Cyclicality will lead: Wells Fargo strategist on what to expect for the markets in 2022

Anna S. Han, Wells Fargo securities equity strategist, joins Yahoo Finance to share her insights on what we can expect in the markets in 2022.

Video transcript

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- Welcome back to "Yahoo Finance Live." Stocks are rebounding after three consecutive sessions of selling. Taking a look here at the three major stock indexes, the NASDAQ up more than 2% this afternoon, the Dow up more than 1 and 1/2%, and the S&P 500 up about 1.6% as we speak. But for a deeper look at the markets this afternoon, we're welcoming in Anna Han, Wells Fargo Securities equity strategist.

Anna, thank you so much for joining us. First, I want to ask about the trading action that we're seeing this afternoon. What do you think is driving this recovery rally that we're seeing today?

ANNA HAN: Well, I think you naturally are getting a little bit of this bounce after we've had a couple of choppy sessions. But you know, also, the market is trying to really price and digest the new information we're getting here. We had some news on Build Back Better getting delayed. We have more information on Omicron. These are the things you're seeing, combined with a low liquidity as we get into year end. So not surprising to see the volatility.

- Anna, the president, in his address to the nation, mentioned another bank which said that without Build Back Better, we'd see GDP drop next year. But then he said-- the last thing he said as he was walking away regarding the potential to do something-- he said, we will do something. Do you think the markets are picking up on that, or will that come next?

ANNA HAN: I think most of us expect that it's not really completely off the table. It's the can got kicked down the road here. But for us, our equity projections were baking in no impact from Build Back Better-- or not no impact, I should say. We weren't expecting it to pass quite yet, because we've seen the political landscape develop. You saw what happened with the off-cycle elections in Jersey and in Virginia. So it looks like that inter-party strife is going to be a big theme next year.

- And Anna, again, going back to the market action that we've been seeing over the past couple of days now, we really have been seeing this see-sawing between cyclical leadership and then, of course, tech and growth leadership. And, of course, we are seeing the NASDAQ composite and those tech names outperforming today. What do you think is ultimately going to be the leadership as we look into 2022?

ANNA HAN: Our projection for 2022, it's going to be a barbelled approach where you're going to want that cyclical exposure. We do think that cyclicality will lead. As you start getting really late-cycle dynamics, you start seeing real yields coming up. Then, that cyclicality is going to be important.

But it's going to be different than just a value approach. The difference here is we actually want high quality. When you have accommodation coming off the table, you see credit liquidity being reduced, you really want to be leaning more towards your lower leverage, wider profit margins sort of company. So we need a combination of both.

- I'm going to throw out a company. You don't have to respond directly to that, but I'm asking for examples-- like Verizon. That stock has essentially been flat for years, but it's a dividend-payer that people love. But where are their earnings are really going to grow? So when you talk about cyclicality, and then finding high value, where would you send me as an investor?

ANNA HAN: Well, I would actually qualify that a little bit here. We want cyclicality, but we want to not pay too much for the high quality price. What we want to avoid here when we look at corporates is we don't think that GDP growth is going to slow down so much that you need to pay these exorbitant valuations for it. That's that growth at any price style that we've seen. But when you have these companies that are opportunities, such as that have cyclical exposure, that are reasonably priced, and they have good balance sheets, that's that sweet spot we're looking for.

- What do you see lift-off taking place here for the Federal Reserve next year, and how do you expect stocks to react to that?

ANNA HAN: Well, what we have seen, the Fed has been very clear with its communication. It actually accelerated tapering, which was something pretty expected. And naturally, as you accelerate tapering, you see that rate hikes are being pulled forward.

But in that respect, what's interesting is it does help perk up real yields. You see very traditional late-cycle dynamics of yield curve flattening, and you do see cyclical sort of take the lead. But what's still murky-ing the waters is we have the Omicron issue going on. And until we get more information, I think that teeter-totter you mentioned earlier, is going to continue, and we're going to see more equity volatility next year.