Why this is the 'kitchen sink quarter' for investors: Heritage Capital President

Heritage Capital President Paul Schatz joins Yahoo Finance’s On The Move panel to discuss the outlook for the economy and whether or not the market rally is nearing an end.

Video Transcript

ADAM SHAPIRO: But when we watch these markets trade higher, especially on this vaccine news, I got to ask you. Is this a fake out? Are we really up and going forward or might we hit lows again?

PAUL SCHATZ: And good morning to all of you. So my thesis has been that since the middle of April, except for the NASDAQ, which is trading on a mind of its own, the Dow, the S&P, the mids, the smalls, have all been in a trading range. They've been in a band and we've been bouncing around from the lower end of the band, the upper end of the band.

Last Friday I wrote that I thought with one more rally, with one more pop above the most recent range, I thought the market could see some kind of short-term peak, and I didn't expect to wake up on Tuesday morning or actually Monday, and see Novavax news. But whatever the case may be, we've certainly had our share of Monday or first day of the week upside surprises. This is another one.

I think look, when you've been in a range for so long and it's been almost a month and a half, and so many people have seen the same range and I have, many times, to your point, Adam, you pop above the range and then you immediately pull back in the range. So you can see it fake out. I don't think the market, well, I do think we're going to 30,000 next year and 40,000 by 2023, I don't think this is the beginning of the run to new highs right here. I think we need some pause and digestion first.

JULIE HYMAN: Hey, Paul, it's Julie. So we have been in a range, but it's a range where we have consistently made higher highs, right. It's a range that has a very slight upward bias within it. And so I've curious if looking at things like vaccine development news, like economic data. I mean, today we got new home sales, for example, that came in better than estimated. Consumer confidence that came in better than estimated. So on a fundamental basis, is that upward bias justified?

PAUL SCHATZ: Things are less bad. If you notice, Julie, every really bad economics report, market screamed higher, which is pretty amazing in and of itself. Because I said this so many times, for trading and investing, it's not so much what the news is, but how the markets react. So the most bullish thing a market can do, is go up in the face of bad news.

This is a very embryonic bull market. And I think the last survey I saw, 65%, 68% of people polled said this was nothing but a bear market rally. That's why we keep going higher. The S&P 500 has had a slight upward bias. But really the Dow, the mids, the smalls have almost been this perfectly flat range across the top.

Is it justified? Sure. I mean, I think this will be the only lockdown of the entire economy we see the rest of our lives. I think a lot of things were learned. And I do not believe we will ever have a nationwide lockdown again given what we learned. So if you think some semblance of the economy will get back to normalcy, some. A third, a quarter, 40%, you have to, the key is, divide your investments into the haves and the have nots.

The haves, like technology, absolutely ripped off the bottom. But in the last couple of days, what have we seen? We've seen rotation out of technology, out of the Amazons, out of the Facebooks and into some of the, banks are strong today, the industrials, some of the more economically sensitive. Value, which has been left for dead years and years and years, value is percolating. So you're seeing a lot of constructive signs. My point is, I think whatever decline we're going to get, we're getting between now and the end of Q2, and then things will even get back to more normalcy as we go over the summer.

INES FERRE: Paul, Ines Ferre here. And as you talk about getting over through the summer, what do you see the biggest risks going forward? Is it a vaccine not coming through by the end of the year? Would it be China-US relations? Would it be the outcome of the elections? What do you see as being the biggest risk?

PAUL SCHATZ: And there's a lot of variables that we may have to worry about. Look, so you have the smartest people on the face of the earth all working towards a vaccine. I would bet an awful lot of money at least one entity will have a vaccine by Q1 of 2021. So I don't think that's the, the news will be back and forth on who has what. The China thing, it's an election year, I think this is just saber rattling from Donald Trump to generate some more enthusiasm from his base, because he can't have those big rallies.

To me, the biggest risk is a less percent of the people in the country will go out and spend money. I think that's where I'm most. And frankly, because I'm probably a little more cautious than most in my habits, and so I always look and see what everyone else is doing around me. I think that's the biggest risk, is that less than whatever number, 2/3, half, 40% actually go back to restaurants and social scenes and retailers and actually spend their money. So the other stuff would be secondary.

ADAM SHAPIRO: So Paul, boil this down. When you talked about value percolating, and you also talk about the have not sector should lead in the next rally. Going forward, which are those sectors? Where do you see? I heard you mentioned banks. Is it financials or is it something else?

PAUL SCHATZ: Yeah, that's right. So I want to be clear. The have nots are the ones that have the most risk. Things like airlines and hotels and cruise ships, et cetera. Banks are part of that, because banks have a lot of loans out to the have nots. And the concern is that they're going to have to build more reserves. So the key for me on banks is, and we're very light on banks, but the key for me would be, if we start to see some big banks cut dividends, that'd be a bell ringer to buy banks. I think this is the kitchen sink quarter. So those are the ones where I'd want to get involved.

I'm not going to buy the cruise lines, I'm not. And a lot of the have nots, I'll only look at best in breed, the strongest have not, like JP Morgan. In the airline space, I don't love the airlines. I've railed on them with you guys time and time again. But the strongest airline is Delta. So if you have to look at the have nots, look at the best in breed. Don't go out on a limb and hope to hit 1,000 percent gain in some beaten down stock at $2 bucks.

ADAM SHAPIRO: We don't have time for me to take issue with your call on Delta, because I would say Southwest is actually perhaps in a better position. But Paul Schatz, thank you so much for joining us.

PAUL SCHATZ: Good to see you guys.

ADAM SHAPIRO: Heritage Capital. We're going to pick it up on that next time, Paul. Be well, buddy.