy long. But I'm curious, what are the key sectors that you're following to look for guidance as to where these markets may be going? Because you alluded to that in the notes you sent us.

PAUL SCHATZ: I did. I've got four-- and I say I. There's no secret. So many people look at the same sectors as I do. Four key sectors that really judge the health of a rally-- you've got banks, you've got semiconductors, and you've got discretionary and transports. Those are always my four key sectors. And I like to have three of them leading or being in sync with the market. The problem with my four key sectors today is that not a single key sector is making new highs with the market. That's one of my concerns.

Now, price is always the final arbiter. So I can poke holes in this rally right now. Participation is underwhelming. My four key sectors, none are making new highs. You've got the Russell and the S&P mid-cap index not making new highs. There's plenty of things to poke holes in. But before people get overly bearish on that, price, S&P, NASDAQ, DOW, price is still making new highs.

So it's OK to rotate. It's OK to book some gains, harvest some acorns. But this is not the point where you say, oh my gosh, we're going down 20%. Put your crash helmet on. I think you've got to be a little more sensitive to what's going on around you. But those sectors are the four that I'm most in tune with. And then I'd add in, frankly, high yield bonds. We don't have big bear markets, huge declines when the credit markets are behaving so incredibly well.

ALEXIS CHRISTOFOROUS: Paul, in addition to a very big earnings week, investors have a Fed meeting to contend with. And since the last Fed meeting, a lot has happened. We've seen more proof that inflation continues to heat up. And we also see that the COVID-19 virus is heating up because of this Delta variant, mostly among the unvaccinated. But what are your expectations for the Federal Reserve? I know you've been a critic of the Fed and of this Fed Chair for quite some time. What are your expectations? And is it going to be market moving, do you think?

PAUL SCHATZ: And I love how you very professionally bring in Powell and the Fed and comment that I've been a critic. And saying I've been a critic is very polite because I've been a lot less than a critic.

ALEXIS CHRISTOFOROUS: I know. I tried to put it politely, Paul.

PAUL SCHATZ: So my issues are many. A year ago right now, on your program, I started talking about inflation, how it was percolating. The genie is getting out of the bottle. It's a year later, and the Fed has done nothing. I feel like it's-- they're hedging this. Use any metaphor you want. But the markets have rewarded Powell because the hottest prints we've had were mid-May and mid-June, and bonds actually rallied on the hottest prints, which says the market thinks inflation is not going to accelerate from here.

We do not need $120 billion of new money being printed by the Fed to buy treasuries and mortgage backs. To me, that is clinically insane. They should be tapering mortgage backs months and months ago. I don't think we're going to hear about it yet. Probably, they'll start floating trial balloons ahead of Jackson Hole.

But that's what they should be doing. If there will be anything out of the Fed meeting, very unlikely. I think unless the market pushes Powell, they're going to stay the course, at least in the short term. They should be tapering mortgage backs immediately. And they should float the plan to taper Treasury bonds shortly thereafter. And they should clearly be thinking about raising rates at some point, second half of 2022.

ADAM SHAPIRO: Paul, we're going to be talking about, when you talk about housing and mortgages, you know, the deceleration in the new home sales. But right now, I got to say, you're coming back because I want to see if you think Chair Powell auditioned successfully for his next role at the Fed after Jackson Hole. Paul Schatz is Heritage Capital President. It's good to have you here, and it was good to see you, Paul.