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Stocks: ‘Big chunks of this market’ are getting cheap, strategist says

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CAPTRUST CIO Michael Vogelzang and Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Senior Portfolio Manager, join Yahoo Finance Live to discuss market sell-offs amid rising inflation, the upcoming Fed interest rate hike decision, and CPI and housing data.

Video Transcript

RACHELLE AKUFFO: As we can see there, the markets ending mixed today. Usually, the NASDAQ takes the biggest hit on the day. Not the case today. So Michael, what are you taking a look at in terms of what are the markets digesting right now?

MICHAEL VOGELZANG: Yeah, that's exactly the right term, is the markets digesting. We had a real hiccup with the sort of above average-- above expectation inflation numbers last week. And the market's still just trying to dig in and understand what that terminal rate is going to end up being and how tight the Fed is going to be. I think we know that the Fed has clearly been broadcasting, or at least whispering, that they're looking at 75 basis points tomorrow. So I think the market's just coming to terms with all of those moving parts.

DAVE BRIGGS: And Andrew, do we need to see that 75-point hike tomorrow? And how will the markets respond?

ANDREW SLIMMON: Oh, gosh. That's a tough question. I have a portfolio manager. What I know is that until we get a better feel that inflation is peaking, I think the equity market is going to struggle. So I'm not really-- I'm not an expert at knowing whether 50 or 75. I just know that we can't-- the markets just can't go off when you've got inflation running at these levels. And I think what's really happening is, we're transitioning from transitory to more permanent. And that's pulling the multiple on the stock market down.

SEANA SMITH: Mike, what do you think? I know you can't exactly predict what the market is going to do tomorrow, but how do you think the market has assessed the Fed's move? Do you think the 75 basis point has largely been priced in at this point?

MICHAEL VOGELZANG: I think most of it. I think most of the damage over the last week has come from that move from 50 beeps to 75, right? I think that's clear. I think the-- we've been talking about in our investment meetings about, frankly, we just wish the Fed would get done with this, right? We know where they're trying to go. They're probably looking at another 175 or 200 basis points before this, at least for the intermediate cycle.

So let's just get there. We'd be happy with 100. I'm not sure the market would be. But we'd like to see the market-- we'd like to see the Fed get there. Just, again, what's the difference, right? At this stage, the market's anticipating it. The equity markets have, as mentioned, already discounted a lot of this. So let's get there.

RACHELLE AKUFFO: And Andrew, our previous guest said that a lot of people are positioning their portfolios for the downturn, but not for the potential rebound that we might see, depending on what we see with the soft ish landing and what comes next. How are you seeing portfolios being positioned right now? Are retail investors especially, are they looking at this the right way?

ANDREW SLIMMON: Yeah, I mean, you know, so that's a great question. And your last segment was on the home builders. And you're starting to see weakness in the homebuilding, but the homebuilding stocks, they peaked last year. They're down a ton. Anything to do with a house is down quite a bit. So I think we may be halfway through a recession already. And if that's the case, then some of these early cycle stocks might do better coming out. So I think it's too late to buy the defensive.

But I think we've got more choppiness through the summer. I just don't-- I wouldn't chase those. And I do think some of these kind of quality growth stocks are down quite a bit. And I think you start to develop a list, thinking that maybe the second half of the year will be better. But I do still think it's a little early.

DAVE BRIGGS: Mike, is there more pain to come? And can we get out of this without a recession?

MICHAEL VOGELZANG: Yeah, I mean, the path for the Fed is pretty narrow. But I agree with Andrew, right? There's big chunks of this market that are getting really inexpensive. We took a look at the number of the percentage number of stocks in the Russell 3000, right, so broad index, that are trading below 8 times earnings for 2022 and 2023. That number is 12% or 13%.

And probably-- actually, this was before the last week. So it's probably higher than 12% or 13% today, including some of those homebuilders that are trading at four or five, six times earnings. So there's a lot of cheap stuff out there. And I agree. Make a list. Check it twice. And start to build your portfolio with things that are going to rebound when this thing inevitably comes back.

SEANA SMITH: And Mike, when you're identifying specific opportunities in the market, those cheaper names that you were just mentioning, are there any sectors or anything like that that you were favoring at this point?

MICHAEL VOGELZANG: You know, again, I think higher interest rates, higher inflation, is going to make the higher valuation stuff more difficult to go up, right? It's just-- it's not going to be a safe place. So, again, we're looking for more quality dividends, lower valuation, things that can generate cash flow that are going to treat shareholders well.

SEANA SMITH: So it's more of a stock specific basis.

MICHAEL VOGELZANG: More of a stock specific or type of stock, if you will, than a specific sector.

RACHELLE AKUFFO: And Andrew, as we look at the valuation of the market, given what we're seeing with where the 10-year yield is, do you think they're pricing this incorrectly?

ANDREW SLIMMON: I think the market is pricing in earnings estimates [INAUDIBLE]. If you look at the consensus bottoms up estimate for next year, the market is trading at less than 15 times earnings. And so obviously, the market is thinking, those estimates are going to come down. The path to success for equities in the second half of the year is inflation does peak, and we don't end up in a bad recession. So those earnings numbers don't come down nearly as much as some of the bears expect.

So I guess my answer is, it really depends on whether-- how the extent of an economic slowdown. If it's short and shallow, I think the market is nearing a low. It's just the timing of everything is still early. But if you think-- you know it's going to be a deeper recession, then those estimates are forthcoming. And then maybe the market doesn't look like it's trading at 14, 15 times next year's earnings.

SEANA SMITH: So Mike, as you're trying to figure out how far we are or whether or not we are going to fall into recession or further into recession as some estimates out there, right now, consumer sentiment plunging to a record low. When you take a look at the consumer, the consumer, up until this point, has been relatively resilient. And some people would still make that argument. I'm curious, how would you characterize the strength of the consumer at this point in that cycle?

MICHAEL VOGELZANG: Yeah, it's interesting. It divides by sort of by the type of consumer, right? The consumers at the high end are fine. Consumers at the low end, saving rates are falling. Yet, the balance sheets are in pretty good shape because of all the stimulus we had in the last couple of years. So the hope is that those balance sheets, that extra cash on everybody's balance sheet, the lack of debt, or relative lack of debt, for consumers will allow spending to continue, even though we don't have a lot of government stimulus coming.

So that's the question. And then you've got-- you go back to your housing market segment, right? Whether housing slows down or not and how does how does that play-- how does a 5 and 1/2% mortgage rate play into the whole spending equation? But I think the consumers felt relatively straightforwardly, I think, healthy. Employment is strong. Wage gains are strong. The consumer is fine. And I think the Fed is using that as cover to continue to goose interest rates higher.

DAVE BRIGGS: And Andrew, what are you seeing from the consumer? I want to follow up on your comments about the bond market and the 10-year. Drew Mattis told us yesterday that he sees this highest rate since 2011 as a sign of faith in the Fed. Is that how you read it?

ANDREW SLIMMON: Well, first, back to consumer, one question that I would ask everyone on the panel is, do stocks do better when consumer sentiment is high? Or do stocks do better when consumer sentiment is low? When it's high, it can only go one direction, which is low, or if it's low, it can go direct to higher.

Again, stock prices are looking forward. A lot of this negativity is priced into these consumer stocks already. So I think you have on the margin, you have to get a little more optimistic on them, knowing that sentiment is very low. And stock prices reflect that. In terms of-- I'm sorry, second question about interest rates?

DAVE BRIGGS: Yeah, the 10-year. Drew Mattis told us yesterday that he sees the 10-year as a sign of faith in the Fed. Do you agree with that assessment?

ANDREW SLIMMON: Well, look, the real question is the number one buyer of bonds is exiting-- the Fed. They're not rolling these maturities. What does that mean? How do we factor that in? I don't know the answer. I don't think anyone really knows because we've never seen it. Jerome Powell even said it-- I really don't know. We've never seen this before.

So I think it's really hard to put a pin point and say, this is the rate with which the 10-year will go to. Yes, on the surface, I think the fact that the two-year is going-- yield's going up tells you that there's not a bad recession around the corner. But, you know, I just wonder whether it's really more of a demand-supply imbalance than anything.