Markets should expect a ‘period of adjustment’ in the economy: Strategist

iCapital Network Chief Investment Strategist Anastasia Amoroso joins Yahoo Finance Live’s Julie Hyman and Brian Sozzi to discuss a normalizing economy, what to expect from the Fed, and three opportunities in crypto.

Video Transcript

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BRIAN SOZZI: Lots to digest in the markets today, from mixed bank earnings to a whiff on retail sales. So what's the next best trade you should be making in this environment? Anastasia Amoroso iCapital Network Chief Investment Strategist is here with us now. Good to see you as always.

So look, bank earnings mixed at best. Retail sales, meh, not so hot. Even Sherwin-Williams, we were just talking about, Anastasia, in earnings warnings from them this morning. Now, you're looking for a 10% return on the S&P 500 this year. But do you have to dial back what you're thinking in light of reports like this?

ANASTASIA AMOROSO: Yeah, you really do have to. And I think, Brian, that's really the story as we head into this year is we're in this adjustment process, which might be a little bit patchy. We're adjusting from the economy that was very, very strong, a very strong reopening momentum. And you had the Fed that was doing nothing. The Fed was just sitting back.

And this is clearly changing. We now have an economy that's normalizing. And you really see that across the board, whether it's the bank earnings we saw this morning, whether it's the retail sector, whether it's the industrials and some of the PMI and ISM numbers. We're seeing this step-down, lowering activity, and normalization of activity. Still solid, but it's just slower.

And now the Fed is actually starting to do something about it. So that's what's causing some of this volatility here. And this might be a process. This might be a period of adjustment that goes on for some time. And Brian, if you look at the numbers, what typically happens for the markets during this transition process, it's exactly that. The volatility, the choppiness persists.

For example, we looked at the three months before the rate hike and the three months after the first rate hike over the last three or four rate hiking cycles. And we find that, within that bracket of six months, the markets kind of do nothing. There's just a lot of choppiness back and forth.

But if you look at the 12 months after the rate hike, you do tend to have positive average returns. But to your point and to the point that we wrote in our outlook about is those returns are not double digits. They're somewhere in the 6% to 10% range. And that's really our expectation for this year as well.

BRIAN SOZZI: But just staying on that too, I think so many concerns in the market are over the Federal Reserve. Oh, they're going to lift rates three times this year. Maybe it's four. Maybe it's five. Who knows? But should more concern actually be placed on the pandemic? Because when I see Sherwin-Williams come out here talking about ongoing supply chain shortages, lifting prices by 12%, really, the pandemic continues to hammer corporate America.

ANASTASIA AMOROSO: It really does. I mean, we're certainly not out of the woods yet. And I'm very hopeful, as I think are a lot of us, that we're going to move out of this pandemic stage to the endemic stage at some point this year. As we talk about normalization, I think we have to normalize COVID here as well.

But until we do, we're going to continue to have these disruptions. I mean, you go to certain places, and you go to certain hotels, and restaurants are closed because there's not enough workers to actually keep the restaurants open. So we're seeing the supply chain challenges all over the place. And until we normalize the treatment of COVID, given all the medical tools that we have, unfortunately that too is going to continue to weigh on activity.

JULIE HYMAN: Anastasia, given all of these hurdles that we're talking about and all this tension, all this volatility, you have some interesting ideas in your latest note for what you say is hypergrowth, which I think gets people excited. Everyone would like to see some hypergrowth in their portfolios. And the first idea that you have is venture capital, which I think is quite interesting here because obviously, we're coming off of a pretty big year for exits from venture capital and early-stage stuff that was then maturing and coming to market. What's the best way for everyday people to get into and invest in venture capital?

ANASTASIA AMOROSO: Well, this is definitely a space that's been reserved for institutional investors, endowments, foundations, have invested in it. And also family offices have invested pretty heavily. But the access to some of these vehicles, VCs, is broadening into more and more wealth management community and clients.

So to your point, Julie, about this has been a banner year, last year, for venture capital because so many of these VC companies were able to tap the public markets. So the concern now, maybe it's like, well, does that slow down, and we're not going to see the same exit opportunities? And I don't have that concern because if you look at VC exits, the IPO market is one of those exit paths. But the other one is all the M&A that's occurring.

And actually, typically, the M&A market, the strategic acquisitions of some of these smaller VC-backed companies, that's a bigger avenue for exits. And so when I come back to the corporate America and when I look at the earnings growth rate, despite some of the disappointments this morning, it's still at record levels. And it's still 25% above the pandemic. And you still have $7 trillion of cash on the balance sheets.

I think these companies are going to be redeploying that cash. And they want to invest in those hypergrowth opportunities as well. So I think the exit environment for venture capital-backed companies is going to remain still quite strong.

And not to mention, Julie, that you have $1.4 trillion in dry powder for private equity firms. And private equity firms might be looking to take a company and bolt on another company to it. And that's how you come up with a better enterprise. So I think you still have a lot of tailwinds. And again, the access to VCs, VC funds, and VC access is definitely expanding.

JULIE HYMAN: And of course, you've got some publicly-traded private equity companies now. You've got a new one yesterday in TPG.

I also want to ask about one of your other ideas, which is crypto, DeFi, et cetera. And I think this year showed that people are definitely interested in this area. But I think there too, I would ask a similar question. There are sort of more opportunities to invest in this space than ever before. It's not as difficult to get into. But how do people decide in which thing to invest when they're looking at crypto?

ANASTASIA AMOROSO: Yeah, Julie, I think a lot of people are asking that question. And frankly, it's a struggle because if you've kind of missed the run in Bitcoin, and now maybe you're unsure what's next for Bitcoin, where else do you go to? And I would just point to three opportunities that I would say they're longer opportunities. They may not necessarily pan out this year. But I think we should start looking at them this year.

And the first one is just the use of things like automated market makers and automated lending. And where can you potentially take out the intermediary and let this peer-to-peer network of computers based on blockchain do the work? So those are the types of applications and cryptocurrencies that we're looking at. That's one category.

The second category is smart contracts. If you talk to a lot of CTOs and tech officers who are within corporations, they're very much focused on automating some of these transactions that typically were labor-intensive and paper-intensive. And blockchain and smart contracts that are pre-programmed software, they have a big role to play in that.

And the last big trend-- and by the way, the venture capital community is very much interested in this-- is this concept of Web 3.0. So this is decentralized applications, for example decentralized social media, decentralized metaverse. And this notion that, rather than letting somebody else own your data, we own our data. And we're able to sell it in parcels or allocate it in partials as we see fit.

So those are the three very exciting ideas in crypto right now that obviously extend well beyond Bitcoin. And some of them are available as cryptocurrencies. But more and more of these are available as VC-backed companies that are being built as we speak.

BRIAN SOZZI: I think most of us are still trying to figure out how to use Web 2.0. It's just a true story there.

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Anastasia Amoroso, iCapital Network Chief Investment Strategist, always good to see you. Have a great weekend.