Sizemore Capital Management CIO Charles Sizemore joins Yahoo Finance Live to discuss fourth quarter bank earnings, inflation, and the energy sector.
KARINA MITCHELL: We're going to keep it on markets and bring in our next guest Charles Sizemore. He is from Sizemore Capital Management. He's the CIO there. Sir, thank you so much for being with us today.
Just want you to weigh in on the bifurcated bank earnings that we received so far-- Wells Fargo doing well because borrowing is up. JP Morgan a different kind of story, missed on trading equities and helped along by that loan reserve loss that it released-- $1.8 billion. Otherwise, it would have underwhelmed with earnings.
Is this the peak of the sector that we're seeing? And is it a harbinger for what comes down the road next week when more bank earnings come out?
CHARLES SIZEMORE: Well, not necessarily. So looking at the banks, there's some headwinds and some tailwinds. The headwind, of course, is that the economy does appear to be slowing. We saw that in the retail sales data today. It seems like some of that post-lockdown boom is starting to fizzle out.
But the tailwind, what should help the banks is the rising interest rate environment. That should be good for them so long as rates don't rise at such a fast pace that it starts to choke off the economy. So if we do get that sort of Goldilocks scenario where the economy does continue to grow it just doesn't grow at a blistering pace and the Fed continues to raise-- well, actually, not continues, starts and then continues to raise rates, then that actually should be a good macro backdrop for the banks.
ALEXIS CHRISTOFOROUS: Charles, we know that the market is, I guess, borderline obsessed with inflation right now. But you say we shouldn't be focused on that so much as the possibility for disinflation, even deflation, later this year. How might that play out for the stock market?
CHARLES SIZEMORE: Sure. Well, you look at the headline numbers recently and they look absolutely awful. You have 7% year-over-year inflation, which, of course, sends chills down the spines of Wall Street. But you look at going forward, if inflation were really that big of an issue, bond yields would be significantly higher than they are right now. The bond market is pricing in a more benign environment there.
Gold prices as well-- gold has really not participated in-- commodities have done well, but gold has not participated in that which does suggest that the market is not really seeing a lot of inflation down the road. If you look at what's driving the inflation, it's two things. It's cost push and it's demand pull.
The cost push is easy enough to understand. You have all the disruptions due to the pandemic that are being worked out little by little. It's not like the world's industries are just waiting for things to happen. They are proactively putting things in place to help get that done.
Taiwan Semiconductor is investing $100 billion in increasing chip capacity for crying out loud. So a lot of that logjam should be broken in the coming months. Then, of course, on the demand side, the Fed is committed to draining the liquidity out of the system, which should dampen that as well.
Come six months from now, we may be wishing we had more inflation. I would say that kind of in the medium-term it's not a particularly big risk. But if you look kind of 6 to 12 months down the line, that's going to be a major headwind for the market.
KARINA MITCHELL: And then what is the health of the consumer this year? We've already got consumer sentiment down. We saw retail down in December. How much before this sort of 7% inflation handle, maybe higher before it goes lower impacts their pocket further?
CHARLES SIZEMORE: Well, there's a bigger story there. And part of it is retail spending was really constrained during the pandemic, particularly those first six months. And so what we had after that was an explosion of spending also aided by government stimulus, low rates, you name it. We had all of these factors that really boosted spending.
Well, all of those have slowly drained off. Government stimulus is largely done. The Fed's already committed to raising rates. So a lot of the things that juiced retail spending earlier last year and in 2020 is just slowly draining off. So I think it is fair to say that the consumer was running out of steam even before inflation became an issue. You add to that rising prices, and that does have an effect for sure.
ALEXIS CHRISTOFOROUS: What are you looking at in terms of pouring money into particular sectors? Because you've got still sectors of the stock market that are quite frothy, stretched valuations, not a lot of opportunity for yield in the bond market, even though we are seeing yields move higher. So where are you concentrating the cash right now?
CHARLES SIZEMORE: We're doing a couple of things. Looking at specific sectors, energy looks great right now. Energy is one of the few sectors of the market that has been cheap for a while and is still cheap in an otherwise overpriced market. So we do like energy.
Beyond that, we're keeping things fairly short-term. Rather than take large positions to buy and hold, we're focusing more on week to week, day to day trading trying to eke out kind of some short-term profits. I think that's what really makes sense in this environment.