Qontigo’s Managing Director of Applied Research, Melissa Brown, and Ryan Payne, President of Payne Capital Management and host of the “Payne Points of Wealth” podcast, sit down with Yahoo Finance Live to talk about stock and bond market trajectories, Fed rate hikes and inflation.
SEANA SMITH: Alright, well, that concludes the trading day. It looks like the Dow Jones will make gains just around the flat line.
DAVE BRIGGS: Oh wow.
SEANA SMITH: Less than one point. I guess you can call it a win…
DAVE BRIGGS: We will take it.
SEANA SMITH: –After the last two days. S&P closing about 2/10 percent. NASDAQ, again, the underperformer, down about half a percent. We want to bring in Melissa Brown, General Manager of Applied Research at Qontigo. We also have Ryan Payne, president of Payne Capital Management and host of the “Payne Points of Wealth” podcast.
It’s great to have you both here to join the show. Ryan, help us break down what we saw today, the lack of action perhaps, more generally, if you take a look at the overall numbers. But the sale we’ve seen recently, how that sets us up. What’s your big takeaway?
RYAN PAYNE: Yeah, I think first of all, we’ve had a huge movement in the market over the last two months. So I think the bottom line is– and the Dow is up, like, 20% in two months. I’ll take that for a year back. So we saw a huge bounce off the bottom, and I think you’re getting some profit taking here. All of a sudden, all the banks became very negative in the market, at the same time as investor sentiment also worsened.
So I would actually say that it’s probably setting up for a pretty positive end to the year when sentiment is this low, and the fact that all year so far economic data has been pretty good.
DAVE BRIGGS: It’s been very negative, Melissa in particular, as Ryan said, one bank CEO after another has been forecasting some kind of recession early next year. Does this prepare us for a positive year-end?
MELISSA BROWN: Well, I hope so, although I’m not as confident as Ryan. I think we saw very low trading volume. And so I think all news, we’re going to see a bigger reaction than expected. So if the news continues to be good, yes, we could have a nice year-end rally. But if we start getting a bit more negative news, maybe the next bank will issue a negative view, on that low trading volume, we could see a much bigger downturn than we otherwise would if the volume had been higher.
SEANA SMITH: Ryan, recent economic data points, it seems, are at least pointing in the right direction. All points all – I guess the signals point to a cooling in inflation just a bit. However, the job market remains relatively resilient. How do you square all of that up in terms of what it likely means for Fed policy in upcoming meetings?
RYAN PAYNE: Well, I think at the end of the day, the Fed has to be data dependent, which is an overused phrase, but I mean, if you look at it, like, oil prices, I mean, man, we’re down to almost $70 a barrel of oil now, which is just a huge drop, which is– which fuels everything in the economy, isn’t it?
So it’s very disinflationary. Wood now costs 60% less. The housing market at this point begins to fall. So I think the Fed has already pretty much set the stage to start not only cutting what it was doing before, but also soon stopping raising rates here.
DAVE BRIGGS: Melissa, what’s in store for the Fed and what could be the catalyst to move things the other way than next week’s CPI data?
MELISSA BROWN: Well, the CPI data will definitely be important. But we anticipate a year of higher impressions. It will take a long time for this year-over-year inflation figure to actually come down, even if we see flat month-over-month inflation. And so I think that’s something that the market – that investors are always going to be watching very closely to make sure we don’t – I think they might overreact even to a slight upside if the number comes out a bit higher than expected. But as Ryan pointed out, with this drop in oil prices, it’s probably…there’s probably less of a chance of that happening.
SEANA SMITH: Ryan, how does that prepare us then, just in terms of the investment opportunity, where are you looking to buy right now, as we head into the new year? National versus international, which makes more sense?
RYAN PAYNE: Well, I think the international has already hit rock bottom. If you look like China, they’ve already had a huge dip. You start to see the dollar weaken, which as a US investor is great when you’re buying overseas. Valuations are cheap overseas. We have already taken into account that we have an energy crisis. And if you look at, in fact, hard to believe, but the FTSE 100, your UK stock market is actually positive for the year. Who would guess that?
So I think global markets are recovering. I also have money abroad here. And I probably wouldn’t overweight the tech. The winners of the last 10 years will probably not be the winners of the next 10 years.
DAVE BRIGGS: Melissa, I just want to follow up on your mention of this downward move in oil. Given the price caps, given the EU sanctions, will this continue? And to follow up, you also say that stocks evolve less according to their own characteristics. What are they advancing? And what does that tell you?
MELISSA BROWN: Well yeah. So when I say that, I mean stocks have become increasingly correlated with each other. So they tend to go in the same direction. And by the way, stocks and bonds have also become more correlated, as have stock markets and the dollar. So, you know, I think that suggests that investors are looking at the inflation picture as a whole. Oil is going to have an impact on many, many types of stocks. And they’re looking at that more than saying stock A looks better than stock B in terms of earnings.
But they have lowered their expectations for fourth-quarter earnings. We still have a little time before we start worrying about it. But that’s something, too, I think over the next month we’ll start to see if earnings actually go down.
SEANA SMITH: Ryan, on the small cap side, like you said, maybe the outperformance will come from what we haven’t seen in the last 10 years. Small caps are outperforming, what… 30% cheaper, should I say, than large caps right now, the biggest discount we’ve seen since the dotcom bubble. As you explore try to identify some of these names, what are you looking for?
RYAN PAYNE: I’m a kid in a candy store. I mean, if you look at valuations outside of technology and disruptive technology, everything is currently trading relatively cheap, based on history. And I think if you look at the macro picture, look, I mean, we know inflation is coming down. We know the labor market will remain hot. Salaries are rising.
So I think the US economy should be strong. I think small caps are a great way to play that. And I think overall you don’t have to be so smart here. I mean, interest rates have gone up, so the bond market is doing well too. And I talked about it on my podcast, “Payne Points of Wealth,” one of the top financial podcasts in the country.
So I think right now it’s like you have to be in the game. Accept the fact that we have uncertainty here. And I think everything is lining up right now for a pretty good rally across the board. Again, but just spread your risk because the market offers a lot of freebies here in terms of buying.
DAVE BRIGGS: And Melissa, what is the movement of the yield that tells you, in particular, the 10 and the 2, and also the movement of the dollar most recently.
MELISSA BROWN: Well, the 10 and 2 reversal is the biggest since 1981. The good news is that from 1982 when the Fed started cutting rates…and I was there at that time There, I hate to say it…we saw a multi-year rally. So it could be a bit of a pain in the short term. But hopefully eventually, if we end up with some sort of soft landing, that might be good news. But for now, I think we need to keep an eye on this soft landing as it is a very big reversal.
And as Ryan also mentioned, the dollar has gone down well. I think that kind of volatility makes trading difficult. Where do you want to invest? Things change so much. You may have positioned yourself for a higher dollar a month ago, and now you need to start selling. We haven’t seen that yet, as I mentioned, in the volumes. But we might be starting to see that too. People have to reposition themselves for a different economic environment than they were positioned for.
SEANA SMITH: All right, Melissa Brown, Ryan Payne, thank you very much for being with us this afternoon.