Energy sector: ‘We need to continue to rebuild the space,’ strategist says

Yahoo Finance speaks with Baird Managing Director, Michael Antonelli on market volatility following a hot CPI inflation print and energy sector moves.

Video Transcript

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JULIE HYMAN: Breaking news out of the UK-- Liz Truss says never mind when it comes to the planned freeze on the corporation tax there. Um, and she's also talking about Jeremy Hunt, who is now the incoming chancellor to replace Kwasi Kwarteng, who resigned under pressure this morning. She says Jeremy Hunt is going to deliver a medium-term fiscal plan by the end of the month. So effectively, Liz Truss, after meeting with a lot of opposition and a market revolt-- basically, um, now reversing course and saying, spending will grow less rapidly than previously planned. She'd been under a lot of pressure to do kind of drawing in or b-- or cutting down on spending-- austerity, if you will-- rather than doing the plan that she had proposed with Kwarteng.

We've seen a lot of volatility in the British pound this morning. Right now, we are seeing a little bit of dip in trading, and we've been seeing yields go higher on gilts, which is the UK version of treasuries. All of this volatility had been kind of spilling over into the US, as well, reflective of the volatility we've been seeing overall as evidenced in yesterday's session here in the US.

Michael Antonelli is joining us now, Baird Managing Director and Market Strategist. And, like, I feel like my head is just spinning around [LAUGHS] here this morning, Mike, between--

MICHAEL ANTONELLI: Yeah.

JULIE HYMAN: --yesterday, and now this action coming out of the UK. Let's just quickly, um, touch on the UK action and how you're thinking about it from a very US perspective and what it means, if anything, for US investors.

MICHAEL ANTONELLI: I think the main lesson, Julie-- it's great to see you again, obviously. Uh, I think the main lesson is that if you're a policymaker, the markets can be a really powerful counterbalance to you. You know, what politicians want to do, the kind of policies they want to put forth based on on their views of what they think is going to work or not can be-- can basically be stunted by the market. The market can say, no, at-- at this point, that policy, uh, may not make the most sense. So I think that the-- the main lesson is that the markets, as you know, as I know, as most people know, are a really powerful force that can actually, you know-- that can actually stay policies from their-- from politicians.

- Michael, um, this week, we've seen some interesting market moves-- notably, stocks rise on, I would say, still inflationary data. Look how that market reversed intraday yesterday on a still-hot CPI. Do you think the bottom is in for this bare market, just based on the activity we saw this week?

JULIE HYMAN: That was one of my favorite days ever yesterday. I'm not going to lie, my friends. I love days like that. I absolutely love when the news is bad and the stock market rallies.

You know, people are texting me saying, I don't understand this. It's because positioning in the really, really short run kind of runs the day, it really, really rules the day. You think about where we were. We have been down six straight sessions. We were going to open down 1% at a new 52-week low.

You know, we were just basically as oversold as you kind of get. And that-- even though we got bad news, that high-- hot CPI print-- the market can bounce on that kind of stuff when everybody's leaning the wrong way, when everybody's leaning one way. I like to say the market likes to punish the most amount of people it can at one time. And it did that yesterday. I mean, there was no-- no doubt.

I don't think the market's bottomed. I know my friend David Tepper said he likes the 3,500 to 3,600 range. I've kind of landed on the take that we need to wipe out all of COVID. We need to wipe out everything that happened during COVID-- all the stimulus, everything-- and that's around 3,400.

Um, and like you said, inflation data is still hot. There's no pivot. The-- the discount rate, the kind of future terminal rate, is still going up. So I think 3,400 is my kind of first line in the sand of, all right, we've now wiped out COVID. Let's see if we can get constructive here.

- So you don't believe that this is the beginning of what some have classified as a rip-your-face-off rally?

MICHAEL ANTONELLI: I do think you can get that. And it's-- it's another great term. You've got to love finance, right. You've got to love markets.

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I do think you can continue today. Uh, when positioning does get that kind of extreme, you can get a couple-day rally. I think I said this morning to some of my colleagues, I think it's going to continue today because people are still going to be offside They start to unwind those-- all those hedges that they were leaning into.

Uh, I don't think it's going to be like the summer. I don't think we're going to get one of these, like, 8%, 9%, 10% rallies, but I do think we could probably continue a little bit further. Earnings aren't bad today, right? You guys have been mentioning it. Uh, they're not a bad start.

JULIE HYMAN: Not a bad start. It's true, although we've got a long, long way to go, Mike. Uh, just looking at sectors this morning-- and there is one sector that is not participating. That's energy. I believe you're still an energy fan.

MICHAEL ANTONELLI: Yeah.

JULIE HYMAN: Why?

MICHAEL ANTONELLI: Look at yesterday. Just look at-- it kind of bounced off its 50-day-- the one you're showing up there-- the XLE, right, the ETF. That's what I've kind of looked at to see what the energy sector was doing. Um, it bounced off its 50-day yesterday. It's still in an uptrend.

It-- it bounced significantly. Typically, when you get those big rallies, my friends, what happens is people rush into the racy stuff, the stuff that really moves, the stuff that's beaten down. But-- but still energy had a good day yesterday. It kind of basically still led even on one of these really short covering bounces.

Uh, and I also believe a lot like defense, I think energy has a kind of secular tailwind to it. We know that-- that we need to continue to rebuild the space. We know that we need kind of an energy abundance agenda, frankly. Um, and I like not only the secular tailwinds, but I like how it acted yesterday even on a bounce.

- There's going to be an interesting distinction in the type of demand that companies not just have seen in the most recent quarter, but what they're reporting in their forecasts as well. Is all demand really created equal here, and where do you think there could be some outsized winners versus some losers in the demand equation for either the B2B companies or even the B2C companies out there?

MICHAEL ANTONELLI: I mean, the-- certainly the sectors that are going to benefit from not only earnings reports, but kind of where we are in the world-- I think, are going to be the ones that aren't-- they're going to be the ones that are more consumer or services-focused. You saw Delta Air Lines even-- even have a pretty good commentary after their report. So-- so some of these tech companies are still going to struggle, just based on the version of the world we're in-- interest rates, all those things.

Um, but I do think that the kind of consumery and banking sectors can, you know, make progress even in these very, very difficult times. So I am kind of still sticking in the things that are working. Um, that's what I'm kind of trying to double down on-- sectors that are still working, like energy and defense, and the names that are still working. Uh, airlines are benefiting from people going back to travel, and I think that's important-- that's an important trend to be a part of.

- Michael Antonelli, Baird Managing Director and Market Strategist-- Michael, great to get some of your time and insights here this morning.