Market rout leading to ‘a much more balanced risk-reward outlook’

Sevens Report Research Founder Tom Essaye joins Yahoo Finance Live to discuss the stock market and what to expect as the Fed meets this week.

Video Transcript

- From tech stocks to cryptocurrencies, we're seeing investors flee these riskier assets. I want to welcome in now Tom Essaye. He is founder and President of the Sevens Report. Tom, good to see you again, and thanks for being with us.

I think the question on everybody's mind is, first off, why the aggressive selling today? And are you seeing any signs that the end could be near? Perhaps there's a capitulation on the horizon.

TOM ESSAYE: Hi, Alexis. Thank you very much for having me on. I think that, you know, all of a sudden, the market has really been faced with multiple challenges. And some of them have been looming, and now the market, really, investors have to face them.

So we have a more hawkish Fed. Earnings are so far not spectacular, which is a change in the last several quarters. And now we have geopolitical issues going on with Russia, Ukraine, and NATO. Throw it on top. Still more pain in the growth area of the market.

And look, it's clearly a bit of a rout today. But it's-- but now, all of a sudden, we are getting into an area where you can start to discern some value in the market. We've come down pretty quickly. And while I'm not going to say today is the bottom, we're certainly getting to an area in this market where a lot of future bad news has been priced in, and now, all of a sudden, it's looking like a much more balanced risk reward outlook.

- So it sounds like you're saying that there may be some opportunities, even amid all of this volatility. So where are you looking at?

TOM ESSAYE: Sure. Hi, Akiko. So basically, we we're looking primarily in the value space, right? We do-- we do like the value names. We do still like financials, especially insurance companies. I know banks are getting hit because of earnings, but we like insurance companies.

We like large cap, especially here in the US, and then very high quality tech. I mean, one of the words we're using a lot in the report is quality, lower PE names with strong cash flows, good dividends or share buybacks.

Look, I mean, we were listing some really good stocks that are down a lot. Microsoft-- down double digits; Amazon-- down double digits. We don't know if this is the bottom, but, you know, that's not Bitcoin, right? I mean, these are companies that make a lot of money. So I think for investors that can stomach the volatility and have a longer term time horizon, it makes sense to be nibbling on the buy side today.

- You know, is there anywhere to hide right now in this market? Is any place considered safe? I mean, if you're sitting on cash, is it best to sort of wait this out and see where the chips fall? Is it better to put that money to work in something like the Treasury market? What do you do?

TOM ESSAYE: I wouldn't go into treasuries. I think that-- that inflation is here to stay. We don't know exactly how high it will be, but it's here to stay, and that's negative for bonds.

I think that there is something you can do. You can go into these high quality names, these large caps-- value ETFs. I think that's the best place to hide, because, frankly, the economy's not rolling over, right?

I mean, all of a sudden, everybody's gotten really afraid. Oh, my God. The Fed's is going to hike four times, and they're going to do quantitative tightening. Well, we're still at 0% rates. I mean, they're still actually doing QE today, right? So the economy is not about to nosedive. I know the PMIs were soft this morning, but that was Omicron-related.

So I think if you look to these companies that are cyclically-oriented. Again, go into your financials, your materials, your industrials-- large cap, low valuation. That's the place to hide.

- And then, Tom, you know, the Fed starts its two-day policy meeting tomorrow. What do investors want to hear on the other side of that meeting?

TOM ESSAYE: They want to hear that the Fed is not going to kill the recovery, essentially, right? So I think, more specifically, it would help if Powell sort of diminished the talk of five rate hikes. If he stuck to three or four, I think the market can live with that. That's priced in.

And then, perhaps most importantly, he needs to sort of defer on quantitative tightening and/or balance sheet reduction. If he does that, it'll help the market calm down a bit and sort of stop thinking that the Fed is all of a sudden on this kamikaze run that's going to crash the economy, which isn't what's happening, but markets get ahead of themselves. And that's where we are right now.

So I think that Powell can take the press conference to soothe the markets in the context of rates rising. We are getting a rate hike in March.

- Tom, what do you do with oil at the moment? It looks as though things are intensifying, as you said, between Russia, Ukraine, and NATO. So where do you put-- [CLEARS THROAT] excuse me, where are the opportunities there?

I mean, you look at oil today. It's actually down more than 2%. You might actually think it would be rallying with some sort of military activity seemingly imminent in that part of the world. And if something does happen there, what happens to the overall stock market?

TOM ESSAYE: Yeah, I think that oil is just sort of being sucked in with everything else going risk off today, right? But-- but I think oil is still very well positioned because we have constrained supply still coming out of the pandemic, and we have strong demand.

Remember, the stock market is not the economy. The global economy is actually still doing quite well. We're not seeing this huge decline in global economic demand due to Omicron, and Omicron is now thankfully fading quite quickly from the global scene.

So I think the fundamental outlook for oil is very positive. And we need it, right? We don't have very many sectors that are doing very well in the market right now. Energy is one of the few.

So-- so I think we need oil to continue to do well. If you see oil roll over hard, that's just going to make people even more nervous about future economic growth. It's going to be a pile-on. So I think, for the good of the market, we need to see energy hang in.

- All right, Tom, SA founder and President of Sevens Report Research. Thanks for being with us on this wild day on Wall Street.