'I do think there’s a decline coming,' before labor day: Heritage Capital President

Paul Schatz, Heritage Capital President, joined Yahoo Finance to break down his thoughts on what the market will look like for the remainder of 2021.

Video Transcript

ADAM SHAPIRO: OK, let's take all of this and go forward with our first markets guest. And that would be Paul Schatz, Heritage Capital President joining us right now. And Paul, there's so much to talk to you about. But I'm thinking about the old song, "Everybody's Working for the Weekend." And the reason I bring that up is that the close on Friday, there's going to be a bit of rebalance with the Russell just a bit, right? And personally, I like the unbalanced. But why is this going to impact the choices that a lot of us, as investors, make, going forward?

PAUL SCHATZ: And always good to be with you, Adam. So the Russell indices, people are mostly familiar with the S&P and the Standard and Poor's. The Russell is a separate entity. Similar to the S&P, they offer somewhere around $12, $13, $14 trillion of index products. So if you think about that, they rebalance once a year, last Friday in June. People are more familiar with the Russell 2000 Small Cap Index. They're going to take stocks out of that index, put new stocks in. It's all done in one day.

Portfolio managers are going to rush to kick things out, put things in. There's a whole algorithmic game going on right now, this week, where the computers are trying to figure out which stocks are going in and which stocks are coming out. It adds to some volatility, but it does give a lot of people opportunity. So you're going to get some-- usually get some kind of craziness on Friday.

SEANA SMITH: Paul, when you take a look at the performance of the major averages over the past month, the S&P and the Dow, they haven't drifted too far from the flat line. Do you expect us to stay relatively range bound, at least in the short term?

PAUL SCHATZ: You know what's funny, Seana? I hear and I read and I see people talking about the markets surging and the market plunging. Meanwhile, I think I wrote this morning, market's gone basically nowhere for six weeks. That's healthy. We're letting fundamentals catch up to this phenomenal price momentum. We're letting technicals get a little bit of a breather. This is pretty good action after this meteoric rise from October 30 that prices are pausing. They're not pulling back. Every bit of a few percent weakness is being met with buyers. So clearly, eventually, like every range, the range is going to get broken.

You know, I think-- I said this on January 1. Between May 1 and September 1-- give myself a nice big window to be wrong-- there's going to be a peak of more significance. We'll get an upper single digit, low double digit decline. I still think that's the case. Could we pop up above to new highs across the board first? Sure, and then we maybe have a more significant decline. I would be very surprised if we launch another, you know, 10% rally here before Labor Day. I don't think that's in the cards. But I also don't think any kind of huge decline is going to unfold.

Whatever decline we get, I think it's going to be a buying opportunity. Perhaps it's worries about the Fed tapering in Jackson Hole coming up in August. Or we get a 6% inflation number, something out of the blue. I wouldn't get overly concerned the bull market's ending any time soon.

ADAM SHAPIRO: So look, your window is three months. That is not a big healthy window. I think you should give yourself some credit there. But given what you just said, I want to break it down and reiterate for those of us who are just the average kind of investor, what I heard you just say-- correct me when I get it wrong because I so often do-- is, no problem waiting until we get the real dip after the peak. And then this fall is going to be a buying opportunity to get in, because did you say that you do expect to recover and gain going toward the end of the year and into 2022?

PAUL SCHATZ: Well, first of all, my friend, you're rarely wrong. And I've known you a long time. So to answer your question, I do think there's a decline coming. For the more nimble investors, they can try to play it. I have no problem with that. Just have a plan in case you're wrong. So yes, I do think there will be a pullback. I absolutely will be pounding the table that it's going to be a pullback to buy, not a pullback that gains momentum and goes down 20%.

Again, the window is here. Between now and Labor Day, I think we're going to put in a peak. We're going to have a decline. It'll feel worse than it really is. People are going to freak out, they'll call for the end of the bull market. They'll blame everybody under the sun. But I think we're going to go to new highs again from there. So is it [INAUDIBLE]?

I was meeting with a client this morning. He said I've got a bunch of cash because business is so good this year in development and construction. What should I do? I told him, listen, we're fully invested. We've been that way since basically October 30. I'm going to wait and put my own new cash to work into the next bout of weakness. I'm not going to-- it's early in the game, you chase momentum.

At this stage, when you're in a trading range that you think could resolve a little lower, you be patient. Enjoy the gains you're having. You should get an opportunity to put fresh money to work as the summer gets deeper and perhaps after Labor Day.

SEANA SMITH: Well, Paul, speaking of putting money to work, I know you were-- you bought some of those IPOs that had underperformed just around a month ago. I think you said mid-May, you decided that you liked Snowflake, Coinbase, and Palantir. What's changing the momentum? Or why do you see the momentum changing in those names?

PAUL SCHATZ: I have a rule. I always say never. But I cannot recall the last time I bought an IPO in the first month of its existence. I don't do that. If something goes without me, so be it. I'm OK missing an opportunity. Almost all the high profile IPOs have their run-up, have their exuberance, have the cocktail party talk. And then three to six months later, 80% of the time-ish, they roll over. They have a pretty good decline, like Facebook did from 42 to 15 or something. And they go sideways.

Now is the time. So Palantir, Snowflake, and Coinbase-- Coinbase, I was a little impatient on. But Palantir and Snowflake, I was perfectly patient. And after they all went down-- we'll call them roughly 50%-- and that's the mark I usually use. That's not a threshold that it's an absolute. But I like when these high flying, high profile IPOs go down 50-ish percent.

They begin to go sideways. People get bored with them. That hot money gets out. Because most of them, frankly, have got great businesses. But the valuation and the exuberance early in the game is, to me, is absurd. And I'm a patient investor. So that's what's changed, Seana. You've got the weak money is getting out of it. Patient money, I think, is going to be rewarded.

ADAM SHAPIRO: And with that, Paul Schatz, it's always good to see you. Thank you for being here.

PAUL SCHATZ: You, too, guys.

ADAM SHAPIRO: Paul is also Heritage Capital President. We look forward to your next visit with us.