‘Housing boom that we’re seeing right now has legs for years’: Strategist

Art Hogan, National Chief Market Strategist, joins Yahoo Finance to discuss the outlook on tech stocks ahead of Big Tech earnings and the outlook on the housing market.

Video transcript

ALEXIS CHRISTOFOROUS: I want to continue our markets conversation now and bring in Art Hogan. He is the chief market strategist at National. Art, always good to see you. So let's talk about what's happening in just about two hours from now. We're going to get numbers from those big tech companies-- Apple, Microsoft, and Google's parent, Alphabet. What are your expectations? And how invested in mega cap tech are you these days?

ART HOGAN: Well, that's a great question. And I will tell you this. Coming into this week, what was looking to be a bit dangerous in terms of the setup for mega cap technology stocks, is, they're all trading at or near all-time highs. And when that's the case when you report earnings, it's very hard not to have that natural sell on the news response. We saw that in the financials two weeks ago with banks trading at all-time highs, reporting blockbuster quarters, and clearly seeing selling on the news.

Last week was a bit different. The setup was a bit better. And companies actually had natural intuitive reactions to their earnings reports. But coming this week, the market had ratcheted up. That market rachet-up had really happened in a concentrated area, which is a lot of those companies that are reporting today. And if you actually looked at the option's implied volatility around the earnings announcements, it actually kind of matches the reaction we're seeing in markets today.

So it's almost like investors are beating the Christmas rush and having that response before the earnings results come out. So that's going to make the after hours response very, very difficult to ascertain or to calibrate. I would say that this is the kind of response I would expect after the earnings reports, not during the day of the earnings reports. And it's a bit of a conundrum.

KRISTIN MYERS: So then looking out ahead over the next two quarters of the second half of the year, I think this conversation on tech really led a lot of our conversations or drove a lot of our conversations, at least in 2020, not as much in 2021. We had constantly seen this kind of push-pull, this whipsaw action in and out of tech. Then what do you think the narrative is going to be for some of those big tech companies throughout the remainder of the year right now?

ART HOGAN: Yeah, that's such a great way to set that up. And when you think about since the March lows of last year, technology was the leadership for about six months heading into the Labor Day weekend. It got very overbought. RSIs were very stretched. Valuations were stretched. And then we had that sort of better news on vaccine rotation into the reflation trade. The economically sensitive cyclicals took over for the next six months. And tech really languished.

That brought us into basically the end of the first quarter of this year. And technology has basically taken over leadership since the yield on the 10-year, which spiked up to 1 and 3/4, got back down to 1 and 1/4, where it kind of sits today. Technology, the discounting mechanism for long duration technology trades looks more attractive. So technology has taken over. And the large cap technology really has been seen as that defensive trade.

I think we're going to see the same kind of rotation for the back half of this year, where cyclicality probably takes over after earnings season and as we get some more economic data and a more normalization, if you will, of the yield on the 10-year, which seems to be happening. We overshot to the downside, very much like we overshot to the upside. And then I think technology will look oversold and be bought again.

So I think the best way to approach this as an investor is to have a diversified portfolio and have some growth on one side and cyclicality on the other. And you have to make sure you're keeping that barbell level and rebalancing every couple of months. But technology, I wouldn't-- I would never bet against that. I would just tell you that at points in time, like coming into this week, it gets stretched and overdone. And the leadership gets very skinny at the top. The indexes really haven't moved that much. As you mentioned at the top, all-time highs yesterday for all three indexes. But that leadership getting us there has really whittled down to a handful of names.

ALEXIS CHRISTOFOROUS: Art, I wonder, especially you taking a look at the housing numbers we got today, how much this housing boom could possibly be a threat to our economic recovery. We saw that home prices surged 16.6% year over year in May. And lots of folks are trying to draw connections between this housing boom and what we saw just before the Great Recession in 2008. Do you see similarities? And are you fearful that we are in a housing bubble that's about to pop?

ART HOGAN: No, not even a little bit fearful of that because I think the drivers for this particular housing boom are twofold. First, the first leg of this really felt like it was that sort of de-urbanization, that, you know, moving out of crowded cities during a pandemic. I have to work from home, so I'm going to move to a home that gives me more space to do that.

But the other real long-term driver is the largest population in the United States right now is just now coming into household formation age. That's the millennial population. And the peak of that is two years in front of us, right? So the 33 is the average age of the firsttime home buyer.

So there's just not enough supply. This is not a demand issue. And this is not the speculative housing boom where anybody can get a mortgage back in 2007 and 2008 that caused that housing crisis. This is a lack of supply issue. And nothing beats-- takes care of high prices better than high prices. We're going to start to see a supply response.

Homebuilders, when they start to get more labor, when lumber prices come down, when they're able to continue to build homes-- and they're trying to do that as fast as they can-- will try to get that supply response to this demand that we have from this bolus of a population that is just now starting household formation. This is the largest population that is going after-- becoming firsttime homebuyers since the end of World War II, so the baby boomers.

And oh, by the way, the baby boomers are part of the driver here, too, because they're downsizing into that same unit that everybody wants. So we've underbuilt that starter home for the better part of a decade. We're just now catching up. I think the housing boom that we're seeing right now has legs for years.

ALEXIS CHRISTOFOROUS: Wow, all right, Art Hogan. You heard it here-- chief market strategist at National. Thanks for being with us.