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U.S. dollar moves ‘not really good news’ for earnings, strategist says

Tematica Research Chief Investment Officer Chris Versace joins Yahoo Finance Live to discuss the U.S. Dollar hitting a 20-year high, earnings, economic headwinds, stock futures, and Fed rate hikes.

Video Transcript

JARED BLIKRE: Welcome back. We are taking a look at the major averages ahead of the open. You can see the Dow off a quarter of a percent there, not even triple digits that we're looking at. S&P 500 down a little bit less than the NASDAQ, down a whopping six basis points. And we're also weighing a skyrocketing dollar and the increasing likelihood of a 75 basis point rate hike this month by the Fed.

So what does this road ahead look like for investors, who are, admittedly, a little bit nervous? Joining us now to discuss this, Tematica Research's chief investment officer, Chris Versace. And Chris, got to start with the big elephant in the room here, which is the US dollar. I'm looking at a chart of the US dollar versus the yen on the YFi Interactive. This is today, 1 and 1/2 percentage points over the last day, two days, 3%. This is a huge move by the yen. I'm wondering what all these currency moves are saying to you right now.

CHRIS VERSACE: Well, I mean, look, we've seen a sharp rebound in the dollar over the last several weeks, but even before that, we had companies warning about the impact to their revenue some six, eight weeks ago, whether they were Salesforce, Microsoft, and even more recently, Salesforce did it again. Dell said it again. And then last night, we had Unipath really chop their earnings expectations, really, the top line for the current quarter, citing currency and macroeconomic uncertainty.

So when we think about the sharp increase in the dollar, we've got to sit back and say, OK, companies with meaningful exposure outside the US, what does this mean for their ability to compete? What does this mean for currency translation? And unfortunately, it's not really good news for them. And, you know, candidly, this is one of just simply another reason to think that earnings expectations, as we go through the month of September, are likely to come down.

JULIE HYMAN: As you say, it's one of many reasons. So do you isolate companies that have that big international exposure and focus more on domestic plays right now, or does that not even help you very much because of some of the other headwinds you referenced?

CHRIS VERSACE: Well, let's tick off those headwinds, right, for the viewers. So we do have, as Jared pointed out, dollar concerns. We've got the slowing economy. We have higher borrowing costs that are going to get only more so. Companies are cutting back on their spending. So you really got to figure out where can I go where demand is resilient. Demand is inelastic. Perhaps I also want to take a look at some dividend income plays.

So over at the Action Alerts PLUS portfolio, we've been very conscious of this unfolding pretty much the way it has. And we've really pivoted the portfolio into some more domestic names to your point, Julie, companies like an American waterworks, for example, or even a Verizon, where no matter what happens, we know that people are going to continue to consume water.

We know that in today's increasingly connected society, people are not going to shun their smartphones. So we know that wireless service is relatively defensive. And those companies also have great track records for increasing their dividends.

So there are plays out there. Just real quickly, some other areas that I would suggest to your viewers, think of all the stimulus that Washington is bringing on. Whether it's the CHIPS Act, whether it's fighting inflation or the Biden infrastructure law, these are all areas that are largely domestic. They're also areas that are going to see uptick in spending. And I would suggest that readers position themselves for that.

JARED BLIKRE: Well, Chris, let me follow up on that. You mentioned some dividend names before, but I know from your notes, you also like cybersecurity. Wondering if that fits in what you've been-- with what you've been talking about the CHIPS Act and these new investments and such.

CHRIS VERSACE: Not so much. I think if we think about enterprise spending, however, again, we've heard commentary that it's starting to slow, but we also know that the pace of cyberattacks just continues to accelerate, ransomware in particular. A company needs-- companies, excuse me, need to continue to protect their crown jewels, even as the type of attacks that we're seeing are widening out.

You know, I believe most recently, IHG got hacked, large hotel company, which also raises some data privacy concerns, but you look at some of the attacks going on in Europe with energy companies and the like. It's just a complete widening out. And longer term, whether it's 5G and IoT, more connected devices mean more points of vulnerability that need to be protected. So this is a huge pain point for companies. And they're going to have to spend to address it.

And Jared, I think I just saw a statistic that said 43% of surveyed CEOs don't think their companies can successfully fend off a cyber attack. So that tells you, this is an area of spending. And there's a lot of different companies that people can buy. The preferred way that we have is to get well rounded exposure using a cybersecurity ETF, whether it's CIBR or perhaps even HACK.

JULIE HYMAN: All of this says to me that you are on the defensive, Chris. How worried should investors be right now? How much do they need to be thinking in that defensive posture?

CHRIS VERSACE: So the way we approach it, Julie, is we always try to look forward, right? And when we're doing that right now, just think of the conversation that we had already. Dollar headwinds, you know, economy slowing, higher borrowing costs, all these things. And you have to ask yourself, OK, which way are earnings expectations likely to go? Is there a reason to think that they're going to move demonstrably higher? Or do they need to be revised lower?

And I think just the comments that companies have put out in the last couple of days tells us that the risk is greater to the downside. Remember, too, that we have a rash of earnings conferences this week and next week. So we, along with everybody else on Wall Street, will be listening for, at the margin, what is new. What's the update since companies reported? And odds are a lot of these factors are going to weigh on their guidance-- again, another reason to think that those earnings expectations for the second half of the year are likely to come down.

And here's the thing-- they've already been coming down. If you look at where S&P 500 consensus expectations were for the second half of the year, at the end of the second quarter, compared to the first half, they were up just shy of 10%. Now they're up just over 3%. Odds are they're going to come down even further.

JULIE HYMAN: Well, not too cheery of a conversation, but maybe a realistic one. Chris, thank you so much. Appreciate it. Chris Versace of Tematica Research, the chief investment officer there. Good to catch up with you, Chris.