Stock market: How investors should think about the ongoing rout

Hennion & Walsh Chief Investment Officer Kevin Mahn joins Yahoo Finance Live to discuss low trading sessions during market volatility, how investors should listen to their risk tolerance, what investment opportunities are making themselves known, and high interest rates.

Video transcript

ADAM SHAPIRO: It's, we know, the last 20 to 15 minutes of the trading session is Pepto-Bismol time. So get ready. But Kevin Mahn always has a smile when he comes on board. And it's good to have, because those of us who don't like this kind of volatility, I mean, you make your living on this.

But this is frightening to average investors, especially when you consider-- I realized we had 27% gain last year on the S&P 500. But looking at year-to-date, and we're not even a full month into the year, S&P 500 is off 7%. So before we dive into-- the headline I take from you, Kevin, is growing, but slower. I want to calm everybody.

Help us understand what we're witnessing right now. How much of it is fear? How much of it is I need to take some profit off the table? And how much of it is just driven by things beyond our control, like the expiration of options contracts?

KEVIN MAHN: Yes, it's been a tough start to the year, to say the least, Adam. But let's consider the following-- the technology-laden NASDAQ index is having its worst month since November of 2008. The US Large Cap S&P 500 index is having its worst week since October of 2020.

But it's also had its best three-year run since 1999, with the return of 72%. All of that led to excessive valuations, with a PE of around 26 to end the year. Those excessive valuations ran into a more hawkish Fed as we left 2021 and turned to 2022. And as a result, investors got concerned that a more aggressive Federal Reserve might slow down the economy and also pose some problems for those more highly-leveraged technology companies. But putting that all into perspective, once again, we think these pullbacks are creating some very interesting investment opportunities in certain areas over the longer term.

EMILY MCCORMICK: Kevin, it's great to have you on again. I'm wondering, for investors, because there certainly are many of them who are heavily weighed in their portfolios in some of these high-growth, highly-valued technology companies, what would you suggest that they do right now? Should they be selling when we get little mini rallies throughout the rest of this year? Or should they be holding through some of this volatility?

KEVIN MAHN: I think investors should generally be true to their risk tolerance. They shouldn't necessarily get more aggressive when the market is moving higher, as it has over the last three years. And they shouldn't get more bearish when markets are moving lower, as they have at the beginning of 2022. But I think this market now is much more of a stock-specific market than it is an index or asset-class-driven market.

A couple examples in point, Emily-- consider Amazon right now. Amazon is down over 13% year-to-date. Does anyone think Amazon is going out of business? Or do you believe with us here at SmartTrust that Amazon is likely to be the hub of the e-commerce ecosystem for years to come?

Apple is another example, down 8% year-to-date. Does anybody believe that Apple is going out of business? Or perhaps it was just trading at some excessive valuation and it's being taken out right now with some of the selling pressures that are going on across those various technology indexes. So I think investors should stay true to their risk tolerance, understand what their longer-term growth objectives are, and then focus more on the individual companies, their positions within their industries, and whether they tie into the themes that should drive this economy moving forward.

ADAM SHAPIRO: The other thing that is pretty practical advice that you have for your clients is you talk about asset classes that perform well. We know we got the interest rates going up probably starting March at that meeting. But you point out, look, high-yield bonds, precious metal miners-- I don't know if Cleveland-Cliffs-- I love Cleveland, so I always go to CLF, hardly precious metals.

But there are places that money is going to be made going forward. Can you talk more about that? Because a lot of people are looking for opportunity.

KEVIN MAHN: Absolutely. And whether the Fed moves three times this year, four times this year, or even more than four times, as Jamie Dimon recently suggested, it's clear we're in a rising rate environment. And historically, there are certain asset classes that tend to perform better in rising rate environments, understanding that rising rate environments generally accompany expanding economies or the Fed wouldn't be raising interest rates. One of those areas is high-yield bonds. High-yield tends to outperform investment-grade during period of interest rate hikes.

If we drill into certain sectors of equities, one area that we particularly like, Adam, are financials, notably the smaller cap regional banks, community banks, and mortgage and thrift institutions. We think their spread business where they're making loans and now earning a higher rate of interest as rates rise is going to do very well for them. And we also anticipate the M&A activity to pick up in that regional bank space as well. The same can be said for smaller-cap biotech companies, as we think the pace of M&A activity of some of those innovative health-care solution providers in the areas of gene editing, gene splicing, oncology are going to become more and more attractive to the larger-cap pharmaceutical companies who have a lot of cash on their balance sheets to spend.

ADAM SHAPIRO: Kevin Mahn, you're like a legal dose of Valium when people get jittery. It's good to have you here. Kevin is Hemming & Walsh chief investment officer.

KEVIN MAHN: Thank you, Adam.

ADAM SHAPIRO: All the best to you.