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We're going to be 'pleasantly surprised' how industrials, materials, and the really deep cyclical names did in the second quarter: Strategist

Art Hogan, National Securities Corp. Chief Market Strategist, joined Yahoo FInance Live to break down his thoughts on what markets need to keep the current momentum going.

Video Transcript

SEANA SMITH: Let's talk a little bit more about this with Art Hogan. He's the chief market strategist at National Securities Corporation. And Art, we're looking at record highs again this week-- the best week that we have seen for markets now in a couple of months. What's needed at this point to keep this momentum going?

ART HOGAN: Well, a couple of things. I think we need to continue to see an improvement in the economic data on a sequential basis, and we need to see a deceleration of inflation also on a sequential basis. So clearly, today with the PCE, we saw that the year over year number was eye-poppingly large. That's been true for the CPI and the PPI. But the month over month number decreased and we likely will see that continue.

So if we continue to see a deceleration in the economic data as it pertains to inflation and an acceleration as it pertains to things like new job creation and retail sales and industrial production, et cetera, I think that is one of the things that's going to help. The other piece of the puzzle-- remember, we're going to roll into July which means we're rolling into second quarter earnings reporting season next week. And with that, we'll likely see estimates for the second half start to rise. I think that helps an awful lot. So if we are actually looking at the back half of this year being better than estimates are right now, multiples come down as we stand still and we likely would create a nice tailwind for stocks to end the year with.

- I want to get your take on the bond market here. We saw the 5-year-- the belly of the curve-- really pick up last week on the FOMC decision and also the 10-year-- excuse me-- the 10-year is up another few basis points today at five, and now we have the 30-year, that's up eight basis points. So we put it all together, the yield curve kind of contracted a little bit I guess on certain parts of the curve but now it's expanding, and do you think this is due to the infrastructure and does this have legs?

ART HOGAN: Well I'll tell you this, if I were to tell you last week that not only were we going to get the Fed to have a mild hawkish pivot but then you're going to have every dot plot voter that was in 2022 out in front of the public and continuing to beat the inflation horse and yet the yield on a 10-year was going to sit right at one and a half where it's been more or less for the last three months, I don't think you would believe that.

So to me I think the Treasury market is actually reflecting much more calm about both the path of the economy and the path of monetary policy. So I think that it's interesting. It was the stock market that really had a bit of a temper tantrum about what we heard from the Fed, but the Treasury market seems to be taking this in stride and I think that what we're looking at here in terms of net interest margin, we'd like to see that gap widen out a bit.

So to your point, yeah, we've seen just very modest moves in the yields at both ends of the curve-- 2-year, the 5-year, and right in the belly of the 10-year clearly-- but nothing like the kind of volatility we've seen in equity markets, and that's probably telling us that the bond market's got it right.

SEANA SMITH: Art, one piece of data that did miss the mark this morning was consumer spending. It was something that-- I don't know if we expected to see but something that was certainly on our radar. How would you characterize I guess the strength of the consumer right now and how is the market looking at that?

ART HOGAN: Well, I think the strength of the consumer is remarkable only insomuch as we still have nine million people that we need to get back to the workforce, right? So about half of those people that lost their jobs before the pandemic are still looking for jobs and trying to get back into the workforce.

But the US savings rate is almost three times as high as it is on average, right? So one of the good things is, very much like corporate America, US consumers hoarded cash during the pandemic and typically will have a US savings rate anywhere between 6% and 8%. That's been largely true over the last 50 years. We're currently sitting at two or three times that right now. So that helps, right?

So I think the consumers' balance sheets in good shape are creating about 540,000 jobs a month, so we'll have more discretionary spending and consumers will actually have the ability to get out and do that. So, I think that the consumer is in pretty darn good shape. There's going to be some volatility around the month-over-month numbers, but we're certainly going to see a significant increase in consumer spending on a year-over-year basis.

- I want to get your take on earnings season now. You mentioned that interest margin that refers to the banks, they're going to be kicking off earnings season in a couple of weeks. And you don't have to limit your discussion to banks. What do you expect in general here for the Q2 earnings season?

ART HOGAN: Yeah, it's such a great question. So when we look at the second quarter, we're actually coming in with the bar raised even higher than we did for the first quarter of this year. What's been interesting is that in the weeks preceding an earnings reporting season, you typically see estimates come down. They have moved higher. That was true in the first quarter. It is true in the second quarter.

So the bars up a bit higher than it was as we entered the first quarter, and I actually think it's a bar that can be beat. I think that when we look at the groups that are economically sensitive like the financials, I don't think the Street is actually going to punish them if the second quarter trading, for example, is lower than it was in the first quarter. We've actually heard most of the big players guide to the fact that the second quarter slowed down there, but investment banking-- typical investment banking activity picked up. M&A activity, secondary business, IPOs, et cetera.

I think that what we look at the banks for is going to be the future, right-- because they just passed their stress test-- and we're going to find out how much money they're going to put to work. How much of that free cash flow they're able to put to work, whether it's in buybacks or dividends or Capex, et cetera.

So I think the first wave of the financials will be fine, but I think the second wave, when we start to look at some of the industrials, materials, that's the real deep cyclical names, I think we're going to be pleasantly surprised with how well they did in the second quarter, and I think estimates are too low for that group.

The wild card is technology, right? That's come in and out of favor. Multiples are lower than they were going into the first quarter last year, so when we look at technology writ large that just started to have a run over the last week and a half, I think technology has an opportunity to actually surprise to the upside and actually react to that. First quarter earnings season saw some great reports but nobody was reacting to good news and everybody overreacted to bad news.

SEANA SMITH: Then, Art, going over that, we've seen this back and forth between the growth names versus the value names and certainly some rotation there in the leadership. If you had to pick one versus the other right now, how would you be positioned?

ART HOGAN: Well, three things on that. First, you don't have to pick one or the other and I don't think you should. I think you should have a barbell approach with even weightings to both. I will tell you, the other piece to this is, when we would go back to March 20, which was the low point post-pandemic in this market, for the first six months it was completely run by growth, right? It was all those things we needed to get through the pandemic or work from home.

Click into the Labor Day of last year and then we pivoted and you sold technology and growth and you bought economically sensitive cyclicals. That lasted exactly six months, which brought us into the middle of the first quarter of this year. So far this year we've had five different rotations back and forth between growth and value. I don't think you need to make that choice. I think right now both look relatively attractive.

Economically sensitive cyclicals will clearly do better because we're reopening and we're just at the beginning of that process. But technology has really sat on its hands for a period of time as a sector and I think has some tailwind. So I think when we get through these mini rotations for the balance of working our way through the course of the summer and into the fall. But if I look at the rest of this year, I'd rather have both. I don't think you need to pick one or the other.

SEANA SMITH: All right, Art Hogan, always great to speak with you. Chief market strategist at National Securities Corporation. Have a great weekend.