U.S. households ‘are really, really exposed to the equity market’: Strategist

Tematica Research Chief Macro Strategist Lenore Hawkins joins Yahoo Finance Live to discuss the 2022 stock market outlook.

Video Transcript

BRIAN SOZZI: Stocks are struggling for direction early on in the year as the 10-year yield marches toward 2% for the first time since mid-2019. Our next guest says stocks simply look massively overvalued. Lenore Hawkins is chief macro strategist at Tematica Research. Lenore, nice to see you again. Your note on where you think stocks are valued here, something caught my attention. Why do you think that's the case?

LENORE HAWKINS: Well, we've actually never seen kind of the confluence of events that we've got going on right now. We've never seen equities priced quite this high. The cyclically adjusted price-to-earnings ratio is pushing up against 40. And the last time we saw that was in 1999.

But if you look at price-to-sales, that's over three times. That's higher than what we saw in the dot com bubble. And what has been a little bit more concerned is we've never seen ownership, at the household levels, of equities anywhere near this level. The level of household balance sheets with equities is about $43 trillion. Now, that's about twice the US economy.

And, if you go back about 10 years, it never got up really above $12 trillion. So that tells you households are really, really exposed to the equity market, to a level they're normally never. And they've only got about 3% in bonds. And, again, that's another record low.

They've just never adjusted as we've never rebalanced as things have been going out, because you couldn't, really. I mean, all you heard was buy the dip. And, if you didn't buy the dip, you got killed. And it was all about momentum and growth. So households have just been riding it all the way up, which means they're really vulnerable right now.

BRIAN SOZZI: Well, to that point, Lenore, do you think investors are acting irrationally?

LENORE HAWKINS: I think they're actually acting pretty rationally given the way they've been trained by the Fed and the market. You got killed over the past 10 years if you didn't buy the dip. If you did what was prudent-- what has been prudent for decades-- you got killed. So, at some point, you'll learn the lesson. You buy the dip, and you keep riding it.

And it's all been about growth and those tech stocks. And some of that definitely made sense, even from a fundamental basis. I mean, the economy is changing dramatically because of tech. And there's an awful lot-- despite what poor Cathie Wood and ARK has been struggling with because they flew so high so quickly-- but there's an awful lot of really great things happening in tech. But those things that are happening in tech are also deflationary pressures because what we're doing with technology is having the ability to increase productivity dramatically. So it's a little bit mixed.

JULIE HYMAN: So, Lenore, put it all together for us. We're looking at a median forecast for the S&P this year. That's 49.50. We just had a pretty lousy start to the year. Are people way too optimistic here?

LENORE HAWKINS: I think 2022 is going to be all about recession risks, whereas 2021 was talking all about inflation. And I think that inflation talk got a little ahead of itself, to put it mildly. And I'm actually a bit surprised that the Fed didn't hold on to its temporary stance with the inflation for-- it kind of gave that up towards the end of the year.

I mean, if you look at the data, the dollar bottomed out in early October. The Baltic Dry Index, which is a measure for what it costs to ship stuff around, that kind of peaked in early October. Commodity prices, they peaked out in around late October. And we're hearing from international companies that input prices fell for yet the second month in December.

We're seeing data point after data point is kind of indicating that the inflationary pressures are rolling over. And what we're facing looking at '22 is something we've never before seen. We're looking at a cut to fiscal stimulus, because fiscal stimulus represented about 12% of GDP. And it's gonna get cut back to about 8%. So fiscal spending, that's a 4% cut to GDP.

At the same time the Fed is talking about not only rising, increasing rates, but also possibly cutting back the balance sheet. And this is all coming when we're facing a global health crisis. So that's a new one. We haven't seen this all together at once.

And I think the risks there for pushing us into a recession are pretty high. And keep in mind that four out of five times that the Fed goes into a rate hike cycle, we end up in a recession.

JULIE HYMAN: Lenore, so there's a lot in there to unpack. But I'm just gonna take the stimulus part for a moment. Reportedly, Congress is considering some sort of new stimulus, specifically to help the companies that have been most hurt by the new-- by the Omicron variant. What happens if they don't get that stimulus? Is that stimulus now necessary to keep the party going, so to speak?

LENORE HAWKINS: I wish we could answer that with just a yes or a no. The problem is the debt. How are we gonna pay for it?

So you kind of get yourself into this endless circle where the only way we can possibly do more stimulus like this is to have the Fed continue to print more money. But there's a concern with the Fed just filling so much liquidity into the markets. I mean, that's what's been putting up all-- pushing all these asset prices up. What we've really seen is asset price inflation, right? Everything has gone up, and there's a concern with that.

So the Fed says, well, I don't want to do that. I want to pull back. You can't really have the fiscal side where you're spending a ton. That's a bunch of stimulus, which is increasing demand, right?

If the government gives a bunch of money out, that's supposed to increase demand at the same time that the Fed is slamming on the brakes, saying, well, we want to contract the balance sheet and we want to raise rates. That's like driving in fifth gear with your foot all of the way on the gas and pulling on the emergency brake at the same time. Not a good idea.

BRIAN SOZZI: That's not a good idea, but I think I've done that once or twice, mainly back in my high school years. We'll leave it there.

LENORE HAWKINS: Fun then.

BRIAN SOZZI: Lenore Hawkins, chief macro strategist at Tematica Research. Good to see you. Stay safe. We'll talk to you soon.