Shopping list

Equity strategist details ‘shopping list’ of what to buy in the markets

Linda Duessel, Federated Hermes Senior Equity Strategist, and Chris Konstantinos, RiverFront Investment Group Chief Investment Strategist, join Yahoo Finance Live to discuss the market outlook amid inflation, Fed monetary policies in an election year of midterm and the S&P 500.

Video transcript

Here is the closing bell for today, May 16th.

[MUSIC PLAYING]

SEANA SMITH: And that does it for today’s trading action as we shake off the final trade of the day. Looks like the Dow Jones will hold on to slight gains there, closing around 27 points. S&P and NASDAQ however, under pressure. We have seen sales in the market over the past few weeks. Once again, S&P and NASDAQ are starting this new week in the red. Let’s take a look at some of the best performers here, the worst performers in the Dow Jones today, Boeing, NASDAQ closing around 2 and 1/2%. Disney also lost 2% of sales to the sales force. This stock is down about 1 and 1/2%.

We want to share all of this with Federated Hermes Senior Equity Strategist Linda Duessel and RiverFront Investment Group Chief Investment Strategist Chris Konstantinos. Linda, to you first. When you see another selling day, albeit a lot lighter than what we’ve been used to over the past few weeks, what do you do in that type of environment?

LINDA DUESEL: Well, we are consolidating right now, it looks like the S&P 500 here, as well as the bond market. And so what we do is we basically make a shopping list of what we want to buy. Cash is king. We’ve been saying that pretty much since the beginning of the year. But what we want to buy and pick our spots, because we’re going to have to suffer and have patience with a lot of these meandering days, and then maybe you’ll have a big down day. Maybe you’re buying something on that shopping list that’s been beaten enough to feel good.

DAVE BRIGGS: Chris, are there any opportunities? Do you see more pain coming?

CHRIS KONTANTINOS: Well, first of all I would like to say that I agree with Linda’s assessment that keeping cash for dry powder for a rainy day is really, really important here because there will be bargains once the dust settles. But to directly answer your question, I think the complexion of this market is one that suggests the path of least resistance is still down in the near term. I wish I didn’t believe it. But that seems to be the case.

We perform fundamental and technical research here at RiverFront. And the technical picture in my opinion is still relatively difficult. Because you now have the main market trend pointing down, you now have the S&P 500 trading below. For a long time, only international equities experienced a trend break. But now we also have the United States.

So I think in the short term, from a tactical point of view, I would still be cautious. But I like the idea of ​​a shopping list. And the idea – what we’re really looking for is that if the last 12 years starting this year was all about TINA, you’ve heard that acronym, there’s no alternative to growth stocks, the new acronym in my opinion is PATTY, which pays attention to performance.

We’re looking for quality dividend-paying stocks, we’re looking for decent fixed income opportunities and things like bank loans, which are floating, high-yielding, short-lived. And we also keep extra cash on hand to be opportunistic.

RACHELLE AKUFFO: So Linda, while you’re watching the signals, whether it’s the yield, whether it’s what the Fed is doing, what about keeping an eye on what’s going on with China? How does this factor into their supply chain issues and latest data in how you advise clients?

LINDA DUESEL: Well, China is the second largest country in the world. And they’re probably a lot weaker than they’ve been saying for some time now. It’s really interesting that they stay locked in a pretty decent respect because the president is going to want to be re-elected here in the fall. And we actually think you’re going to see more now. They just started with Shanghai, a greater opening of this economy.

And that’s a positive catalyst that could really help us, especially we have at the top of our shopping list the energy patch and the energy stocks, which are really under-owned. And that oil price is going to keep going up and could really go up if you see China really opening up.

I love what Konstantin said about PATTY. I think maybe I should steal this idea from PATTY. As we suggested as part of our shopping list, the high-quality dividend strategy, which has really been overlooked for the past five years, remains fairly inexpensive. And you’re going to want to get your yield if we’re looking for some tough challenges in terms of the markets ahead.

SEANA SMITH: I liked it too, Linda. PATTY, pay attention to the yield. Chris, another thing you pay attention to, I know, is some critical levels, especially with the S&P. So we saw another slight downward movement today. What’s the next real level we need to keep an eye on?

CHRIS KONTANTINOS: Yeah, so 4,000 is a huge psychological level. But what worries me a bit is that we have what I would call definitely broken up with that. Of course, now we’re back around 4,000, so it’s kind of acting like a magnet. But I’d say we’re past 4000. And now you have to look at the next level of support, probably around 38.50, which by the way, 38.50 from a valuation multiple perspective also makes sense to me.

Because now you’re starting to go back to the valuation multiples that we saw in the S&P at a time when you had positive real interest rates and an economy that wasn’t super fast, but not in recession either. So think 2013 to 2019. You basically had valuation multiples on the S&P between 14 and 19 times. And with us trading at about 17 and 1/2, you went — you go down to 38.50, that would be even cheaper. For me, that’s starting to be a relatively reasonable level of valuation for the backdrop we expect.

DAVE BRIGGS: OK, so let’s pay attention to performance. But Linda, I’m also paying attention to what former Goldman CEO Lloyd Blankfein had to say, that a recession is a very high risk factor. Do you agree with this characterization?

LINDA DUESEL: Well, I think a recession is very likely as day follows night. We are supposed to have recessions from time to time. What I think is unlikely is a recession here anytime soon. And so that’s what makes it all so interesting to try to navigate. Because no one knows if we’re going to have a soft landing, a soft landing as Jerome Powell said recently, or the recession. And that’s why we have to have our shopping list. That’s why we have to be patient investors and say, you know what? I am a long term investor.

I have money in reserve. And many, and many, and many people do. And so I think it’s relatively inexpensive. I like this level of 38.50 suggested by Konstantin. This is already in a soft landing. If this is what you believe, no one knows, then this is a good place to get involved. But always keep some powder on hand in case Lloyd is right and we end up in a recession.

It’s a tough tightrope that the Fed is walking because we have persistent inflation.

RACHELLE AKUFFO: And obviously, speaking of inflation, you have consumers, they’re looking at their 401(k). They wonder when some of this pent-up demand will continue to decline. When, Chris, do you think we’re going to see that kind of start to bite into earnings if inflation persists at that level?

CHRIS KONTANTINOS: Well, Rachelle, I think you asked the $60,000 question right there. And that’s the debate every day in my shop, when is this going to start showing up in revenue? Because if you look at the 12-month forward earnings stream, it’s actually improved from the start of the year to now. I think it’s somewhere around, let’s call it, 230, 235 dollars.

So the question is, what’s the next shoe to drop? Now we have this – we got the multiple to contract because of interest rates. Will the next leg of the market downtrend now be all about earnings? For now, we don’t see it. And if you look at the last earnings season, which we just finished, yes, the beat percentage was a bit lower than historical, but it’s still a pretty decent number.

And the overall earnings stream, earnings power of the S&P 500 is actually still quite good. So we’re watching that very closely. We monitor earnings revision trends not only in the US, but also in Asia, throughout Europe and other major geographies. But right now, the US still has one of the strongest earnings revision patterns. And it’s still slightly positive. So at the moment, I would say that there is no red flag on income yet.

SEANA SMITH: Linda, in terms of cyclical trading versus defensive trading, I guess what are you waiting for take us higher at least from here?

LINDA DUESEL: I think what would take us higher is probably the most I don’t mean the cyclical theme but those areas of the economy think finance for example a big chunk of the S&P 500 is usually early play cycle. But it’s very cheap. And banks are really, really cheap right now.

So I think you might see that with a kind of feel-good feeling about things moving away from technology. But energy is our preferred sector. And just followed by financials, materials, industrials, these are all sectors that do not suggest a recession on the horizon. And they are really, really cheap right now. Technology has just been creamed. And it’s still historically expensive.

So, and I think that’s also the right way to invest. Because when we look at earnings forecasts for the S&P, they only recently hit an all-time high. And that’s really only thanks to Amazon. You still see many companies able to pass on these higher costs because the consumer still has a ton of money to spend.

DAVE BRIGGS: A silver lining. Alright, Chris Konstantinos and Linda Duessel. I appreciate you being here. Thanks to you two.