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Rising rates aren’t ‘a detriment to equity markets’: Strategist

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National Chief Market Strategist Art Hogan joins Yahoo Finance Live to discuss rising rates, Netflix stock dipping as subscriber growth disappoints, The Fed's dot plot, and the outlook on financials, industrials and energy.

Video transcript

- Let's turn our attention back to the broader markets. As we said, the NASDAQ certainly in focus, given the week that it's had, dipping into correction territory and being dragged down even further, now on track for its worst week since October of 2020. Let's bring in Art Hogan, National Chief Market Strategist.

And Art, I realize there are a number of threads that are happening right now, but over the course of the last day, we've seen two high growth stocks take a steep fall. We're talking about Peloton, as well as Netflix. These are separate issues, but it feels like there's a bit of a rerating that's happening broadly on some of those high growth names.

ART HOGAN: Oh yeah, for sure. And I think that you can actually couple them together and say, here's a couple of pandemic darlings that likely pulled forward a good deal of future sales and got multiple compression when they had to announce what the future looks like. And I think that that's likely true in all of the sort of high multiple price to sales or price or revenue type companies right now, and that that rethinking of valuations really just follows in the wake of rising interest rates, right?

So we averaged 1.5% on the yield on the US 10-year for all of last year. And this year, we'll likely average somewhere between 1 and 3/4 and 2%. So that net present value calculation is obviously putting pressure on multiples across the technology complex, but much more so in the price to sales and price to revenues.

At some point in time, we'll look at this and say we probably are overdone, right, and we've taken too much multiple compression out. And what likely will be the signal if that's the case is when we start to get into earnings season in earnest next week, with a much heavier schedule of reporters, and see where the winners and losers really sit. And I think that, you know, unfortunately, kicking things off with financials that are likely to be beneficiaries of higher interest rates next quarter, that wasn't true last quarter.

So we saw some disappointment of financials. And then bringing up Peloton and Netflix, clearly some household names that have disappointed in the near term. But I think as we get into earnings season, we'll start to look at the damage that we've done, especially under the hood of the NASDAQ composite, with the average stock down about 40% and the index being down only about 10% or 11% from its all-time high of late. So I think earnings season perhaps turns the table a bit, and we look at just how stretched that sell the growth and buy the economically sensitive cyclical value names has gotten on both sides of the equation.

- And Art, there's some overlap in what the banks were saying, as well, in this early moment of the earnings season, anticipating more rate hikes than even we were talking about at the tail end of 2021. And so if they're saying that, that's going to continue to impact some of those technology stocks that we had seen continue to move lower, as well, with that potential headwind. And so this question of whether this kind of reevaluation of some of those tech stocks with the scrutiny surrounding some of their high valuations, whether it is kind of oversold or whether this is just the beginning of further selling activity.

ART HOGAN: Yeah, Brad, you know, the point that you bring up is interesting because, you know, the Fed sort of pivoted the week after Thanksgiving and dropped the term transitory, and started talking about picking up the pace of tapering. And then lo and behold, at their next meeting, they delivered three dots in their dot plot, in their summary of economic projections looking for rate increases perhaps three times. And everyone seems to have jumped on this bandwagon and running around with their hair on fire, saying oh, it's going to be 50 basis points in March. They need to shock and awe. We'll likely see four or five, maybe six rate increases.

I think that gets pretty far in front of what a very transparent Fed has done throughout this cycle. And by transparent, I mean just talking about exactly what they want to do versus kind of surprising the market and getting even more aggressive. And they're likely to start raising rates right at the point in time we're going to see a peak and a rollover in a lot of the inflationary pressures. If you look at the regional Fed surveys that have come out over the last two months, we've seen the prices paid component roll over consistently.

So I think that come March, the first time they raise rates, which we think will be 25 basis points, they're going to be doing that in the teeth of sequential improvement in inflationary pressures. Therefore, I think they probably raise three times, they do it once a quarter, get the taper behind them in the early spring. And that likely is the case. And if that's the case and we're going to average-- let's say we're going to average 2% in the yield on the US 10-year, and we were at 1.5% last year. And you try to do that net present value calculation with a different multiple, if you're not using three or four and you're using something closer to two or two and a half, we've likely priced in a lot of damage, at least on that basis, right?

And I think that if rates are going up for the right reason, it generally is not a detriment to equity markets. The first year of a rate hike cycle typically sees an S&P 500 perform at about half the rate it performed the year before. So that still sort of signals to us that we may have high single digit, low double digit returns on the S&P this year.

- So Art, give me three sectors here you're watching really closely as we get into the heart of the earnings season. A lot of people are going to be watching this, saying, look, I've got my money crowded in a lot of these high growth names. Where do I move it?

ART HOGAN: Well, I certainly think technology and growth is going to be a sector you want to be in in 2022, but I think you want to be in it in companies that measure themselves in price to earnings. And I think earnings will play that out. So when you think about some of the household names that have been around for a while, the stalwarts that have large moats, and start delivering earnings and giving us guidance, that likely is going to help a whole lot in terms of that thesis there. On the flip side of that, you want to continue to be exposed to economically sensitive cyclicals. So we continue to believe financials, industrials and energy are going to be the other side of that barbell for you. And I would continue to be focusing on that.

- Art Hogan, National Chief Market Strategist joining us here today. Great to speak with you, Art. And have a great weekend, as well.

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