Market strategist: Last month ‘one of the better Januarys’ in a century

Heritage Capital President Paul Schatz joins Yahoo Finance Live to discuss the state of the markets with the release of new economic data, inflation, investor sentiment, and the outlook for the economy.

Video Transcript

[AUDIO LOGO]

- Well, let's turn to our top story this morning-- where markets are headed, especially as we close out the week. To recap, the Fed reiterating its hawkishness in Fed minutes on Wednesday atop a super-hot inflation print out just this morning. Today also marking the first anniversary of the war in Ukraine with oil still volatile in the years since.

Well, let's get right to what this means. Joining us now, Paul Schatz, Heritage Capital president. Good to see you, Paul. So obviously, a lot of information to take in here when you now process in markets were a little bit comforted by what they heard in the Fed minutes. We're now seeing this PCE inflation coming in, markets selling off again. What mood are the markets in at the moment as they try and really take in all this information from this week?

PAUL SCHATZ: Good to see you as well. Look, the markets certainly are cranky. You can't argue anything to the contrary. But take a step back, get beyond the last two weeks, and you saw a huge run right out of the gate in January. So January was one of the better Januarys we've seen this whole century, and now we're giving some back.

I'm a little surprised at how negative the reaction is today to the PCE because of what we saw in the CPI and PPI reports. It's hard to believe that people could be caught off guard. I figured it would come in somewhere a little hotter than expected. It came in a little hotter than expected, but the reaction's a little deeper than expected.

It is a Friday, so in a crankier market, that could exacerbate some of the clients. But all in all, we're still up on the year, which is-- again, it's only-- what, seven weeks old? I want to see some more constructed action. The market needs to put in a low next week. I'll say that. For my bullish scenario to hold in Q1, I want to see a low next week.

- And so then as we think of what this means for the Fed's path forward, you're predicting Fed hikes in March and May and maybe June and then going neutral for the rest of 2023. What's your base case for that?

PAUL SCHATZ: The Ouija board. So here's how I look at it. People are way, way, way too granularly focused on each and every tick, each and every parsing of the words in the Fed. Take a step back, and let's look. They will end up raising rates by somewhere around 450 to 500 basis points. Let's call it 5% for round numbers.

That enormous-- I mean, that's an unprecedented move on a percentage basis, and most of that's not even in the economy yet. Second quarter, you're going to see a big chunk of those Fed moves from last year begin to impact the economy. So people, I think they're-- I don't know who said it earlier yesterday. It doesn't matter.

But when you are sick and they give you a pill, and 10 minutes later, you're like, I'm not better yet, give me another pill, I'm not better yet, give me another pill-- I feel like investors and economists and the Fed-- too many people are saying, oh, my gosh, we did a rate hike. Let's do more. It didn't work. Let's do more. People need to just take a step back, calm down and breathe. Because these Fed rate hikes-- be careful. They're going to negatively impact the economy sharply in Q2 and Q3.

JULIE HYMAN: Hey, Paul. It's Julie here. We're having a little bit of technical difficulty with Rochelle, so I'm going to hop on in here and talk to you about what's going on too. As we get through this year, Paul, do you have a single best idea that you've been focusing on or something that you think the market's not giving enough credence to?

PAUL SCHATZ: Yeah, so single best-- no. I came into the year super bullish. I've said this with you guys before. Since 1939 when Germany invaded Poland, the third year of a president's term has never been down. And I don't think it's going to be down this year. So I am bullish on equities. I'm bullish on bonds. I'm bullish on gold. I'm bullish on crypto.

Within that, I like the risk on sectors. I think bonds is a second half of the year story, but I think bonds do-- for the more conservative folks, bonds are going to do 8% to 10%, 8% to 11%. And on the stock side, equity side, our base case is 15% to 20% on the upside. If the market puts in the low that I'm looking for next week, if it confirms that, even a better scenario is still possible, but it's not confirmed yet.

I came in-- I loved semiconductors. Biotechs were my favorite sector coming into the year. I've never loved bitcoin until 2023. So I can't say I love anything, any single idea the most. I do like risk on. I do like bonds second half of the year.

JARED BLIKRE: Paul, Jared Blikre here. Good to see you. Hey. Wondering about the US dollar. I have no idea who's going to pop up next, but the US dollar has been strengthening over the last couple of weeks, granted a reprieve. And some say that was responsible for the rally or at least enabled the rally that we had earlier in the year when it was declining. But now that it's spiking up again, we're seeing risk markets falter a little bit. How do you see king dollar? Is it going to be the disrupter that it was in years past?

PAUL SCHATZ: I'm waiting for Sozzi to text me that he's on next. Look, last year, three things were absolutely imperative for markets to bottom. You needed the dollar to roll over. It did. You needed the 10-year to peak-- yield-- it did. You needed the two-year to stop going up. It did, but not by a wide enough margin. I think those three-- to answer your dollar question, the dollar had a big decline into the last two weeks ago. So this is the reflex rally.

If I'm correct and the dollar has peaked for this bull market, I expect the dollar to have a bit more of a rally and then roll over again to new lows or somewhere where we were a couple of weeks ago. But you're right. If I'm wrong and the two-year continues to new highs and higher, and the 10-year somehow gathers itself and kicks it up a notch, and the dollar goes anywhere near the old highs, my bullish scenario is wrong. I will have plenty of egg on my face to make enough omelets and scrambled eggs for the whole Yahoo crew.

JULIE HYMAN: All right. Well, we'll hold you to that, I guess, Paul. No more surprises for today. Thank you so much for rolling with us. Paul Schatz, Hertiage Capital president--

PAUL SCHATZ: Good seeing you guys.

JULIE HYMAN: You too. Thanks a lot. Appreciate it.