Market strategist: Why 2022 is the year of ‘patience’ for investors

Heritage Capital President Paul Schatz sits down with Yahoo Finance Live to talk about the 2022 market outlook, earnings season expectations, the Fed, and inflation prices in commodities like gas and oil.

Video transcript

DAVE BRIGGS: All right, stocks, as you can see, higher as we head into the final hour of trading. And investors are gearing up for a busy week of earnings. Joining us now to discuss is Paul Schatz, Heritage Capital President. Good to see you, sir.

So you talked about, this is not, clearly, the year of the investor. So we'll put you on the spot-- it's the year of what?

PAUL SCHATZ: Patience, quality, frustration-- I can go on. Look, ex the first quarter of 2020, the market's had seven straight pretty good quarters. So similar to other periods of time where we saw markets rip higher, this is not a year like 2008, or 2002, or 1987 even. This is a year where you really-- you take a step back, you've got to have patience, you're not going to be able to follow momentum.

And the modern day investors been used to buying anything that was doing well to go higher. Pick any big tech stock you want-- really until November, any time it pulled back, people just bought it. This is the year where we-- it's a big chop sideways, just like 1994 and 2018-- both years where the Fed, I will say, was overzealous, went too far. They did end up threading the needle because we didn't have recession in 1995-- and they were both huge years for equities.

And I'll say the same thing about 2023. Bide your time. Stay patient. Don't be stupid. Buy quality. Accept the chop. And 2023 should reward you handsomely.

BRAD SMITH: And so, Paul, early on in the earnings season is one of those opportunities for us to really gauge across several of those items and topics that you just mentioned, whether it's the consumer, whether it's what the Fed may do, whether it's how we are moving forward in a, again, midterm year where there is going to be so much focus later on in the midterm elections. And it is the financial services sector. And so, quite frankly, what are you extrapolating from the tail start-- or the beginning, I should say, of the earnings season to really understand what we should expect from companies who are reporting over the coming days and weeks as well?

PAUL SCHATZ: There's a whole lot to unpack in that question and comment, so let me do my best. First, you're right-- it is a midterm election year midterm. Election years for a first-term presidents typically are the el stinko. They're not good years. I think it's like 7 out of 10 times where a midterm election year is down in Q1, the rest of the year is not so good either-- it's down or around unchanged.

And that is the theme of the year. You asked about earnings and the Fed-- look, the economy is slowing-- fact. There's no more stimulus coming. Pretty much, that's a fact. The Fed's being overzealous, which is going to likely slow earnings growth. I'll add one more thing it-- and I also think inflation literally just peaked with the last report.

So the rest of the year, the Fed's going to raise rates when they should have been doing it in the summer of 2020. As usual, they're-- you know, remember Bernanke's famous comment in March of 2007-- there was no subprime contagion. So this is the typical action of the Fed. They're going to go too far, just like they did in '94 and 2018.

They'll end up blinking later in the year because earnings are going to slow, GDP is going to slow, inflation's going to slow, and that's going to give you an impetus for the next leg of the rally. Earnings-- you're in a spot where you want to differentiate what they just reported versus what the guidance is. More so than I've seen in years, the market's going to trade solely on the guidance and not the earnings that were just announced, because guidance is going to be so much different with companies looking at the dollar and inflation.

So I think the number one takeaway for investors should be, watch how your stock reacts more than the news. If your stock rallies on bad news, that's a pretty good sign the markets have absorbed, and digested, and have priced in the bad news.

RACHELLE AKUFFO: Now, you mentioned that inflation is peaking right now. You've made some other predictions regarding oil and whether that's peaking as well. Walk us through how that's informing how you're advising your clients.

PAUL SCHATZ: So I was on with you guys back in the fall and I said sometime by the end of March, inflation should peak. Right now, if you look at energy, for instance, the energy component of the inflation calculation, you need to get crude oil into the $140s, $150s, and then $160s given what's dropping off the one-year inflation numbers. Because, remember, inflation is not high prices. Inflation is rising prices.

So you need to keep them going to keep the inflation number going. A lot of the food commodities-- lumber-- have already peaked and rolled over. So on that front, housing is really the last bastion of inflation's strength, if you will. And I just don't think with the 30-year bond at 5%-plus and the economy beginning to slow, and I also think we've reached or we're forming a low in the unemployment rate-- I think that's all going to slow down housing as well, except for maybe Florida, Arizona, and Texas.

So all that leads to a thesis which says, tough year, not a place to hide-- buy quality, whether that's in the bond market. Bonds had one of the worst quarters ever, but stick with quality this year. Investors, you'll have an opportunity to buy your favorite tech stocks maybe late third quarter or early fourth quarter. But this is now the time to harvest a few acorns and take away that greed impulse off of your investing behavior.

DAVE BRIGGS: All right, Paul, last question-- 20 seconds if you can. Let's go beyond the El Stinko year, your words, not mine. Goldman puts the likelihood of a recession at 35% in the next two year. Is that overly pessimistic or do you agree?

PAUL SCHATZ: First of all, how are-- I can't believe people are making such a big deal-- a 35% chance over the next two years. Anyone could have called that. I mean, we're not going to have a recession this year. Next-- you know, for 2023, it's possible. I don't know how their algorithm puts it at 35%.

But I'm going to take that we don't have recession 2023. Dow is going to 40,000-plus next year and everyone's going to smile. How's that?

DAVE BRIGGS: I like it. I love it.

BRAD SMITH: Paul Schatz, we like to hear, no recession this year. Paul Schatz, Heritage Capital President, joining us here this afternoon. And coming up on the other side of this short break, everyone-- Twitter management is activating a poison pill to try and fend off the $43 billion acquisition proposed by Elon Musk.