Great Hill Capital Chairman and Managing Member Thomas Hayes joins Yahoo Finance Live to discuss economic data, market sentiment, earnings, the global economy, and the outlook for a Fed-led

Video Transcript

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RACHELLE AKUFFO: Coming in like a lion. Investors hoping for March's traditional trend to strength may be watching the Friday jobs report for a boost for that thesis or to temper expectations perhaps. Joining us with a view on fundamentals, Thomas Hayes, chairman and managing member at Great Hill Capital. Always good to see you, Thomas.

We know this has already been a very rollercoaster year because, obviously, stocks off to the races in January, disappointed in February, now March really sort of circling the drain here figuring out what's going to happen, especially with this big jobs data that's coming out. What are some of the market catalysts that you're going to be honing in on for March?

THOMAS HAYES: Well, there's a lot of pessimism coming in. We just went through the normal February week seasonality, Rachelle. And great to be with you by the way. But there are three key myths out there right now that are keeping people out of stocks and I think at the exactly wrong time.

First and foremost is stocks don't go up during tightening cycles, a.k.a. don't fight the Fed. How many times have we heard that? But if you look back over the last four tightening cycles since 1994, the stock market is up on average 7.8% during the tightening period. And another myth within that is that tech can't outperform. But if you look at the data, tech and REITs are actually two of the top performers during those periods.

The second myth that's been out there is that the stock market must go down when earnings are coming down. And history actually doesn't support that. Since 1930, in years where earnings are up year on year, the S&P does about 10.2% including dividends. And in years that earnings are down, year on year the S&P does 9.8%. So the key is not timing the market. It's time in the market.

And the final myth-- and this is the big one, Rachelle. I'm sure you're hearing it all the time. You can't be in stocks with super high inflation. However, in periods of rising inflation, the S&P goes up on average 5.5% so not so great. But in periods of falling inflation, the equity indices go up on average 14.7%. And I don't know about you, I don't need a magnifying glass to see since last July, inflation has come down every single month. We're in a falling inflation environment.

RACHELLE AKUFFO: Now Thomas, that's hard. I mean these are some very well established myths and when you think about the fact that this really isn't your typical period when you think of a recession. This is a Fed-led recession. And so people trying to sort of balance what they know from history with their usual market expectations. So what should people be doing differently from the crowd? Where do you see the opportunities?

THOMAS HAYES: Well, I think they should be like George Costanza from "Seinfeld" and do the opposite. If you remember, everything started working well for when he went against his normal instinct.

And what's the instinct? What is the crowd doing right now? Well, we see from data that equity flows out of equity funds have been the highest in the last few weeks since spring of 2020. And to jog everyone's memory, spring of 2020 we had that violent rally off the lows, the March 2020 lows.

We rallied about 40%. And all of the commentators were coming out and saying, we're going to go back and test the lows. We don't have a vaccine. We're going to break the lows. And what happened? We went up another 50% instead.

And I think we're seeing the exact same situation right now is that everyone is saying, oh, we've got to go test the lows. You have negative earnings. You have an inverted yield curve, et cetera, et cetera, et cetera. And the maximum pain right now is to push higher against the wall of worry. Just like we crashed 25% last year in anticipation of the slowdown this year, we're going to start to rally this year in anticipation of the earnings recovery next year.

The second thing is everyone is buying VIX call options at a record pace. So they're buying insurance for a house that already burned down last year. Bad move. And finally, if you look at the Bank of America Global Fund Manager Survey, managers are the most overweight bonds relative to stocks than they were since the pandemic lows in March of 2020 and the great financial crisis lows in March of 2009. Those were times to buy equities, not bonds.

And I don't know about you, Rachelle, but one thing is clear. The stock market does not top when people are overweight bonds. It tops when everyone's overweight equities and you run out of marginal buyers. And we're nowhere near that right now with cash levels and funds coming out of equities. So we think there's a lot of opportunity in the market to buy high quality companies that are on sale.

RACHELLE AKUFFO: I mean it's tough because a lot of people are looking for the safety that they're used to in bonds. Do you think perhaps longer term there is a time to get in there or have people already missed the boat?

THOMAS HAYES: Well, in terms of the equity market, I think on a company by company basis, you see high quality businesses on sale. I also think that people are very, very pessimistic about the recovery. And I think what they're underestimating-- everyone keeps looking for the black swan, what's going to take this thing down.

But actually, what's going to take this up is that the second largest economy in the world in China is reopening after three years of stop and start and major lockdowns, basically being offline for three years. Somehow the world economy managed to forge forward without them because they didn't have the proper vaccines, et cetera. And since they've opened-- and it's only been eight weeks. If you look at the composite PMI just last week alone being at higher than pre-pandemic levels of activity, that rising tide is going to lift Europe. It's going to lift S&P earnings. And it's really just getting started.

Even today, we saw box office tickets for the movie theater up 12% year on year in China. So I think that is kind of a positive catalyst for the global economy that very few people are putting weight on because it's been offline for so long that you stop accounting for the positive benefits of that contribution.

RACHELLE AKUFFO: And a lot of people have been waiting for this China reopening story to really pick up pace. But as you heard there, we heard from ECB chief Christine Lagarde saying inflation is still this global monster. People wondering though, is it going to be a double edged sword with the China reopening? Is it going to be fueling inflation while it's also helping with demand?

THOMAS HAYES: Well, it's interesting. Everyone looks to Saudi Arabia and looks to Russia for oil production. But while China has been shut down, what we see is that US rig count has been creeping up back to near pre-pandemic levels.

So while their demand was down a little bit and they built up supplies buying a lot of oil from Russia and Russia's production was still cranking even while they were shut down, they were buying at a discount. They built up a lot of storage, just like Europe built up the natural gas storage. But now you've got all this US production getting back to pre-pandemic levels within months. And I think that's going to contribute. And that's going to offset moving forward.

So we're just looking for high quality businesses that are marked down. You can still buy companies like Amazon 55% off of its recent highs. One that we're looking at right now, Rachelle, is 3M. It's kind of this boring, sleepy company, industrial, transportation, health care, consumer. But it's trading at 11 and 1/2 times forward earnings. And that compares to its historic multiple of 17 times. Even its great financial crisis low multiple in March of 2009 was 14 times.

So why is it trading so low? It has a legal overhang, two lawsuits, one of which the Department of Defense for earplugs came out last week and said 90% of people who used those earplugs actually had zero hearing impairment. So that's a positive catalyst to help alleviate some of the litigation overhang. They'll pay the fine. They'll come to some settlement and then the stock can move from there. They're also doing two tax-free spinoffs to unlock value to shareholders. So we think that's going to be a positive one moving forward.

RACHELLE AKUFFO: You say 3M is boring, but I think investors could welcome a bit of boring after the year they've had so far. A big thank you as always, Thomas Hayes, chairman and managing member at Great Hill Capital. Have a good Monday.