Stock market: Analyst predicts the ‘real story for 2023’

Morgan Stanley Private Wealth Management Katerina Simonetti joins Yahoo Finance Live to discuss the rise in stocks amid the latest economic data, the strength of the retail sector, and a hawkish Fed.

Video transcript

- Let's also take a wider look at where investors think the market is headed this year. One big name weighed in over the weekend, none other than Warren Buffett himself, in his annual letter to shareholders. A key quote, Buffett comments that stocks often trade at truly foolish prices, both high and low. A warning to ignore the noise around the markets. The Oracle of Omaha had also chosen some very select words for naysayers of share buybacks, saying that they are either, quote, "the economic illiterate or a silver-tongued demagogue," and adds the characters are not mutually exclusive.

Let's take a closer look at where stocks are headed and whether we'll see a bottoming out. Joining us now with more, we've got Katerina Simonetti, who is the senior vice president and wealth-- private wealth advisor over at Morgan Stanley Private Wealth Management. Thanks so much for taking the time here this morning. First, the major, major item from you that perhaps sticks out from this weekend in Warren Buffett's shareholder letter. What would you be really keying into here?

KATERINA SIMONETTI: Well, Brad, thank you for having me on the show. And Warren Buffett certainly is hard to ignore. When you think about it, the focus of last year was inflation and Fed action. And we seemingly underestimated inflation, and now we're seeing the results of it. And the big surprise for this year is, of course, broadly, we thought that by early this year-- as a matter of fact, right now, in February-- Fed would be done raising rates. But economic data surprised us to the positive, and so Fed is going to continue.

But as we look at this, and as we continue to focus on the Fed, in our view, the focus should be on the earnings revisions, because this real story for '23, in our view, is the fact that it was easier to be profitable during the times of the high inflation. And as inflation is coming down, these profit margins are harder to find. And the US company specifically are going to be revising their earnings and setting them to the more normal level.

And it's going to be really viewed by the market as a negative, as it should be. And we think that this is what is really underestimated by the general investing public. And so we think that there is a lot of risk in this market, and that the risk/reward is just not there, so which gives us a lot of caution.

- So we've already started to see some of that guidance reset in the most recent-- or the kind of earnings period that's accounting for the most recent quarter, Q4 2022. Do you believe that there's still more to come?

KATERINA SIMONETTI: Well, absolutely, because when you think about what we're just coming out of is the pandemic was not the normal environment, so earnings were somewhat skewed to the environment. And then immediately after the pandemic, we had this historically high inflation. So what is now? What is normal? And this is what we're going to be defining.

So we think that the earnings have a long way to go. The stocks seemed highly overvalued. We think that there is going to be another leg down that will be pretty significant. And in our view, it's something that almost needs to happen in order for us to pivot our way into the next bull market.

But we think the bear market is not over. But with that said, this is also not us saying that there are not opportunities in this market. Sometimes the best opportunities, specifically for stock picking, for improving the qualities of the portfolios, is exactly here in these volatile markets, where we have really a great option to improve the positioning of our portfolios, both tactically and strategically.

- Yeah, and so that kind of dovetails into my next question, which is, if you have a client that reaches out to you on the wealth management side and they say, hey, you know what, Katerina, I want to take some risk right now because my time horizon is three, five years, maybe even longer out from now, what do you tell a client in that capacity?

KATERINA SIMONETTI: First of all, I love your question because we have to pivot our thinking from the time horizon of two months, three months, six months into a couple of years out, because if we think that way, there is a tremendous amount of opportunity in this market. And what we tell our clients is just stay defensive, focus on high-quality dividend-paying stocks in sectors like health care, like financials and utilities.

There is also a change in the environment in comparison to the last year that there is actually yield out there. Interest rates are high. So all of a sudden, investors can actually make money on bonds. So this combination of blue chip dividend-paying stocks plus higher-yielding bonds is what is going to carry us through this volatile time.

And we have to remember that technology was the leading sector during the last bull market. And we're not saying that we're not excited about some of these really attractive tech names, but we have to also consider that this might not be the leading sector in the next bull market, that there might be different market leadership going forward.

- Katerina Simonetti, senior vice president and private wealth advisor at Morgan Stanley Private Wealth Management. Thanks so much for joining us here this morning. Appreciate it.