Let's bring in thomas Hayes Chairman over at Great Hill Capital thomas,
Good morning.
Good to see you as always.
Markets have continued their winning streak for quite a while though,
all through political turmoil, climate devastation
were starting 2022.
What do you sort of looking in terms of the broad
market trends you're expecting for the rest of the year?
Yeah, baker. Well, thanks for having me. I I think one thing came out this morning.
The Bank of America Global Fund Manager survey,
which surveys about 300 managers with a trillion dollars under management.
And what we saw for the month of january was
the allocation to commodities hit an all time historical high.
So that that trade is getting pretty crowded right now and here we are at 85 $86 on W. T.
I. And everyone is calling for $100 a barrel.
Usually when the sentiment gets that extreme is when it starts to back off,
maybe supply will come back on from Opec,
maybe maybe us producers will start to amp up supply.
And then the other thing we saw in that survey was the net allocation to tech
fell 20% in the month of january, which was the lowest since 2000 and eight.
So we're seeing managers are getting really concerned with rates.
You saw the 10 year yield up to 1 83 this morning.
Uh and and that is impacting the market.
But I do think when you step back baker and look at 2022 uh this is going to be a last,
shall be first stock market.
So if you look at sector performance over the last couple of decades,
a clear pattern emerges and that is the laggards become
leaders and the leaders fall from grace every 1-2 years.
In that context, we like industrials,
industrials was the third worst performer in 2021.
We think it will be in the top 20,
top three in 2022 uh earnings for for industrials are expected to grow
35% in 2022 versus the S&P is going to grow at 9%.
Uh and one of the companies we like in that sector is
boing boing is still off 50% from its pre pandemic highs.
That re certification process in China is going swimmingly.
They're expected to fly planes by the end of this month, that will be a big catalyst.
And secondly, we like general electric in the industrial space.
Uh and on the sum of the parts thesis, they're breaking up into three parts
larry culp will go with aviation
and we think that that business is going to unlock a lot of value moving forward
thomas,
given the fact that we're now starting to see omicron
cases start to wind down just a little bit.
I mean in new york, which was the number one hot spot for omicron.
Now we're ranked 15th in omicron cases Jersey now ranked 20th in cases
if we're seeing a decline in omicron,
does that change the outlook of the rest of the market
for the rest of the year as a result of that?
Yeah, there there's no question about it. I I think you're gonna see two things.
One with um a crime coming down.
Uh you will see more people I think start to re enter the labor force.
The other factor that's gonna affect labor that few people are
talking about with the Supreme Court decision on the vaccine mandate,
20% of the population is still unvaccinated and a lot of those
people are staying out of work because they can't go back to work
with that mandate uh struck down by the Supreme Court.
I think you're gonna see a lot more people willing to go back to work.
Uh and that's going to help slow the
labor cost labor inflation because more supply of
labor is going to come back in and I think that's going to be constructive because as
labor costs come down
as people start spending more on services moving forward,
travel and leisure versus goods.
Uh the inflation narrative will start to subside.
And that may put the Fed in a position to not
move as quite as quickly as people are now fearing.
And that's why you're seeing all of this choppiness in in early january as
no one really knows what the Fed is going to do right now,
we're priced in, you know, 34 rate hikes.
Now, you've heard people talking about five or even seven.
Jamie Diamond was talking about.
The other thing that the market was worried about was quantitative tightening.
We saw that in the Fed minutes, everyone got nervous.
They said, well maybe when we start hiking rates, which people expect in March,
we'll start with quantitative tightening at the same time.
That was a big surprise that no one expected the last time they
waited 18 months after starting to
hike rates before doing quantitative tightening.
So I think if the inflation data comes down from increased supply and spending,
going from goods to leisure,
then the Fed can slow down their their process
and maybe just do two or three rate hikes,
maybe push off quantitative tightening for another year.
And in that case some of these extremes with everyone crowding into commodities
and out of tech will start to moderate
right now. We just have to see how good our tech earnings going to be
in the next few weeks, Whether they're earning,
whether they're multiples are justified or they need
to come back a little bit thomas.
Do you still expect the Fed to raise interest rates in March?
Do you sort of think that that's sort of the month that things are gonna change here.
And are you also expecting that quarter percentage
hike that a lot of people are thinking that
jerome Powell might do here.
Yeah, I do think that that that's going to take place in March.
And the reason I think that's gonna happen baker is
the moderation of inflation data will not come quickly enough
for him to justify pausing and and largely with the
market kind of expecting it and it's ready to go.
They have no reason to hold back.
However, I do think that the data will start to moderate on the inflation front
Around that time March April moving forward from there.
And as a result, this idea of 4567 hikes.
I think it's a little bit premature and a little aggressive and
I'd be more looking along the lines of uh you know,
three hikes uh you know, 2-4 hikes is more reasonable.
And that quantitative tightening which was the big fear in recent weeks
being pushed off to to maybe 2023.
And in that case there's a very nice glide path for the economy.
There's a very nice glide path for the stock market.
I do think based on 9% earnings growth for the S. And P.
Will probably have a high single digit low double digit year for the S. And P.
This year. Uh with a lot more volatility than we saw last year.
The 3-5% Pullbacks of last year
will probably turn into 8 to 10% plus many many corrections this year.
But overall finish out the year
constructively thomas while I have you just
briefly on earning 76% of companies have
at least beat on the bottom line so far that are in the S.
And P.
Has anything surprised you through the, through the earnings relations so far.
And have you read any sort of tea leaves of what
to sort of expect for the rest of the year?
Yeah. I think it's very constructive.
I was a little concerned that earnings estimates in the last three or four
weeks for 2020 to have kind of stalled out at $223 to the S.
And P. 500. I do think we're going to start to see those creep higher in coming weeks.
I think we need to see about 2 30 to justify the multiple uh in the market right now.
And I do think we're going to get that before the end of Q. One earnings season.
So on balance with with how aggressive omicron was in december.
The fact that these companies have really adapted and been
able to produce on the bottom line is is impressive.
So as this list,
I think the market's going to extrapolate better things
to come and were constructed for the year.
Great insight is always thomas Hayes Chairman over a great hill capital thomas.
Thanks so much for getting up early with us this morning