for more insight on early morning trading.
I'm joined by David Waddell Ceo and
Chief investment strategist at Waddell and Associates.
Hopefully I'm pronouncing that correctly,
the SNP is on pace to finish the week down 3.1%.
The NASDAQ having its worst week since october of 2020.
As we kind of alluded earlier,
We haven't seen a 7% pullback in markets in about a year.
So what do you think it is signaling about sentiment in equities right now?
And what exactly are you focusing on this morning?
Well, I think the market has started to behave differently in different areas.
Right where we've been used to this correlation, where earnings go up,
multiples go up.
GDP goes up. We have monetary stimulus going up, we have fiscal stimulus going up.
It was sort of the everything rally
that ended a little bit last year but people weren't paying close attention.
So if you look at the I. P. O. Index for instance, that's down 33% over the last year.
You know, the Ark innovation fund that gets a lot of press is down 50%.
So investors had started differentiating between areas of the market last year and
they decided that tech companies that have no earnings needed to be sold,
they decided that the Fed might start
tightening monetary policy and those with the highest
earning multiple started coming down and that
trend has now gotten upmarket or downmarket.
However you want to look at it to the point where it's infected the SNP. So while the S.
And P. Is down 7% this year. And that sounds troubling
the S. And P. Growth index. The pure growth index is actually down like 13%.
But the S. And P. Pure value index is up 2%.
So what we're seeing is a rotation that's gathering steam in the
media that's actually been going on since almost this time last year.
Um
And so it's getting more media attention but it's a rotation that's been underway.
It just appears more violent now that it's hit the main indices.
So if I'm understanding you correctly,
you think investors have kind of priced this in
ahead of some of the things we're expecting.
The Fed still buying bonds and rate hikes aren't expected to begin until March.
Or do you think this is also a combination
of a reaction to upcoming rising interest rates?
Yeah, I mean right now, so the 10 year Treasury bond ended last year at 1.5%.
Today it's at 18 or something like that.
You know, that's a 20% move multiples have come down, you know,
5% maybe 10% total on the S.
And P. Depending on how you're counting
at 1.8%.
The 10 year Treasury yield is still below where the
Fed would like to get the overnight rate which is
2.5%.
So this increase in interest rates is occurring and will
continue to occur unless the Fed breaks the economy.
Now there is some concern now I think starting
to manifest that that will be the case that
they'll have to volker the economy if you will
put it into recession to get rid of inflation.
I don't think that's true.
So sentiment may be too negative here but the trend of rising rates will continue.
Um and I hate to throw out this analog. But if you think back to Y2K.
You have to be old enough and have gray hair like this to be able to.
But if you think back to 1999 et cetera,
um
The the deflation of that bubble was pretty dramatic early on in a lot
of names and then it spread and continued on into the you know,
2002 bottom.
I don't know that this is going to be quite that dramatic
but there's certainly plenty of analog between what was going on then
and what's going on today.
So at least for us and for our portfolios we want things with low P. Es.
I want to stay away from anything with a high P. E.
That is subject to multiple contraction,
which is going to happen as the Fed raises rates.
So I think you can navigate through this period.
I don't think we're going into recession sentiments really low.
I think the market's still worth owning but I wouldn't
go chase the pandemic winners anymore than I would have
gone and chased the internet dot com's back in 99
Those things went dormant or dead for a decade.
Let's hope we aren't headed for a recession.
I think a lot of experts and analysts we've had on
the show that are kind of pointing in that direction,
also underscoring the fact that we do have a pandemic this time around.
Um, but the NASDAQ is down nearly 11% from its all time high set in November.
The software and semiconductors industries have declined
over 10% in the last four weeks.
Each trading near its 200 day moving average.
What's your overall take on tech right now?
And do you anticipate Q4 earnings will boost the industry?
I do not.
And I think what you're seeing with netflix is
the virus that will continue to plague tech stocks,
which is expectations and valuations just got too high.
They did, it was super fun, but they got too high.
And now reality is going to come in and
you know, a lot of these companies,
there are multiple ways to entertain yourselves and streaming and
their subscriber growth was obviously less than they expected.
And so these companies are subject to competition.
Um,
and so a lot of the expectations around peloton and netflix
and some of these other names that have gotten media attention.
We have simply been too high.
So the reality is coming to come in below expectations and
that's kind of the theme that I want to really get across
is right now. you want to go to areas of the world where reality
could outperform expectations Now I'm not a china bowl right now
but find me somebody bullish on china right now right?
And the pe in china is mid single digits.
I mean we haven't seen a P in china like that's trading like it's Russia is it?
I don't really know, but while north America is not working at high valuations,
latin America at low valuations is working.
So I think it's just sell the expectations rally,
You know what's going on in Bitcoin and big
Bitcoin trades like a tech stock with no earnings
that may ultimately be the global reserve currency,
but right now it's not that different from Zoom.
Um so I think this is just what's occurring
in the market and we've seen this movie before,
you just have to go back 20 years to watch it.
Yeah and basically the honeymoon period for a lot of these
pandemic darlings over or kind of slowing the steam there.
But I want to talk specifically about netflix because you
mentioned them reporting their Q four revenue um leadership,
Warning about streaming competition and of course
we know the slowing subscriber growth being
a big headwind noted in that report,
What were some of your biggest takeaways from their earnings and
what do you think it signals about the overall streaming landscape,
we know so many bullish because there is a lot of competition there.
Um but as you mentioned, a lot of different ways to be entertained.
We also have those contending with reopenings,
we've seen a lot of movement in the gaming space. Any thoughts on overall streaming?
I mean,
it's hard to be a big tech stock that's driven by consumer
tastes and preferences and stay that way for a really long time.
I mean, if you're in a Microsoft or something, the core of that businesses,
an enterprise business and we're all hooked.
I mean,
I'm using Microsoft on this computer right now
and have been since whatever the mid 90s.
So the taste and preference stocks, the peloton is the netflix, etcetera.
They just, it's harder to build wider moats around those things.
And they are the enemies of small companies, they are the enemies of entrepreneurs,
they're the enemies of the state to a certain extent,
as politicians get more hostile to
large cap tech stocks. So they just got a lot of people shooting at them.
And sometimes those bullets get through the fences and I
think that's what you're seeing in some of these names.
So I don't really have a particular call on netflix, I mean they hit their revenues,
you know, the earnings weren't bad.
But yeah, the subscribers were soft.
Um, and that just indicates that reality may come in lower than expectations.
And that's just a tried and true market cell signal
as we kind of wade through this environment and big things coming up next.
What do you see as the most undervalued industries for investors during this time?
I think the value trade has legs.
I mean you go from the things that were loved to the things that were unknown.
Um So within our portfolios,
ironically are top performers are in emerging markets, right?
And the value sectors there um the international stocks are doing well, you know,
the U.
S. Dollars surprisingly is down about a half a percent
year to date even with the Fed rising.
Um if the dollar ends up declining,
that adds additional marginal returns to overseas stocks,
emerging-market stocks, et cetera.
So small cap value in 2001 I think was up 22% while us large cap growth was down 33%.
So if you can find areas of the market trading at single pes just kind of by them
because the liquidity flows are seeking out those names that are forgotten.
Um So I think it's it's somewhat simple right now.
The market is telling you if you've got high pe stuff, reduce those holdings,
go find some low pe stuff and they exist in small
cap value land developed international land and in the emerging markets.
Alright.
David Goodall Ceo and chief investment strategist at Waddell and Associates,
thank you so much for joining us this morning on chatter news