Market trends indicate an equity recovery following ‘extreme pessimism’: Strategist
Mill Street Research Strategist Sam Burns joins Yahoo Finance Live to talk about Thursday's market activity, the outlook for the Fed in 2023, and more.
- All right. There's your closing bell on what I like to call Festivus Eve, Jared. I don't know if you celebrate Festivus and the feats of strength and the-- no? OK, apparently not, not a "Seinfeld" fan. But it was ugly today, as I said earlier. This is signs of weakness as opposed to feats of strength. Brutal day for the markets-- 250-point loss for the Dow. The NASDAQ drops 1.4%.
And the big loser-- tech-heavy NASDAQ, down 2-plus percent, 233 points. Doesn't look like Santa is coming to town, does it? For a closer look at the broader markets, let's bring in Sam Burns, Mill Street Research strategist. I guess the bomb cyclone that is hitting this country in terms of the weather hit Wall Street today. Why, Sam?
SAM BURNS: Well, I think people are getting nervous looking what the Fed's doing relative to what they think the economy is going to be doing next year. And it's also, of course, holiday trading, so it takes less activity to move the markets around. I think you're seeing thin trading plus some nervousness about what's going to happen with the Fed next year starting to make people nervous now.
- Well, let's stick with the Fed next year. We got past that last meeting, and I think investors just want to wipe 2022 off the books. But looking ahead, the Fed has its work cut out for it. There's a huge disconnect between what the Fed is expecting to do less next year, as it has broadcast and its statement of economic projections, and then what the market thinks the Fed is going to do. Markets are already pricing in rate cuts for the back half of the year. And in the meantime, the Fed is still hiking. Where do you see this falling down next year?
SAM BURNS: Yeah, that's right. It's an unusually wide disconnect between the market, what the treasuries are saying, and what the Fed is saying it's going to do. And that's why the yield curve is so inverted. The Treasury market is clearly yelling at the Fed, telling it not to hike rates anymore. But the Fed is looking at the more backward-looking data, the year-on-year change in the CPI, and some of the labor market data that's probably not the most sensitive things to look at. And they're staying with the rate hike story, at least for now.
I suspect we'll get one more rate hike in February, and then after that, things may have slowed down enough for them to pause. I think there's definitely signs of slowing already in the data, but it hasn't come through everywhere, certainly not in the labor market data yet. So I think that's what they're focused on. I think that's why they're staying with their story right now. They don't want to look bad.
But I think the Treasury market is looking more ahead at the more of the forward-looking data and seeing a slowdown coming next year and also looking at earnings estimates falling and some other measures that show that things don't look very strong for next year, so inflation pressures should be much less.
- Wow. So you think no hike in March. Is that then the catalyst for a rebound?
SAM BURNS: Potentially. I think as the market gets closer to what looks like the end of the Fed tightening cycle, there should be some further recovery in equities. I'm starting to see better signs in my indicators for the equity market just because everyone has been so pessimistic and so negative for quite a while. Certainly through end of October, really, there was extreme pessimism. And now it's gotten a little bit better, but it's still very choppy. People are still very nervous. And I think that's an environment where any kind of upside surprise or less bad news would be enough to lift stocks a bit more.
- You mentioned some of the data a little bit ago, and we got a data dump today. We get another one tomorrow. In the mix is leading indicators. It's not one of the indicators-- or it's not one of the economic reports that gets talked about a lot in the media, but it's been very prescient, forecasting all of the recessions back to 1967. If you look at the year-over-year numbers, when they go negative for two months in a row-- and this happened in August, by the way, of this year-- you tend to get a recession seven months later. So based on that timeline, we could see a recession as soon as March, or maybe, I guess, on average next March. Just wondering how that lines up with some of the other data you're looking at or maybe your other macro look.
SAM BURNS: No, that's right. The leading indicators have really turned steadily downward. And I think that's part of the reason why the bond market is pricing in lower rates next year, is the assumption that those leading indicators are telling you that there won't be any need for rate hikes. And we'll certainly-- it might even be needed for rate cuts next year.
Now, the gap or the disconnect, really, comes with the coincident indicators, which also come out with leading indicators and get even less press. But they kind of tell you what's happening right now. And the leading indicators are supposed to be the forecasting type of indicators. And there's an unusually wide gap there, where the [INAUDIBLE] indicators are still rising. They're still showing growth. But the leading indicators are very negative.
And that's unusual to see this wide of a gap. And the leading indicators certainly do have a good track record overall, but their lead times can vary depending on the cycle. Sometimes they're much more coincident, and the recession comes very quickly. And other times, it takes a year or more for the real recession to show up.
So I think there's a lot of uncertainty about when this will happen, and if so, how bad it will be and how sensitive the market is or the economy, really, is to the Fed and interest rate hikes now as compared to, say, the 2005, '06, '07 period when there was a lot more leverage in the system, and therefore, a lot more risk when the Fed was raising rates.
- David Tepper raised a few eyebrows this morning, saying he is short on equities next year, short on bonds. You say, look international markets. Specifically where, and why?
SAM BURNS: Yeah, a lot of the indicators that I look at look better outside of the US than in the US. And specifically, Europe is one of my favorite areas, which is very unusual in the sense that most people are very negative on Europe economically, the economic sentiment. And most people are expecting recession. They're certainly seeing a lot of energy crisis there thanks to the Russia situation.
And so it's unusual to see, the fact that earnings estimates are actually holding up better in Europe than they are in the US. And some of that is related to just the composition of Europe. It doesn't have as much of the big-cap tech and tech-related names like Tesla or Amazon or Apple or some of those names that have been under pressure here lately. They just don't have as much weight in those areas, so they're less exposed to the sources of weakness that we're seeing right now, even today in the NASDAQ, which is leading the way down.
So what had helped the US for a long time was the big tech weighting, the growth stocks. Those are the ones that have been under pressure recently. Those are not as-- don't have as much weight in the indices in Europe, and they're actually holding up better. And if you think the dollar is going to continue to weaken or at least stay stable relative to, say, the euro or the pound, then you've got a tailwind for US-based investors to hold non-dollar assets.
- We're waiting for that next directional signal from the dollar. Got to leave it right there. Sam Burns, thank you for stopping by.