Main Street Research CIO James Demmert and Capital Wealth Planning Lead Portfolio Manager Josh Smith join Yahoo Finance Live to weigh in on the market rally and technology stocks rebounding along with the FTX-Binance saga.

Video Transcript

- Here's the closing bell for today, November 10.

[BELL RINGING]

- And that will do it for Thursday's trading session. Let's take a look at how the major indices ended the day. A bumper day. We saw that CPI print there lifting all boats. The Dow ending up the day 1,198 points there. Up almost 4% there. The S&P 500 up more than 5 and 1/2% at 200 points. And the tech-heavy NASDAQ up about 7 and 1/3% there. 760 points gain on the day.

Well, for a closer look at the broader markets and breaking all of this action down, let's bring in James Demmert, Main Street Research chief investment officer, and Josh Smith, Capital Wealth Planning lead portfolio manager. So Josh, I want to first start with your reaction to this rally off of this one CPI print. It seems to be that ray of hope that the markets were looking for.

JOSH SMITH: Yeah, definitely. It's a nice reprieve after a really tough year. Obviously, any upside at this point is going to be cheered by everybody across the Street. So we're very happy with today's reaction. We think it'll probably extend into tomorrow and early next week for sure. We're just going to monitor how things develop over the next couple of days on whether or not we think this is sustainable into the end of the year, that traditional Santa Claus rally, or if we need to be a little bit more cautious as we go into the end of the year.

- James, what do you think? Is there reason to believe that the gains that we're seeing today are going to hold as we look ahead to the next couple of weeks or a couple of months?

JAMES DEMMERT: Yeah. I think it's a great question. In a couple of weeks or a couple of months, I think it definitely has momentum. We did today what would normally take two weeks. The tremendous buying power that's in this market. But I do think that investors are starting to think about this over the next couple of weeks and start to think, well, the Fed knows now raising rates does beat inflation.

But if they're going to go to 2 when we're only at 7.7, that might make the market very vulnerable over the next couple of months. So a couple of weeks, yeah, the momentum, the excitement. We've seen this over-excitement a few times in these bear market rallies. And this probably is one. Maybe the last one, though.

- So Josh then, in terms of what we've seen with earnings season as it's coming to a tail end, what does that story tell us? And what are the expectations then for the coming quarter?

JOSH SMITH: Yeah. This earnings season, especially for the third quarter, has been really challenging. I mean, names that didn't produce good earnings have been severely punished. Your Amazons, Metas, those type of names. Names that have had really good earnings or even stable earnings-- you think of your consumer staples or health care-- have done really well and been rewarded for that.

So it's a mixed bag. You have to be very selective on where you're allocating capital at this point in this market that we're in now. So there are a few sectors that we like are obviously energy, health care, and then some select industrial names that have really shown good earnings and good growth over the last few quarters.

- James, the other big story that we're following this week, obviously, the collapse of FTX, what this means for the crypto market, what it means for investors, obviously, exposed in this sector. As an investor, I guess, what's your takeaway from the headlines that we're getting? And what do you think this means for future investment within the industry?

JAMES DEMMERT: The FTX story is a sad story. And a lot of investors have really gotten beaten up by it. And it's a reminder to everyone out there-- use a stop loss. They don't cost anything. And it's a way to take your human brain out of the equation before this stuff falls catastrophically.

What does this mean for crypto? We think crypto will survive this. But like a lot of changes and sort of primitive asset classes, which this really is, a lot of businesses are going to come and go. And FTX is just one example.

So we would suggest in the new bull market, which we think is going to be-- it's only months away. But you want to probably have some exposure to the crypto space. It should do quite well, particularly from, finally, these ridiculously lower valuations. But, again, use stop losses when you're any asset class, but particularly these sort of not very mature, not very liquid asset classes. I hope that's helpful.

- And Josh, I mean, we saw a lot of institutional investors pouring into crypto. Although, obviously, putting them in different places versus, say, on an FTX. What do you think this actually signals in terms of institutional investors and any direction that might change for them?

JOSH SMITH: Yeah. I think it's just buyer beware. I mean, anybody, as you said, even big institutional guys, Sequoias and the other names involved, can be fleeced on a really good story and have sort of FOMO, if you want to use that term. So I think, like he said, you have to have stop losses in place and protect yourself to the downside if these things go against you.

Luckily, most of these institutions had very low allocations as far as their overall capital. So they did have some risk management perspective there. But all in all, we don't know ultimately how this whole crypto collapse is going to shake out in terms of what the effects are over the next few weeks. We'll be monitoring to see how it sort of develops. But right now, it's really too early to tell how it ultimately is going to play out.

- James, let's talk about what could be an attractive investment opportunity at this point because once again today the massive rally that we saw. All 11 of the S&P sectors moving to the upside. What was leading today's gains were a lot of those larger cap tech names that had been beaten down in this rising rate environment. Where are you seeing the most opportunity as we enter the final weeks of the year?

JAMES DEMMERT: Yeah. It's a great question all investors should be thinking about. We're sort of what I would call in the last third of the bear market. And this is the opportunity to really set yourself up for the new bull market that we envisioned probably starting in 2023 in the early part of that year. And so here's where you really want to think about what would do well in the next bull market.

I will tell you one thing. You won't need to be overweight technology in the new bull market like we were in the past because rates are never going to go back to where they were, according to our research. So tech is probably not going-- it's going to do well, but not be the leader that it was. And I think what you see in the last few weeks of the Industrial companies, like Josh mentioned, the financial companies really taking the lead when we go forward.

So here's where I would say the opportunity is take down the technology exposure, particularly lesser quality, into this wonderful rally that we're seeing. And then set yourself up for-- inevitably, the market is going to go overbought.

We're going to correct from some levels up here, maybe back to the old low, maybe even lower, because earnings are decelerating. And set yourself up to really bring in those industrial financials, stuff that's going to really lead this new bull market that we envision. Technology, for sure, but not necessarily as overweight. So if you're overweight tech, bring it down. And set yourself up for buying on the next probably significant dip.

- And Josh, how would you be positioning yourself now?

JOSH SMITH: Yeah. I tend to agree. I think technology is going to trade really heavy between now and the end of the year. And it's not going to be the leader. I think the leader is, ultimately, going to be blue chip, large cap names that can show consistent earnings and revenue growth through this entire cycle. And, really, those names have been rewarded throughout this year.

If you look at the Dow, for instance-- I know it's an old index that most people don't like to quote. But after today's move, I think it's down like 2%, 2 and 1/2% for the year. And the NASDAQ is down over 20%. The S&P is down 15%. So, ultimately, I think if you stay with the tried and true staple names, those blue chip large caps, you're going to be able to ride this out even if we do get another major sell off early next year and make a lower low. You'll still be able to ride this out and really participate in the next push of the bull market.

- Josh Smith and James Demmert, great stuff. Thanks so much for joining us this afternoon.