Why volatility is a 'friend to long-term investors,' expert explains

Nancy Tengler, CEO and CIO of Laffer Tengler Investments, joins Yahoo Finance Live to discuss the pressure on the "Magnificent Seven" stocks and the broader market sell-off.

Tengler emphasizes the importance of considering one's investment time horizon. She highlights Tesla's (TSLA) utility-grade battery storage segment as the "fastest-growing most profitable business," which she believes will contribute to Tesla's success. Despite the stock trading lower due to slowing EV headlines, Tengler views this as an opportunity for investors "to pick up shares at more attractive levels."

Drawing parallels to the 1990s, Tengler notes similarities with the current environment, such as higher interest rates, labor shortages, and technology spending aimed at improving productivity. She advises investors "to take that playbook out" when considering the Federal Reserve's actions this time around. However, Tengler acknowledges that the markets "need a correction," and the volatility will present opportunities for investors "to add to names."

Regarding the uncertainty surrounding potential Fed rate cuts, Tengler suggests that the timing "doesn't matter." She cautions investors "to be careful" with companies that are not "generating peak earnings."

Tengler also highlights Walmart (WMT) as a retail company that has adopted AI and evolved its business operations on the e-commerce front "to improve productivity margins." She mentions trimming positions in names like Chipotle (CMG), Costco (COST), and Lululemon (LULU), describing it as a "stealth broadening" in the market.

Despite her positive outlook in the long term, Tengler warns of geopolitical risks that could affect commodity trades, such as gold.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

JULIE HYMAN: Well, Tesla's not the only Magnificent Seven stock that is seeing losses as of late, leaving investors wondering how long the group can keep the market rally alive. For more, let's welcome in Nancy Tengler, Laffer Tengler Investments CEO and CIO. Good to see you, Nancy. Thanks for coming in.

NANCY TENGLER: Thanks for having me, Julie--

JULIE HYMAN: Listen--

NANCY TENGLER: --John.

JULIE HYMAN: --I want to start with Tesla specifically because Pras was just saying, for many it's hard to see the bull case right now. I believe that you just visited a Tesla facility, if I'm not mistaken. So let's just jump right in there. Do you see the bull case for Tesla?

NANCY TENGLER: Yeah, it all depends on what your time horizon is. I'm not investing for the next three weeks. I'm investing for the next three years. And if you look at the mega battery segment of the business, these are utility grade battery storage unit.

JULIE HYMAN: And that's what you visited?

NANCY TENGLER: That's what I visited. And what you'll see is that it's the fastest growing, most profitable business. And we'll probably, ultimately, in the not too distant future dwarf the EV business. So the stock is going to trade on the EV headlines for now, which gives people like me an opportunity to step in and pick off shares at more attractive levels.

We initiated last January at about $104. Barely got to buy any and it took off. And so now we're happy to go back in and add to holdings for the next three, five years.

JOSH LIPTON: Nancy, a broader question for you. I thought it was interesting that you say the environment we kind of find ourselves right now reminds you of the 1990s. How come, Nancy? Walk me through that. What are the comparisons?

NANCY TENGLER: I bet you were born in the 1990s.

JOSH LIPTON: Oh, man. No. No, I wish it were so, Nancy. I wish it were so.

NANCY TENGLER: Well, I was managing money then. And what you had was an environment where investors had to contend with higher interest rates. So the 10-year was at 5% to 7% on average for the entire decade. 3% inflation growth on average, labor shortage, spending on technology to improve productivity, an inverted yield curve as well as a soft landing that was executed by Fed Chairman Greenspan.

And I think you have to take that playbook out for the Fed this time around. They cut a few times. They raised aggressively in '94. And just rates stayed a little higher for longer and stocks roared, and it was driven by productivity. And there are some other differences, but in general, it was also that the US was the best economy on the block, the global block, and we are once again.

So I think there's a lot of things to like. We need a correction. So if this continues, I'm not alarmed by that. We get about a 10% correction every 12 months. So we've run pretty hard pretty fast. So I'll be using it-- I say always to my team, volatility is a friend of the long-term investor. So we'll be using volatility to add to names.

JULIE HYMAN: What do you think will happen with volatility if the Fed, like Raphael Bostic floated, cuts and then pauses, or cuts later than expected, or as Torsten Slok of Apollo has posited, doesn't cut at all this year?

NANCY TENGLER: Honestly, Julie, I don't think it matters because that's the analogy of the '90s. We had higher-- the 10-year was at 5% to 7%. We're at 4 and 1/4% right now. And they started cutting and then they stopped.

JULIE HYMAN: And, of course, that was also a time where we did not get the communication from the Fed either about what they were going to be doing.

NANCY TENGLER: I long for those days.

JULIE HYMAN: Really? You liked it better when we didn't know?

NANCY TENGLER: I do. I just can't get them to stop talking until we get to the quiet period. But yeah, so I think you have to be careful. I mean, valuations are not nearly as stretched as they were. They're not even close.

I mean, the four horsemen at the end of the decade, Cisco was trading above 100 times peak earnings. And the reason the earnings dropped was because companies they were supplying too were these internet companies that were being valued on eyeballs, and they went out of business.

But we've got robust companies that are generating not peak earnings. And you can just use Microsoft as an example. It was trading at 51 times. At the end of the '90s it's trading at 32 times, and it's a much better company in terms of breadth and depth.

JOSH LIPTON: Beyond Microsoft, Nancy, I know one kind of thesis of yours is you say you're looking for-- you and your team are looking for those kind of I think older economy names embracing, though, digital solutions, embracing Gen AI. What are some of the names that you think fit that bill?

NANCY TENGLER: Well, so Walmart is a perfect example. Target's earnings we own it. Great. But Walmart is an example of a company that has pivoted not just to digitization and e-commerce but robotics and generative AI to improve productivity, margins.

American Express is using AI to reduce fraud alerts. Emerson is generating automation for industrial clients. So, you know, we added to technology in the fall of 2022. People thought we were nuts and consumer discretionary. We trimmed them last summer. They sold off. We added more. On October 31, I wrote a piece, and we were adding to them.

Now we're trimming them again, and we're broadening out to financial names. We've increased our exposure to American Express. Industrials we like a number of the names in the group, but we just added L3Harris and Emerson. And then in retail, we do like Walmart, but we've had to trim Chipotle, Costco, Lulu, Uber, and Spotify. And that's part of | broadening out that you're seeing in the market. These stocks have done better.

JOSH LIPTON: Stealth broadening.

NANCY TENGLER: It is a stealth broadening.

JOSH LIPTON: Yeah, I stole saw that from you, Nancy. I heard you say it. That's where I got it from. Yeah, give you full credit.

NANCY TENGLER: Aren't you clever.

[LAUGHTER]

JULIE HYMAN: You're the clever one. He just stole it.

JOSH LIPTON: I just copied it.

JULIE HYMAN: What's the biggest risk to this market, then? Because you sound pretty darn positive, all things considered.

NANCY TENGLER: For the long term, I am. I think the risk is that there's no catalyst right now. So everybody's going to be hanging on every word from the Fed, every inflation data point is going to get scrutiny. But the fact remains that inflation has come down dramatically.

There are sticky segments I give you that, and I'm worried about that. But now you've got China exporting deflation to the rest of the world. And I think that's going to put some pressure on inflation that will give the Fed some room to at least do one or two cuts this year, if not three.

JOSH LIPTON: I want to totally switch gears, Nancy, get you out of here on this. I want your opinion on gold and just what you're seeing there, what you make of the trends-- climb to an all-time high. What do you think is driving that, Nancy, one? Like, Fed pivot, geopolitical risk? And also just as a professional, I'm curious when you talk to your clients, what's the role you think gold has in some of his portfolio?

NANCY TENGLER: So we don't own gold for our clients because, I mean, we can't custody the actual metal, and the ETFs can be a little bit squirrely. We do have a clean energy infrastructure strategy that invests in commodities. So we own some gold there.

And I think there's a couple of things. I mean, I think we're seeing a ton of rotation in this market. Some of is short lived. We got the run in value stocks at the end of last year, and then they just had a run the last two days. So I think there's just pivoting and trying to figure out where is this market going.

But geopolitical risk, to be sure, is on the table, and that could really accelerate, as we know, but it hasn't seemed to derailed the story in terms of the US economy and US earnings growth. So we have a small exposure for our clients, but it's not a focus for us.

I think what I've learned over the last 40 years is that the gold trade is cyclical, and what I want to do for my clients is generate long-term sustainable performance. So we don't trade commodities like a lot of firms do.

JOSH LIPTON: All right. Nancy, it is always great to have you on the show. Thank you so much for coming.

NANCY TENGLER: Thanks Josh. Thanks, Julie.