Near-Term Stock Market in a Treacherous Environment - CapWealth Insights

Join CapWealth's Chief Investment Officer, Tim Pagliara, as he discusses the near-term stock market environment alongside High Yield Bond Trader, Bill Zox, with Liz Claman. Learn about their strategies and predictions regarding inflation, interest rates, and key sectors.

Market Conditions and Key Factors Impacting Stocks

Liz Claman (Speaker 1):

Closing bell six minutes away. We do have the markets off session lows, not by much. Dow, S&P, and Nasdaq are looking at their second down week in a row right now with the S&P down 2.6%, the Nasdaq down 3.3%. It's the Dow Transports that are having their worst week in two years as energy prices are spiking, actually weighing on the sector. Oil up one and a half percent this week with just a few minutes to go.

We have perspectives from both the equity side and the fixed income viewpoint. High Yield Bond Trader and Brandywine Global Portfolio Manager, Bill Zox, and CapWealth Chief Investment Officer, Tim Pagliara.

Inflation Impact on Investment Strategies

Liz Claman:

Tim, let me throw it to you first. Did anything about how you are strategizing for your clients change after you saw this inflation number this morning?

Tim Pagliara (Speaker 2):

No, not a bit. We're focused on companies that have predictable earnings and are embedded in the current economy.

Preferred Sectors and Stocks

Liz Claman:

And what are those? I mean, what areas do you feel are matching exactly what you see?

Tim Pagliara:

Well, Williams, for example, a natural gas pipeline company, has been in business since the 1900s. We're going to need more energy. Part of this problem is supply, and so you have to increase supply before you can bend down the inflation curve. Williams is well positioned, 5% dividend yield, lots of free cash flow. They're very well positioned. I've owned that company for over 20 years.

Liz Claman:

Yeah. I was looking at natural gas over the past, just pretty much year to date. Nat Gas year to date up 146%. So, okay, I get that.

H2: Predictions for Interest Rate Hikes

Liz Claman:

Mr. Zox, let's bring you in here. From the fixed income standpoint, we've got Barclays and Jeffries among the two of a couple now that are coming out saying next week we will see 75 basis point hikes. What's your prediction and where do you catch at least a little bit of air for investing?

Bill Zox (Speaker 3):

Yeah, I mean, I think if the markets discount 75 basis points, the Fed will validate that. Look, yesterday the markets were skeptical that the Fed could get to 3%. Now it looks like we're going to test out three and a quarter to 3.5% on Fed funds. But the real important question is, does the Fed have to get to something like 5% or higher? And I'm not seeing that in the market right now. So we think that high yield bonds for a long-term investor make quite a bit of sense from this starting point at about 8% yield, and that's up from about 4% at the beginning of the year.

Volatility and Market Predictions

Liz Claman:

Well, sure, yield, that's what people truly want. I mean, we're showing the 10-year right now. It's not waiting around for next week. It is already jumping 11 basis points to 3.16%. We already saw that the two-year yield is seeing the highest since November of 2018. It is pretty dramatic at the moment. And folks, we do want to draw your attention to the bug and to the lower third banners here. We do have the S&P now down 108 points. The Dow losing 809 points.

Tim, talk to me about your biggest fear here and what would you completely avoid just to guide our investor viewers.

 H2: Stocks to Avoid and Sectors to Watch

Tim Pagliara:

I'd avoid the unpredictable. There's a number of companies, for example, you take DocuSign, they've completely blown up. You had 19 analysts that had a $320 price target. It's down 25% today, $50. Those are the types of things. They don't have predictable business models yet, so you just have to ignore them, not be tempted to get back in because this is going to take a couple of years to sort out. And again, the strong, predictable embedded companies in the economy are the ones that are going to win.

Liz Claman:

Yeah. The CEO was just on, Dan Springer, and he sounds confident. They did see an increase in subscribers, but maybe this is a growing pains type of company. It's still in the first couple of years of its existence.

Long-Term Interest Rate Predictions

Liz Claman:

Bill, give me your final word here on where you see interest rates going. We just had the conversation with Anastasia Amoroso and she called neutral rates two, two and a half percent. I fail to see how that can even be possible. She's smarter than me, trust me when it comes to markets. But where do you see neutral rates in the real world?

Interest Rate Path and Market Outlook

Bill Zox:

Yeah, no, I would agree with you, Liz, that I think we're going higher than that. I think the most important question is does the Fed have to get to 5% or something higher than that? And I'm not seeing signs of that. The fact today that the yield curve is flattening quite a bit is very positive for risk assets over the long term. But in the near term, this is a treacherous environment. There's no question about it that stocks have to go lower to contain inflation, and that's the most important thing right now.

Liz Claman:

Well, I want to thank both of you, Tim and Bill, and our screen says it all. The bears are shredding equities on this Friday. We are closing folks at fresh session lows. When we started this hour, the session low was a loss of 853 points for the Dow. Right now, we're down 871. It is an ugly session. Investors do not want to go into this weekend long after that ugly inflation number.