Why Monday’s selloff will be a ‘blip’ by year-end

Baird PWM Market Strategist Michael Antonelli joins Yahoo Finance to discuss the hectic actions taking place in the market right now, how Chinese stocks are affecting the market, and what to expect from Congress debt ceiling as they debate the debt ceiling.

Video transcript

- We're watching stock futures sell off across the board. Dow futures are trading near the lows of the premarket session. Now down by about 650 points or 1.9%. S&P 500 and NASDAQ futures are also off by more than 1 and 1/2 each as we speak.

Now this is coming as fears over contagion from the potential default of the Chinese property giant Evergrande royal's global equities, and this is also adding to concerns over the coronavirus debt ceiling debates in Washington and ongoing concerns over fiscal and monetary policy paths forward.

Now for more on the markets today, we're welcoming into the stream Michael Antonelli Baird PWM Market Strategist. And Michael, thank you so much for joining us on this Monday morning. Wondering first off, what you're making of this morning's market action? And is this a start of that 5% plus correction that market participants have been waiting for for months now?

MICHAEL ANTONELLI: Hey, Brian and Emily, it's great to see you guys again. It's great, you know, it's great to have something to talk about, right? The narrative has been really, really quiet for the past.

Gosh. Almost like five to six months all we've talked about as kind of supply chains, right? And we've talked a little bit about gosh, it's been forever since we've had a pullback. So I did some math here right before I came on if-- if the stocks open kind of where we are right now in this current kind of overnight drawdown.

We still would not be at a 5% drawdown for the stock market or the S&P 500. So even down 1.5, 1.6%, were still below that. You know, I've got my eyes on plenty of things. There's certainly a lot on our menu, you know. It isn't it funny how this-- this time period is seasonally.

You know, one of the toughest time periods for investors. And it just keeps happening this way. You know, we got our eyes on Washington. We got our eyes on potential tax policy changes. We've got our eyes on the debt ceiling.

And now-- now we have our eyes on Evergrande. We have our eyes on a potential issue abroad. And you know, I looked into history my friends. I looked into history as as to financial events that happened outside the US that might impact the US stock market.

And to that come to mind the 97 Asian financial crisis and LTCM, which kind of was outside the US in terms of what they were holding. Both happened in fall of 97 and 98. Both-- both kicked off drawdowns that by the end of both those years. The stock market was back at its all time high.

And I think this is going to be one of those instances where we get roiled a lot. But we get back on track eventually.

- Michael, are you buying the dip here this morning?

MICHAEL ANTONELLI: I mean, certainly when something like this occurs. It's hard to get your arms around what it is, right? It's hard to get your arms around what contagion means.

Again, think of that stuff that's happened. I think of the euro debt crisis. Or again, the Asian financial crisis.

It's hard right away to get your hands around it. So I don't think there's a rush for say to get in and say let's-- let's load the boat right here. I think you can watch for the pullback.

But-- but I do think that by the end of the year, this will be just a blip along the way. I mean, that's my view. I think earnings estimates continue to rise.

In order for you to think that this is super bad, you're going to have to make the case why this impacts Visa's earnings, and Google's earnings, and Facebook's earnings in a meaningful way such that we hit some 15%, 20% drawdown. And-- and listen, like, you know, these kind of crises can-- can have all sorts of tendrils. I get that.

But I do know-- I do know because I just lived through it. That policymakers tend to take the worst case scenario off the table.

Well, I'll push back on that, Michael. Are we getting here with Evergrand. A first look at what happens when central banks globally start to hike rates, whether that's through tapering programs or just coming out and raising rates.

I mean, we have a world awash in debt caused by cheap money. What say you?

MICHAEL ANTONELLI: Yeah, we do. I mean, there's no doubt we do. You can look at any balance sheet. You can look at any country. You can look at any ratio you want.

Certainly low interest rates have an impact on-- on borrowing. No doubt. You know, the Chinese economy, right?

In this instance, we're focusing on the Chinese economy. China's been trying to deleverage their economy for a while. There's-- there's been lots of warning signs about investing in China. Think about the tech-- the tech action recently.

So there's been lots of ways that China's been pushing back on the way the financialization of its economy. This might be an instance, where, you know, they backstop it. But-- but everybody takes a whole bunch of pain along the way.

But I just don't think that instances like these are allowed to unravel and disorderly manner. We didn't let COVID unravel the world. We didn't let LTCM, or the Asian financial crisis, or we didn't let any of these unravel the world. So that's my point that they take that off that-- they take that of the plate.

But this-- this notion of gosh maybe some people over their skis with debt. I think that's something we'll have to deal with like you said for a while-- for a while. It's just, you know, let's-- let's hope policymakers can guide these-- these unraveling in an orderly manner.

- Michael, you mentioned that this could be just a blip on the radar screen. And that we might bounce back year by year end. But what is the bull case from here?

Because we are in this decelerating growth environment for the economic activity and for corporate profits. We still have COVID concerns and we have the specter of tapering from the Fed and potentially higher taxes from here. So what's the case for stocks to keep going higher?

MICHAEL ANTONELLI: So I-- for the longest time I focused on earnings, if you look at earnings estimates out next year, they've gone nothing but up 2022 earnings nothing but up. In fact, I even saw a 240 estimate.

Now certainly, that will probably get ratcheted down to 40 is probably a little high for next year. But you know, to 25 to 30. If we can keep the multiples in the 2021 range, companies in the US United States have done very well, right?

They have pricing power. They've done very well to-- to navigate the Delta variant and COVID. So my bull case is still that the US, the companies that make up the US indices are still doing very, very well. Earnings projections for next year are still very, very strong.

Maybe those come down. Maybe that pulls down the-- the bullish case. Maybe S&P 5,000 next year, you know. It gets pushed out to 2023.

Certainly, there's a lot of things on the radar. I would like to remind your readers, I'm sorry, your listeners, your viewers. All the stuff that really impacts the stock market comes out of nowhere.

I mean, this China Evergrande thing. Imagine being a client today. You call up your advisor. You call up your-- call up a portfolio manager and you say why is the stock market down?

Well, this Chinese property company is-- is in trouble, there's a little bit over their skis. Well, we got through COVID OK, and now the Chinese property company. So these things come out of nowhere, right? They come out of nowhere, have a plan, be prepared, get yourself some entry levels, 5%, 10%, whatever is right for you, and know that events like these generally don't end bull markets. They're generally blips along the way.

- Well, speaking of things that come out of nowhere, Mike, I would argue that the debt ceiling debate that we're now starting to have again, of course, really played up over the weekend by an op Ed in the Journal by Treasury Secretary Janet Yellen saying, if we don't get this raised, it can cause a catastrophe. How concerned are you that finally we just don't raise the debt ceiling and the stock market's hammered?

MICHAEL ANTONELLI: So you know, I again lie. I again come down to the thought that policymakers generally like brinksmanship for sure. Politics is all about brinksmanship.

But in the end, we decide on the right decision. I personally don't think that they're going to allow the US to default. You'll have the US not to pay its bills. There will be some sort of compromise that generally tends to occur in the last hour.

I think about-- Brian, think about the GFC. Remember when they tried to pass tarp? And in the first vote failed, right? Maybe we were-- we were like--

- Feels like yesterday. I do remember.

MICHAEL ANTONELLI: Yeah. Remember that? So you know, things generally, generally come down to the last minute in politics. And I think, you know, positioning and wrangling over the debt ceiling will-- will continue all the way up to the last minute and then they'll raise it.

- Definitely one more thing that investors will be watching this week and beyond. But thank you so much, Michael Antonelli, Baird PWM Market Strategist.