Ross Mayfield, Baird Investment Strategy Analyst and Ryan Payne, Payne Capital Management President & ‘Payne Points of Wealth’ Podcast Host, join Yahoo Finance to discuss the day of trading and where the markets will head in 2022.

Video Transcript

EMILY MCCORMICK: Welcome back to Yahoo Finance Live. I'm Emily McCormick in for Seana Smith here with Adam Shapiro. Let's get one more check of the markets here heading into the closing bell. As you can see, we are off session lows today but still sharply lower during today's trading day. The Dow is going to be down about 400 points, or just over 1%. The S&P 500 and NASDAQ also off more than 1% during today's session. And here's the closing bell on the New York Stock Exchange.

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ADAM SHAPIRO: All right, we got a close. And let's see where the markets will finally settle, although it's still going to take a minute or two. The Dow did as Emily just say, recovered from its session lows. But still off more than 1%, almost 1 and 1/4%. S&P 500 losing 52 points, another 1% to the downside. NASDAQ is off 1 and 1/4%, losing 188 points. Let's bring in our guest to talk about where we're headed next.

Ross Mayfield from Baird Investment Strategy and analyst there. And then we've got Ryan Payne, Payne Capital Management President and "Payne Points of Wealth" podcast host. I don't like anything with the word pain in it there, but with P-A-I-N, which is what a lot of investors are-- it's all right. It's you're P-A-Y-N-E. But a lot of investors are very worried right now. So let me throw it to you, Ryan.

I mean, we're witnessing a sell off. We've got articles being written about when you see the treasury, the 10 year at levels like this, it's indicating a recession and perhaps a big pullback in stocks next year. How do we position as investors?

RYAN PAYNE: Well, I think first off, you've got to wade through the noise here a little bit. What really has changed? I mean, if you look at the fundamentals of the economy right now, we know GDP growth's going to come in relatively strong again next year. I mean, we're looking at 3% plus GDP growth, which is way better than we had the last decade. If you look at profits on stocks, I mean, the S&P 500, you're going to look at high single digits. So earnings look like they're going to be in check for next year.

So I wonder right now, I mean, we are getting a lot of central banks around the world starting to tighten. The Bank of England has raised their interest rates, you're starting to see rates around the world rise. So we may be getting a little bit of a repricing here into a world where we have central banks that are more hawkish with their monetary policy. But I'd argue the underlying fundamentals still look solid here. Any dip that you're seeing like we've seen all year, Adam, I'd say this is the time to buy.

EMILY MCCORMICK: Ross, I want to toss this question to you. Ryan mentioned what really has changed in terms of the fundamental backdrop. But do you think today's market reaction is adequately pricing in perhaps renewed risks of omicron and tighter monetary policy?

ROSS MAYFIELD: I think, to be honest with you, you saw earlier that some of the cruise stocks were up. Some of the travel stocks were up. So I do think this isn't explicitly omicron related today. And if we're talking about tighter central banks around the world, and particularly the fed, that was something that the market was anticipating for weeks leading up to this FOMC meeting. The market had pretty much pegged the accelerated taper and pulling rate hikes for it into 2022.

And the thing is even if you see the fed as hawkish as they laid out, that's still very accommodative versus history. So we still think that policy is a tailwind. It's just probably less of a tailwind in 2020 and 2021. So I'm prone to agree. I think the underlying fundamentals are still really strong. You might be expecting less returns than 20% a year or whatever we've become accustomed to. But still want to be in equities, still a good time to be an investor.

ADAM SHAPIRO: Let me follow up on that because we just heard Ryan say now is the time to buy. So let me throw it back to you as a follow up there. Which sectors? Because a lot of us as investors are just afraid right now. And I'm hearing both of you say, get over the fear and jump in.

ROSS MAYFIELD: Yeah, if you're throwing it to me, I would say the ones that we like are pro cyclical sectors because we do think that economic growth is going to be strong next year. We think higher interest rates are a benefit to something like financials, which we've liked for quite a while and continue to like heading into year end. There's a lot of M&A activity. Higher interest rates are strong. And a strong economy is good for that sector.

On the flip side, we would barbell that with something like big tech, like technology. Small cap tech has really struggled this year. But big tech is kind of, one, it exposes you to some longer term secular growth trends. It's less influenced by rising rates than small cap growth. And it also is kind of a hedge against any renewed COVID fear. Those have been the places to take solace as we've seen wave after wave appear, or new variant after new variant. So we like that barbell.

And really at this point in the cycle, we want to be doing anything but getting too defensive in something like staples or utilities.

EMILY MCCORMICK: Ryan, taking a look at your notes here, you also mentioned Bank of America's latest fund manager survey showed the highest exposure to cash since May 2020. Now that typically is a contrarian bullish signal, which you also pointed out in your notes. When do you expect to see some of this potential upside here if the market is perhaps overly pessimistic right now in its positioning?

RYAN PAYNE: Yeah, I just love those fund managers. They never get it right. That's why most fund managers underperformed the S&P 500 over time. So I think it's a very bullish sign. The last time we saw that was June of 2020. And we know the markets took off moving past June of 2020 up into the present moment. So I think at some point here, selling probably is going to dissipate. I don't know the exact time that's going to happen. But I think what you have to think about is if the market does start to turn and starts to go up, you could get what I think would be panic buying because you do have a lot of cash on the sidelines.

And just I always look at the simple math here. Inflation was almost 7% over the last 12 months. If you were sitting in cash, you lost 7% in purchasing power. And with the world right now still awash in cash, money needs to get a return with money managers being on the more bearish sign. To your point, that is a very, very bullish sign. And I think what you're going to see here when the market does finally turn and start to go up is they're going to have a lot of money managers playing catch up. That's extremely bullish sign.

That's why I would start to allocate capital now.

ADAM SHAPIRO: Ryan, it's one of the reasons your net worth is probably 20x mine. But I am curious, how would you, Ryan, convince people who've been sitting on cash for well over a year now and missed this upside to now get off the cash at a time when if they were scared going up, they've got to really be scared going down?

RYAN PAYNE: Well I think the bottom line is the market right now, there's a tale of two markets. Big tech has had just a magnificent move. That's really been driving the market over the last couple weeks is just those big tech stocks like the S&P hit an all time high recently. But the beauty of the market right now is there's so many bargains out there. We just talked about cyclicals. I mean, they trade at such a huge discount. Look at energy stocks for instance. They're up huge this year. But you're still looking at very, very cheap multiples.

And if you go overseas, it's almost like a curse word to talk about overseas. But if you look at international stocks, I mean, they trade so cheap versus the US. So if you're looking to get invested now, it's not like you're buying at the top, if you diversify overseas, you buy cyclicals. Emerging markets, another great place to put money. You're really getting an opportunity here to buy. And you're not chasing return, specifically that hot sector like tech, which arguably probably is a little overvalued here.

EMILY MCCORMICK: Ross, speaking of overvalued and some of these hot sectors here, I want to ask your take on some of the more speculative areas of the market as we head into 2022. And I'm thinking the meme trade, some of the SPAC mergers that went public this year. What are your expectations for these pockets of the markets given the potential tightening we may be seeing and the lower liquidity environment from the Federal Reserve?

ROSS MAYFIELD: It's not good. I mean, you've kind of seen that trade and handful of trades deflate at varying paces over the course of the year. And it wasn't hard to find someone in January of 2021 who could look at that activity and see a bubble. But at the same time, a lot of times, those kind of things can last longer than we all expect them to. The SPAC trade has deflated over the course of the year. A lot of the meme stocks have seen a lot of volatility lately.

Higher real rates, higher interest rates are bad for those sort of longer duration plays, I guess you might call them. And then to your point, the kind of liquidity drying up, it's still quite a wash with liquidity, but less than it was before. There's just less money to filter into those. So Yeah, so I think it'll be a tough sledding for those trades over the next year or two. It's why we like cyclicals, those near term economically linked type sectors over those really long duration long term growth stories, at least in the near term.

EMILY MCCORMICK: Ross Mayfield is Baird investment strategy analyst. And Ryan Payne is Payne Capital Management President and "Payne Points of Wealth" podcast host. We thank you both so much for being here this afternoon.