Fed rate hikes ‘will not affect’ stalwart FAANG stocks: Strategist

Baird Investment Strategy Analyst Ross Mayfield joins Yahoo Finance Live to discuss the Fed, rate hikes, market outlook, the tech sector, and cryptocurrency.

Video transcript

ZACK GUZMAN: And, Ross, when we look at maybe some of what Brian's talking about, it does seem true. Because we've had a few guests, kind of, doubting that the Fed would hit three rate hikes next year, of course, still a lot of questions on the Omicron front. But what do you make of maybe some of the jitters we saw into yesterday's close and what we're seeing today?

ROSS MAYFIELD: I think they're pretty standard reaction to a Fed that's acting more aggressive than we thought possible a couple of months ago. You know, the balance sheet notes were probably a bit of a surprise and probably where markets, you know, felt it the most. It could be that lagged basis, it could have been, you know, clocking out before the holiday season and needing to hear it again, as you all noted. I think the jitters make sense. I think the pockets of the market that are getting hit, those ultra-high growth, long duration kind of stocks getting hit, as we expect rate hikes to go higher, makes sense. High valuation stocks getting hit makes sense. And we like the cyclicals in this kind of environment. I still think there's some downside risk for the Fed, should inflation kind of moderate a bit or should a handful of other things happen. But well-- I'll take them at their word and, to be honest, we're still sitting right around all-time highs with three rate hikes fully priced in. That's not a bad place to be.

AKIKO FUJITA: On some of those high growth names, Ross-- we had a guest on yesterday who said this doesn't mean necessarily rotate completely out of tech specifically. It is about being a little more selective and really paying close attention to the earnings growth, the balance sheet, and I wonder how you look at that sector as a whole? Because it feels like-- if you look at the market action, there's sort of a bit of a schizophrenic reaction that's happening. You know, on the one hand saying, well, look the long-term story is still intact, but then there's still jitters around what this means with a higher rate environment.

ROSS MAYFIELD: Yeah, it's a great point. And I think differentiating between large cap tech, large cap growth and small cap tech, small cap growth is one of the key differentiators. Small cap growth underperformed for a majority of last year, even after rates kind of side went sideways for most of the year. Small cap growth has been a big underperformer. At the beginning of last year, you know, there was a lot of talk about a bubble and some of those more frothy, growthy areas of the market. And that deflated over the course of last year things like SPACs, ultra high growth names IPO names, meme stocks, all those kind of get lumped into the same bucket.

On the other hand, you have big cap tech. These are, you know, the FAANG names or whatever you want to call them, they're the stalwarts. They are low debt, high cash, wide moats, wide, wide margins. And, to be honest, a few interest rate hikes are not going to affect their ability to secure capital if they needed it. So I do think it's very necessary to differentiate between those two pockets of tech.

On large cap tech, sure, you have some antitrust concerns, you have some valuation issues. But, by and large, they're a hedge against COVID, they're really high quality operators, and they have, kind of, a long-term growth profile that you still like. So I think that's important. And, in that sense, large cap tech is positioned OK here.

ZACK GUZMAN: Yeah, Ross, let's wrap up on Bitcoin too because, you know, we've been hearing these kind of debates around Bitcoin as an inflation hedge and the rest of crypto really selling off after we saw equities also sell off on the Fed updates we got there too. Sitting around 42,000 now, I mean, how are you looking at maybe what the storyline becomes there as we move forward. Because history might indicate, you know, it hasn't necessarily done poorly in a rising rate environment.

ROSS MAYFIELD: Yeah, I mean, it is tricky, right? It has an extremely short track record. So we have functionally one rising interest rate environment to go on and it was just not the same asset at that point in time. There wasn't the same adoption, same liquidity, same kind of environment. So it is tough to kind of create a historical analog for it. I mean, there has been a narrative at times that it's an inflation hedge. I don't know that that's necessarily played out over this last year. I think it's a high risk, high beta partially liquidity-driven asset. And what the Fed is saying is there's going to be less liquidity floating around, that interest rates are going to be higher, and that hits those kind of high risk, high beta, high growth types of assets. You know, we talk about it in terms of whether it's tech stocks, or meme stocks, or SPACs, or whatever it might be. But there's no reason that that logic doesn't carry over to something like the cryptocurrency space. So that's kind of how we think about it right now and we'll see how it evolves.

ZACK GUZMAN: All right, Ross Mayfield, strategy analyst at Baird, appreciate you coming on here to chat with us today.