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The number of market opportunities ‘are shrinking in front of our very eyes’: Strategist

Michele Schneider, partner and director of trading research and education at Marketgauge.com, and Eric Diton, president and managing director of The Wealth Alliance, join Yahoo Finance Live to discuss the latest moves impacting the markets.

Video Transcript

- We want to bring in our market panel here to go further into today's trading activity. And for that we'll bring in Michele Schneider, who is the MarketGauge.com Partner and Director of Trading Research and Education. And we've got Eric Diton as well, who is the Wealth Alliance President and Managing Director. Great to have you both here with us today.

Michelle, let's start things off with you. What was that play today from your perspective? And is this momentum or is this simply area where we find in the markets where there is some weakness leading up to the Fed's next decision?

MICHELE SCHNEIDER: Well I think that this is the market that basically we're going to expect to happen at least for the rest of this year, which is, everyone will be thrilled if we see a decent rally for short-term trades. And once that rally starts to roll over, it's time to take profits. In terms of the world of equities, the opportunities-- and I hate to say this because I'm usually such an optimist-- that you can find something.

But I think the number of opportunities and the different sectors to go to are shrinking in front of our very eyes as we continue to see not only a very hawkish Fed but all of the other issues that are happening geopolitically, with natural resources, and so on. And so at this point now, I think what we saw today was a dose of reality that I would imagine will continue unless you're into commodities. Commodities are where it's at.

- And Eric, I want to bring you in here. Because obviously, we're seeing this pullback today. We know that inflation has been at historic highs, at 40-year highs. Why are markets reacting this strongly, you think, ahead of the data coming out tomorrow?

ERIC DITON: Look, this-- I think what you saw for the last couple weeks was kind of a bear market rally. I think what's happening today is really the story. There's a whole bunch of challenges out there. Michele was just talking about them. Whether we talk about a Ukraine war or inflation or rising interest rates, these are all headwinds for equity investors.

However-- [AUDIO OUT] --a 2.8 10-year Treasury over the real return is negative. I don't know, negative 3%, something like that, whatever inflation gauge you want to use. I still want to own equities. I still think that's a better play. I don't expect the returns of the last three years. But I think from where we are right now in the markets out to the end of the year, I'd rather own equities.

- Michele, regarding that data that we'll see tomorrow on the CPI, some expect it at 8.4%. And Jen Psaki, the White House Press Secretary, was asked about it, and she said they expect it to be extraordinarily elevated due to Putin's price hike. Do you buy that?

MICHELE SCHNEIDER: Well, I've heard that the actual rate of inflation will be more like over 13% if you add in other factors. Yes, I would expect it to be high, some of it already discounted perhaps. I've heard suggestions that inflation might be peaking. I don't think so. I think it depends on where you're looking at inflation numbers. Obviously, if you're looking at it, say, used cars, that seems to be peaking. Those are the areas that we thought would peak first anyway, more of the tangible goods, things that people buy because they see value.

But I still don't see the end in sight for what could happen with food. I mean, just look at China right now. Their shelves are empty. They can't feed people, particularly in the lockdown areas. They're huge importers of food. And then we have food issues because of supply chain and mother nature everywhere right now. We can't possibly replace that at least for another year, possibly two or three years. So yeah, I think that the numbers could come out scary.

What happens with the Fed remains to be seen, but I think we really have to buckle in. And as far as buying equities, I'm looking desperately for equities, but I have to see a sector, at this point, show me some potential, at least, to stagnate let alone grow before I really want to run in and buy a whole bunch of equities. So that's why we're very heavy commodity-based, right now, and we will continue to do so.

- OK, so Michele, your commodities-based right now. Eric, you are still looking for equities, and you'd rather be in equities right now. Where within equities, which sector stands out to you at this point in time?

ERIC DITON: Sure. And just to be clear, we are-- we're not stock-pickers. We're diversifiers so we have exposure to commodities, and we have exposure to MLPs and floating-rate and private real estate. But within equities, look no further than-- follow the man. Follow Warren Buffett, right? He just came out and bought a nice stake in HP. Why? That's a single-digit PE company with a pretty strong moat.

And what's happening out there with all the damage in the NASDAQ, there are a whole bunch of strong tech companies that are actually trading at single-digit PEs. Look at the semis now. The semis have been annihilated. Now, yes, there are some supply issues, and there are going to be some hiccups. But if you're a long-term investor, and you could buy a Qualcomm at roughly close to a single-digit PE-- Just as an example, Micron Technology, we know that the long-term demand for semis is huge, the metaverse and all the technology that's occurring. This volatility for short-term traders is treacherous, but for long-term investors, it's wonderful.

- And Michele, I want to bring you in here because we saw that Charlie Munger, his daily journal, had halved its stake in Alibaba. In terms of exposure to international markets, how should people be looking at this? As you mentioned, the shutdowns in China, how should people be viewing what we're seeing in some of these emerging markets?

MICHELE SCHNEIDER: Well, the commodity-based emerging markets have done extraordinarily well, South Africa, Brazil, Mexico, Latin America, even Australia. So if you're looking at the emerging markets that actually can produce raw materials, right now they're looking good, and they're definitely outperforming the US market just in terms of value lately.

As far as some of the other markets, looking at the Western markets, for example, I think you'd have to be careful. Certainly looking at the China market I think you have to be careful. And so overall, a lot, I think, will depend on what happens with the US dollar, which is still a flight to safety. The euro, as a result, is struggling with almost at par. Which is every time we've been at par with the euro to the dollar, we've seen a rally in the euro.

If this time we break down under par, you could get more painful for all of the European countries, and not necessarily help the US either because as things get more expensive in dollars, that could hurt. So yeah, if I were going to stick to an area of emerging markets right now, I would want to go with ones like Canada, as well, that are actually producing commodities that people can use.

- Eric, I want to ask you about some numbers out from Reuters. They've polled economists who say the probability of a recession next year is now at 40%. Do you believe that number is accurate?

ERIC DITON: I think that-- I think that's a little high. And I actually think there's a good chance we're going to skirt that recession simply because of this strength of the US consumer. I mean, the end product of this pandemic, people didn't spend money for a long time. They paid down debt. Consumer balance sheets are strong. I mean, one of the drivers of inflation is that people want to buy stuff, and they can't get it.

So do I think things will slow down? Absolutely. Mortgage rates going from the high 2s to the 5s, those are things that are going to slow things down. But I'm confident that this Fed can navigate it well. This Fed has only recently turned really hawkish, and for good reason. They're behind the curve. But I'm confident that they can navigate.

And if I can leave, really, with one theme-- if I wanted to leave everyone with one theme, it's two words, low duration. Low duration, whether it's-- whether it's fixed-income or whether it's equities. On the equities side, don't be buying growth stocks that might be profitable in five years. That's high duration. You don't want to be there. You're not going to be there for a long time.

Buy high-dividend stocks that tend to grow their dividends. Let them give you money back to reinvest at higher rates, for example. Or buy single-digit tech. That's low duration. Same thing on the fixed side. Stay short. Stay with opportunities that can raise your income, like private real estate, like floating rate, like short-term credit. Low duration.

- Well, there you have it from our market panel there. Eric Diton, the Wealth Alliance President and Managing Director , and Michele Schneider, MarketGauge.com's Partner and Director of Trading Research and Education.