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Market strategist: Stocks are ‘repositioning’ due to anticipated Fed moves

Citi Global Wealth Chief Investment Officer and Head of Global Wealth Investments David Bailin joins Yahoo Finance Live to discuss the outlook for the market, the Fed winding down its accommodative policy, and inflation

Video Transcript

- Let's bring in our next guest for more on today's market action. David Bailin is Citi Global Wealth Chief Investment Officer and Head of Global Wealth Investments. David, thank you so much for joining us. As Jared was mentioning, stocks are down. The NASDAQ is dropping another almost 2% today. Is this move mostly about rising rates and Treasury yields? Or are other factors at play here, do you think?

DAVID BAILIN: I think it's definitely a repositioning of the market to deal with, really, what the Fed has done. And the Fed has basically created some certainty around the fact that there will be rate rises that are going to be these quarterly adjustments, three or four of them next year-- this year.

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But then the question really is there withdrawal of support, buying bonds, which is going to take place starting on April 1? And then the question is, how much do they actually release from their portfolio? And it's that that creates the enormous uncertainty. And what we're seeing now is a broad based revaluation of the highest growth shares, which obviously are the most sensitive to interest rates.

But what's happening is that it's taking place across the board. And for us, this is going to present a buying opportunity in areas like fintech, in areas like cybersecurity, where you have very steady growth, you have you increased cash flows, and potentially profitability, as opposed to the more speculative shares. Right now everything is adjusting. So we're in this--

- David, when you talk about-- I want to talk about that adjustment because a lot of investors, a lot of us are thinking, OK, for years I've enjoyed a very easy ride with megacap tech, for instance. And then I hear these correlations between what's going on with interest rates and why I might want to reconsider my position in tech. And in your most recent strategy, you talk about that repositioning.

But it's not as if you're saying throw out the mega-cap, the big names, throw them out. Help us understand what's next then for the mega caps, the big names that we might find attractive, even if they are expensive.

DAVID BAILIN: Right. So the mega caps, if you take a look at, let's say, at the top five stocks, you'll find out that the growth rates from a revenue standpoint have been 15% to 20% per year. They've done that now for over a decade. When you take a look at their cash flow, similarly, they may either reinvest them or pay them out in dividends or do buybacks. The fact is, those companies sort of stand on their own as stalwarts.

What's not taken into account is that there are a lot of medium sized and smaller companies which are doing the same thing, and they're getting very, very significantly hit. And you can see this in the area of payments and fintech more broadly. And my only point is that we want our clients to be accumulating these shares.

When you take a look at the price earnings or price to growth, these variables, they look very reasonable. Imagine if you could buy a technology company now that's got a 10% to 15% growth rate at a PE of 18, which is exactly what the PE might be in '23 or '24 for some of these companies.

So that's when things get exciting for us. So that's the kind of discernment that we're talking about, which is to buy real growth. When you're expecting economic growth to be 3.5% to 4%, to buy real growth of 10% to 15% at a market price is, in my mind, very attractive and something we want our clients to do.

- We've had companies now, from JPMorgan Chase to Goldman Sachs, citing higher labor costs and compensation expenses in their latest quarterly results. Is this something you expect to hear across the board from companies outside of the big banks as well for their fourth quarters? And do you expect this to continue into the first quarter and beyond?

DAVID BAILIN: So I think it's going to be an industry by industry phenomenon. And in finance and definitely in wealth management, you're seeing a gap up in compensation costs, as these sort of scarcer resources are bid up in the marketplace.

We're going to see wage inflation is largely at the bottom of the market for temporary labor, restaurant labor, hotel labor, for trucking, things like that, where there's simply not enough people to fill those jobs until the economy normalizes at a regular growth rate. So it is going to be pocket by pocket. But when we take a look at wage inflation generally across the whole economy, it's not really the number one driver of inflation by any means.

The number one driver of inflation is substitutes, meaning imports substituting for domestic goods, and the fact that we're buying too many things right now. And the second largest factor has to do with the input costs, simply material input costs, which have not normalized yet.

- They say that when the tide goes out, you see who's not wearing any swimming trunks. And back in May, you warned investors that the tide might go out on SPACs. Where do we stand? Because there's still a lot of SPACs out there. I mean, we had a guest on last week raising big bucks, not telling us who they're going to acquire, but that's still pretty much a lot of people thinking, I can get in on this. Are the warnings you issued in May of 2021 still in place?

DAVID BAILIN: Yes, the warnings are still in place, but the fact is that if you buy a SPAC today right and don't pay a premium price, the fact that they've got the capital locked up in Treasury means that you're going to get your money back. What we were warning against when we wrote last time is people's willingness to buy SPACs at $12, $14, $15 prices or even more when there was no target identified and when they could stand to lose 20%, 30%, or 40% of their value.

Today the SPAC market really should be, if you're thinking about doing a SPAC, it should be who the sponsor is and why you believe they're going to find a company that is going to be worth more than $10 per share at the acquisition price. So to me, the speculation has been largely taken out of that market. And while it's not something we find particularly attractive one way or the other for portfolios, we don't think right now we're in that speculative territory anymore.

- All right, we'll leave it there for now. David Bailin, Citi Global Wealth Chief Investment Officer and Head of Global Wealth Investments, thank you so much for your time.