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Stocks could pull back 5-10%: strategist

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As short squeezes slam the markets, ClearBridge Investments investment strategist Jeffrey Schulze tells Reuters' Fred Katayama investors should use the current drop to buy stocks. He shares his outlook on whether the U.S. economy will slip into a double-dip recession.

Video Transcript

FRED KATAYAMA: Stocks on Wall Street dropping sharply Friday afternoon on this last trading day of January. Are stocks still overvalued? Well, let's ask Jeffrey Schulze of ClearBridge Investments. Welcome back, Jeffrey.

JEFFREY SCHULZE: Great to be back.

FRED KATAYAMA: Stocks selling off today but not GameStop or AMC, which are both up more than 50%. Is it that short squeeze that's dampening investor sentiment today, or is it the concern about J&J's data on vaccines?

JEFFREY SCHULZE: I think it's a combination of both. Obviously, the J&J data disappointed to the downside, and you're seeing a bit of a short squeeze probably being shaken out of some of your more traditional positions in the stock market, a bit of a bleed-through that we saw from Wednesday earlier this week. But I also think investors are focusing on some of the weaker economic data that we've seen over the course of January.

Retail sales came in for the negative [? print ?] for three months in a row, which was the poster child of the V-shaped recovery that we saw last year. But also, jobless claims remains stubbornly high. You had a pretty negative December jobs report as well. So I think it's a combination of some stress because of the short squeeze that we're seeing, the J&J vaccination hopes maybe bringing normalization, pushing it out a couple of quarters, but also I think some profit-taking after a pretty robust move that we've seen from the March lows last year.

FRED KATAYAMA: And consumer spending fell for a second straight month. We got that data today. But volatility has been particularly high this week. The S&P 500 is now down about 3.8% since Monday. Do you sense the market is topping? Are we possibly already in what may be the start of a correction?

JEFFREY SCHULZE: I think it is. You know, We. Thought that positioning was pretty stretched as we came into January. Optimism was off the charts. Put-call ratios were at levels last seen in-- 20 years ago. You also had record margin positioning. There is a lot of optimism in all of the investor sentiment surveys.

So I think the market was due for a bit of a breather, a little bit of a consolidation. But we firmly believe that this is a buying opportunity to take advantage of a supercharged US economy that we're expecting to see in 2021 but also bleeding through to 2022, as well.

FRED KATAYAMA: Do you see this as a minor pullback or a correction that is more than 10%?

JEFFREY SCHULZE: I don't think it's more than a 10% correction. I think these are relatively known issues with the market. For a 10% plus correction, I think you'd really need to see the variants hit the US. You'd need to see an explosion of cases, hospitalizations, and deaths, which are all trending in the right direction post that holiday-- the post-holiday burst that we saw-- or a mutation be resilient to the vaccines at this point. But again, I think it's going to be a minor correction, somewhere in this 5% to 10% range.

FRED KATAYAMA: All right, so you're saying that from what you're seeing, you should be buying into the dips, which means that, hey, the long-term looks rosy or looks good. Then why are you reintroducing your recession risk monitor-- or dashboard-- at your firm, instead of just looking at the recovery?

JEFFREY SCHULZE: It all comes down to all of the slowing economic data that we've seen and we talked about before. There is a concern that we are going to have a double-dip recession because of economic retrenchment and social distancing. But if you look at the recession dashboard, it's still flashing a very strong expansion color with seven green, three yellow, and two red signals.

And the one data point within the dashboard that gives me the confidence to say that this is just a slowdown rather than a double-dip recession is manufacturing PMI new orders. That's synonymous with the business cycle. It moves up and down with economic activity. And with a 50 level being neither expansionary or contraction, the print that we got for December was 67.9, which is a very, very bullish number. It's bullish for capital spending trends, and it's bullish for the US economy, as we move through the first quarter.

FRED KATAYAMA: All right, so you're still looking up. Thanks a lot, Jeff.

JEFFREY SCHULZE: Thank you.

FRED KATAYAMA: Our thanks to Jeffrey Schulze of ClearBridge Investments. I'm Fred Katayama in New York. This is "Reuters." Have a wonderful weekend.