joining us now to discuss all of this is Sean O'Hara President at Pacer E. T. S.
Sean, thanks so much for joining us this morning. Welcome to the show
tomorrow's midterm election, as I mentioned, will
show which party controls Congress and impact the future of spending here.
So what are you watching from the markets ahead of the election?
Well, good morning, Thanks for having me.
I think that the market probably would prefer to see a shift in control at least to
slow things down in terms of some of the agenda items that have been a real challenge.
You know,
the spending is what's caused a big piece of this inflation that we're dealing with.
I think energy prices contribute a fair amount as well.
And so I think the market would view a change
in Washington as a somewhat positive thing and you know,
every time we have a midterm election going back to the fifties,
um the next six months out of the gate for the markets has been higher.
So I think, you know,
some of that seasonality of that historical trends in
the market are probably starting to play themselves out.
I think we need to continue to watch the Fed
and we need to continue to watch unemployment and inflation.
The Fed seems, you know,
sort of committed to their path and continue to raise interest rates.
And obviously that has not been good for stocks this
year as has inflation also been a burden for stocks.
So if we can get, you know, a little bit of a change in in softening on the Fed side,
I don't think we'll see it in december,
but perhaps next year some of bit of a slowdown that
also probably would be seen as a good thing for stocks.
I'm glad you brought that up sean because we are, you know,
investors are anticipating Tuesday's consumer price index report.
Excuse me, Thursdays, we have, you know, data coming out about small businesses,
also consumer sentiment from University of michigan
but regarding that cp, I report,
what are you gonna be watching from it that will give
further insight into how the Fed will handle inflation moving forward?
Well,
I mean obviously the top line number is the one to watch
to see whether or not what they're doing is having any effect.
You know,
I've I've sort of been of the opinion all year
that I don't really think this is an overheated economy.
I think it's more of a supply side issue.
I think energy prices are what's really causing the inflation across the board.
Energy touches every sector and every nook and cranny of our economy.
And so when oil prices are as high as they are,
it's very difficult to keep prices down.
So I think the thing to watch is to see whether or
not what has happened so far has had any effect on the slowing
down of the overall top line inflation if it hasn't and I
think the Fed will continue to be fairly aggressive if it had,
then you can see that sort of,
you know,
change their tune a little bit and be a little bit
more than they like to say words like data dependent.
And so that may slow the pace of their increases going forward.
I'm glad you mentioned energy kind of touching all areas of the economy here,
perhaps driving some of that inflation.
But I want to talk about sectors that you're potentially watching
as stands out standouts for your clients to potentially invest in.
How are you advising them?
Well, you know, our largest fund which is a U. S. Large cap, E T F C O W.
Z is overweight three sectors.
It's overweight energy,
it's overweight healthcare and its overweight materials.
It's been that way most of the year.
And so um that fund is actually flat or slightly up for the year,
in a in a year when the market is down over 20%.
And so this is a great example of the shift in the markets the last 10 years.
Going back prior to 2021, essentially the stock market was a fairly easy game.
You just had, you know, good environment, low interest rates, low inflation.
And you had a big multiple expansion on the top
line in terms of pes that's all changed this year.
And so we're we're getting a lesson in what it means to be
in the right place at the right time for the right reasons.
And so we generally screened for stocks that have high
free cash flow and high free cash flow yield,
which is just a measure of how cheap they are versus appears.
But in a high interest rate inflationary environment,
it's not a great thing to do to buy growth names because you're
buying future earnings that have to be discounted by those two inputs,
it's much better to
buy stocks that
current returns so that you don't have that headwind of high
interest rates and high inflation in terms of your returns.
Let's talk about corporate earnings season,
it's obviously benefit season we've had kind of a mixed bag here in terms of results,
but it's winding down now.
So what have you made so far of the quality of the results
that we've seen and what it kind of says about the economy here?
Well it's it's it's the same story.
We just talked about there's winners and there's losers.
The energy sector is has been blowing the doors off.
Health care has also been blowing the doors off in terms of their upside surprises.
The overall market is not quite as as impressive in terms of beats on the upside.
And I think that the key thing to watch going
forward will be revisions to the downside on future earnings.
I mean the expectation for 2023 is that the S&P will will
come in with somewhere between $200 a share or $233 a share
in earnings.
And that's a pretty wide gap If we start to see revisions
to the downside on earnings and we get under that 200 number
then I think you know you have to start to think about again
the broad market continuing to be a very tough place to invest in.
Being very selective with the individual names or sectors that you own
and sean of course ahead of the next federal Open market committee meeting.
How are you expecting the Fed to move?
Especially as we continue to see a strong job market.
You know that's the thing.
I mean the job market is what gives them the courage to continue on their path.
I mean we haven't seen any real spike up and unemployment.
And so the Feds two main mandates
or inflation and unemployment and so they're focused
on the inflation side and raising rates aggressively to try to deal with that.
But they're always going to look at the job market if we start to see
unemployment pick up a little bit, that may slow them down a little bit.
But this last week's number on the unemployment side and on the job side
I think gives them continued cover to be as aggressive as they have been.
So I would expect.
And I think the dot plots have changed a little bit here from three quarters of
a point to half a point but as far as what they'll do in december,
but they're going to continue on their path
until they can get inflation under control,
or until they're forced to sort of address the other side of their mandate, which is
they start to create unemployment or they push the economy too far down.
In other words,
this demand destruction that they're looking for that may
cost them to slow down a little bit.
Sean,
thank you so much for your time this morning that Sean O'Hara president at Pacer E T F.