Disinflationary environments are when to look at sectors that were ‘left for dead’: Strategist

Great Hill Capital Chairman and Managing Member Thomas Hayes sits down with Yahoo Finance Live to discuss oil production, market outlooks amid Fed rate hikes, and Santa Claus rallies expected this year.

Video transcript

DAVE BRIGGS: Let's touch all those topics and go in reverse order and start with oil, which continues to move down despite the price cap and the EU sanctions, reflecting what?

THOMAS HAYES: Well, I think one thing that no one's really talking about these days is the US rig count. And the US rig count is at 784 total rig count. Pre-pandemic, it was at 790. So while everyone's been focused on Russia, and they've been focused on production abroad from OPEC, they've kind of failed to focus on the production in the US has come back and has come back in spades. So I do think that supply is going to continue to come online, and we're seeing it reflected in prices.

SEANA SMITH: And Tom, just more broadly speaking, where we stand right now in the equity markets with the final trading weeks of the year ahead of us, the fifth down day in a row for the S&P. How does this set us up not only for the next couple of weeks, but as we look ahead to next year?

THOMAS HAYES: Well, there's a buyer strike. It's a low volume buyer strike right now, but there will be no Grinch. I think Santa Claus is going to come to town the last couple of weeks. But we're in a holding pattern waiting for the data. So we got the strong jobs report. Market didn't like that. We got the strong ISM services. The market didn't like that.

But as we look forward to PPI on Friday and CPI on Tuesday, just before the Fed meeting, I think those numbers are going to come in better than expected, meaning lower than expected. And you need only look at the 10-year yield. I mean, it's telling us that there's a slowdown. It's telling us that the Fed is near the end of their job. I mean, today, the 10-year yield was down to 3.43. And that's just telling us that it's a disinflationary environment moving forward. And in disinflationary environments, you want to start to look at the things that people have left for dead-- communication services, tech, et cetera, and emerging markets, with the dollar starting to weaken.

DAVE BRIGGS: So you suspect that the sleigh that brings Santa will be the CPI data we get next week?

THOMAS HAYES: Yeah, I think it's going to be the PPI, I think it's going to be the CPI. The key is going to be the dot plot, though. That's what I think is the biggest concern. The terminal rate at the last meeting in September was 4.6%. That's probably going to tick a little higher, hopefully 4.8, 4.9, nothing over 5-- that would spook the market. And in that case, Santa will have a sleigh full of presents for sure.

SEANA SMITH: And Tom, speaking of spooking the market, lots of debate about whether or not we're going to be in a-- if we are already in a recession, if we're going to see a recession next year. Citi CEO Jane Fraser making some comments about that, expecting a recession next year. Where do you stand on this? Any difference from last time?

THOMAS HAYES: Yeah, well, if you look at the last six cycles since 1957, there's a lot of pessimism in the market. Everyone's saying earnings are going to come down another 10% or 20% because we're going to have a recession. But in each instance, since 1957, the stock market bottomed 6 to 12 months before earnings bottomed.

So if you buy all the pessimism that earnings are going to come down another 10%, you shouldn't be buying a new leg lower. You should be buying stocks because history shows us by the time earnings trough, the S&P 500 has made up most of the losses. Why is that? We know the market is a discounting mechanism. So this year, we discounted a lot of slowdown with a 33% peak to trough in the NASDAQ, 25% peak to trough in the S&P. This is not a time to buy wholesale to buy the S&P, but it is the time to buy selected opportunity. And there's a ton of it out there.

DAVE BRIGGS: OK. What is it? What stocks? What sectors?

THOMAS HAYES: Well, what do people want the least of right now, I would say tech. And if you look at the 10-year yield that's telling us a slowdown and what companies can actually generate earnings in a slowdown is historically tech. Amazon is trading at 2018 prices. The difference between now and 2018 is their ad business and their Amazon Web Service Cloud business have both tripled in those four years. The e-commerce business has doubled. Their Prime members have gone from 100 million to 163 million. And you can buy it at four year ago prices. So that's kind of interesting to us.

The other thing, what's everyone been hot on this year has been energy. Well, if you look to next year's estimates for earnings, the worst performing sector in terms of earnings growth is going to be energy, with negative double digits, negative 10% or 11%. The best performing sector in terms of earnings, which no one wants to touch with a 10-foot pole, is communication services. And that's going to grow 35%. And consumer discretionary is going to grow, which also no one wants to touch with a 10-foot pole. They're growing off of low bases. And that's what we like.

SEANA SMITH: So, Tom, when you're trying to identify some of those communication services names, also consumer discretionary, does it become more of a stock picker's type of market? Because there clearly are some winners or losers once you drill down into those two sectors.

THOMAS HAYES: Unquestionably. You know, Warren Buffett says if you wait for the robins to sing, it's already spring. While everyone was sucking their thumbs, waiting for China to invade Taiwan, he was in buying $4 billion of Taiwan Semiconductor. So we like, whether it's Amazon down 55%, Disney's down 55%, that's an absolute no brainer when you look three years out. Taiwan Semiconductors down. KWEB, the China internet ETF, down 70%.

There are only so many times in a lifetime or in a generation that you get an opportunity. The tech wreck was one when tech was down 80%. The KWEB was down peak to trough more than 80%. And then you go back to the Great Depression, buying the Dow Jones, down 80% in 1932. These are generational opportunities.

The government has come out. They've pivoted on the COVID-zero policy. And they just came out in the last 24 hours and said, we're going to do forceful monetary and fiscal stimulus in 2023. No one believes them because we haven't seen it in the last 24 months. But when they say forceful historically, that's meaningful. And they don't have the inflation pressures that we have because they've been buying all the oil from Russia. They've got tons of storage of oil. They've got no inflationary pressure so that they can stimulate till the cows come home.

DAVE BRIGGS: And no one is buying that China reopening because we've been sold this line a dozen times over the last couple of years. You are, though, this time. Why is it different?

THOMAS HAYES: Well, I'll tell you what. I mean, you talked about Amazon. You can buy it at four year ago prices. You can buy Alibaba at its IPO prices from 2014. The only difference is, revenues are up 800% and earnings and cash flow are up 500%. This is a generational sale, and this is what the market does. It's a manic depressive. It's bipolar on the upside. It's bipolar on the downside. And it's overshot. It's back down to 58.

DAVE BRIGGS: Are you talking about me?

THOMAS HAYES: I'm talking about Mr. Market. As Ben Graham taught us and Warren Buffett has reiterated for many years, these are the opportunities that life serves up. And you have to seize them when they're there because if you look at the growth trajectory of Alibaba, their digitization, their Ali Cloud business is where AWS was in 2016. So this is going to be a monster opportunity. If you look at all the reports, they've got 38% share of the cloud business. It's going to triple by 2025. And we think that's a great opportunity.

SEANA SMITH: And Tom, real quick, before we let you go here, what's your outlook when it comes to the jobs markets and the layoffs that we have seen? It started in tech. We started to see that kind of trickle out, kind of had a ripple effect throughout other industries. Something to be worried about, or more so, the correction that not so much that the Fed predicted, but I think many on the Street have been bracing for?

THOMAS HAYES: Yeah, I think the contradiction in 2023, in our view, is that the stock market is going to get better. And the economy is going to get a little bit worse because we've discounted a lot of the pain. So I think the Fed will be successful in terms of they said they wanted unemployment to go up a little bit. I think we will see a four handle on that, maybe mid 4's max. It really depends how quickly they stop. We know we've got 50 in the bag in December.

Question is February. There's a lot of data points between now and February. It could be 25 and done. I know that's not in the market. It's more like 50 and then maybe another 25. But we'll see. Two months of data points is an awful lot. And if that 10-year is right, I think we're going to see some disinflationary data, as we saw with the Manheim Used Car Index today.