The economy is ‘better right now than the stock market is telling you’: Caravel Concepts CEO

Caravel Concepts CEO Michael Jones and Rhys Williams, Spouting Rock Asset Management Chief Strategist, join Yahoo Finance Live to discuss core inflation, the Fed's interest rate hike policies, the market outlook, and new evaluations for tech companies.

Video transcript

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SEANA SMITH: We did see some buying action in the final 30 or 45 minutes here today. Taking a look at where the markets settled, Dow, S&P, and NASDAQ, it looks like we are seeing a mixed picture, with the Dow and S&P closing in the green, the Dow just eking out gains. S&P avoiding the bear market territory. The NASDAQ though, still in red, while off the lows of the day, off just around 3/10 of a percent.

Let's bring in Michael Jones, Caravel Concepts CEO, and Rhys Williams, a Spouting Rock Asset management chief strategist there. Rhys, let me go to you first. We're trying to make sense of the action that we saw this week, what this means going forward. Should we be encouraged by some of the buying that we saw in the final 30 minutes?

RHYS WILLIAMS: Yeah, I do think that it's a little bit encouraging. I think the real pain that we've seen over the last four or five months has been that you've lost money in both stocks and bonds. Most people have a 60-40 portfolio, 60% stocks, 40% bonds. And that's worked really well since President Reagan was in office. And that's worked very poorly so far this year.

But I do think May will be the last of the months that you're going to look in horror at your statement, because from this point going forward, I think bonds will start to act well on stock weakness and vice versa. So you'll have a little bit of an offset. But I do think that the economy is better right now than the stock market is telling you. And my guess is we're going to muddle through on both stocks and bonds over the summertime.

DAVE BRIGGS: Hmm. Michael, beyond the fact that it's Friday and it's 4 o'clock and about time for everyone to get a drink, is there any good news out there for investors.

MICHAEL JONES: Well, I think what we're really seeing here is your classic midway through a bear market cycle. We entered this year expecting about a 10%, maybe a 15% drop in the S&P across the course of the year simply because we were pretty expensive coming in to 2022. And the Fed was moving from being unbelievably accommodative to tightening and raising interest rates.

We are overshooting that a bit. And I think the reason for it is we had a war we didn't expect and COVID lockdowns in China, all of which are going to prolong the inflationary pain and make the Fed a little bit more aggressive.

I will agree that I think bond market pain is getting close to an end. I think as we push towards 3% on the 10-year, the five-year, the three year, that 3% level is an attractive buying on bonds. On the other hand, I'm afraid when I look at the charts and also the valuation picture.

If you believe we're now going to have to take a little bit more time to fight inflation-- and remember, the Fed is going to have to do it all on the demand side. Supply is still going to be constrained. That means we're going to have to push demand even lower. And I think that means we have a full-fledged bear market. And support on the charts isn't until about 3,500 on the S&P, which also corresponds with really good valuation support.

RACHELLE AKUFFO: And Rhys, you've called the last seven weeks a bloodbath. How should investors be going into the weekend? We saw that the markets ended mixed. Is this sort of just a brief reprieve? Or what can we expect for the following weeks?

RHYS WILLIAMS: Yeah, I don't think you can read too much into the last half hour of trading. I wish I could tell you the bottom was 3:50 or 3:30 this afternoon. So I would agree that I would imagine the stock and bond market will stay a little bit rocky here in the very near term.

But I do think that it's possible that there are some good bargains out there. And for those people that have the luxury of not being mark to market every day or not worried about next week's trade, I would start to add to some quality stocks. And we have had the correction this week in some stocks that had held up well, like the consumer staples, like utilities, like REITs. And I do think that there are some opportunities there that one should look at. And that's true even if the economy doesn't return to great growth.

I would expect also that the margin pressure we started to see with Walmart and Target will continue. And so therefore, that's why I don't think stocks run away and hide to the upside. But this has been such a bloodbath. And now there's pretty interesting valuations.

And if we're right that the 10-year stays around 3%, it doesn't go a lot higher, there's some pretty good valuation support. So I would not rush to sell everything either just because you can't stand it anymore.

SEANA SMITH: Michael, what about some of the big tech names? You have Apple losing just around 200 billion off of its market cap this week alone. Google, Microsoft, Amazon really falling here to the downside. Is there any reason to think maybe it's time to scoop up some of those names?

MICHAEL JONES: Well, I tend to like growth at a reasonable price. And I think we still have a little bit ways to go on most of those names to get back to what I would call sort of their average valuation. There was so much priced in for these stocks when we had the Fed pumping $100 billion of fresh liquidity into the financial market every single solitary month.

Now that engine is going to work in reverse. The Fed is going to un-print about a comparable amount of money every month. And the big high-tech flyers this-- our outlook for 2022 was, remember 2000? A lot like that.

And then what we meant by that is that, when the Fed printed all that money in anticipation of Y2K disruptions, it all went into the tech names and drove them to unsustainable valuations. I think the COVID money printing had a very similar impact on the big tech names. And I don't think we're yet through the process of revaluing those names to what the new liquidity environment's going to look like as the Fed fights the current inflationary problems.

DAVE BRIGGS: NASDAQ down seven straight weeks. That's the worst losing streak in 21 years. Rhys, you say, the question shouldn't be about how much the Fed will raise rates. It seems baked in, 50, the next two meetings. What is the right question?

RHYS WILLIAMS: So I said the right question is, ever since the 2007 or 2008 great Financial Crisis, the 10-year bond has not gone over 3% without causing a significant slowdown in the economy. And I'm anticipating that the same thing happens here. And therefore, we don't have to worry quite as much about inflation as everybody is right this second.

Therefore, there will be a profit slowdown. And therefore, the Fed will get some help. And we won't have to raise rates 50 basis points every meeting until Christmas time.

And then the second, I'd like to just push back a little bit on the difference between the tech market of 2022 and the tech market of Y 2000. I mean, these companies are much more established, much better business models. And most of the big tech names that we all know and love trade more or less at a market multiple. I mean, there's some exceptions. But in general, I don't see the excessive valuation, which in 2000, you had a lot of these tech names trading at 100 times earnings, even the quality ones like a Cisco, which at that time was a blue chip quality tech name.

So I do think that there's quite a bit of difference. And I think a lot of pain has already been absorbed into these big tech stocks that we've already seen in the last seven weeks.

RACHELLE AKUFFO: And Michael, as we stick with big tech, obviously a lot of companies with strong China exposure, including Microsoft, Apple, Nike, we saw that China's central bank cut its interest rate in order to try and support the growth there. How concerned should we be about some of these companies and their exposure to China and how that might affect their earnings going forward?

MICHAEL JONES: I think you put your finger on exactly why. I think the valuation still has some adjustments to make on these big tech names, because China appears to me to be getting to the end of their Asian development model, where, just like Japan, just like South Korea, you start with exports. Then when exports run out of gas, you go into a real estate bubble and infrastructure spending. And then when the real estate bubble starts coming unraveled, you throw up your hands, and you wonder what next.

Well, China seems to be right at that point where the real estate bubble is unraveling. They're going to the same old tune of stimulus methods. They're undercutting the valuation of the yuan. They're lowering interest rates. They're injecting liquidity. All of those things will help. But I don't believe you can put the Humpty Dumpty of their real estate markets back together with those traditional stimulus policies.

I think there's a painful adjustment coming. And as you noted, that's been a big source of growth for a lot of the big tech names. And I think that growth is going to come out. And it's going to have to come out of the valuations.

RACHELLE AKUFFO: Certainly be keeping an eye on that. Thank you to our market panel there. Michael Jones, CEO of Caravel Concepts, and Rhys Williams, Spouting Rock Asset Management chief strategist, thank you both for your time today.