Equity strategist details ‘shopping list’ of what to buy in the markets

Linda Duessel, Federated Hermes Senior Equity Strategist, and Chris Konstantinos, RiverFront Investment Group Chief Investment Strategist, join Yahoo Finance Live to discuss the market outlook amid inflation, the Fed's monetary policies in a midterm election year, and the S&P 500.

Video transcript

- Here's the closing bell for today, May 16.

[MUSIC PLAYING]

SEANA SMITH: And that does it for today's the trading action as we shake out the final trades of the day. Looks like the Dow is going to hold on to slight gains there, closing up just around 27 points. S&P and NASDAQ though, under pressure. We have seen selling in the market over the last several weeks. Once again, S&P and NASDAQ kicking off this new week in the red. Taking a look at some of the performers here, the worst performers in the Dow today, Boeing, NASDAQ closing off just around 2 and 1/2%. Disney was off 2% in some selling the sales force as well. That stock off just around 1 and 1/2%.

We want to break all this down to Linda Duessel, Federated Hermes senior equity strategist, and Chris Konstantinos, RiverFront Investment Group's chief investment strategist. Linda, first to you. When you see another day of selling, albeit much lighter than what we had been used to over the last several weeks, what are you doing in this type of environment?

LINDA DUESSEL: Well, we're consolidating right now it looks like here in the S&P 500, as well as in the bond market. And so what we're doing is we're putting together basically a shopping list of what we want to buy. Cash is king. We've been saying that pretty much since the beginning of the year. But what we want to buy and pick our spots, because we're going to have to suffer with and have patience with a lot of these days that are just kind of meandering about, and then maybe you get a big down day. Maybe you buy something on that shopping list that has been beaten up enough to feel pretty good about.

DAVE BRIGGS: Chris, is there any opportunities out there? Do you see more pain ahead?

CHRIS KONSTANTINOS: Well, first of all, I'd like to say that I agree with Linda's assessment that keeping cash on hand for dry powder for a rainy day is really, really important here because there will be some bargains when the dust settles. But to answer your question directly, I think the complexion of this market is one that suggests the path of least resistance is still down for the near term. I wish I didn't believe that. But that does appear to be the case.

We do both fundamental and technical research here at RiverFront. And the technical picture in my opinion is still relatively tough. Because you now have the primary trend of the market pointed down, you have the S&P 500 now trading below that. For a long time, it was just international stocks that had a broken trend. But now we have the US as well.

So I think in the near term, there's from a tactical perspective, I would still profess caution. But I like the idea of a shopping list. And the idea-- where we're really looking is if the last 12 years were coming into this year were all about TINA, you've heard this acronym, there is no alternative to growth stocks basically, the new acronym in my opinion is PATTY, which is pay attention to the yield.

We're looking for quality dividend stocks, we're looking for decent fixed income opportunities and things like bank loans, which are floating, short duration high yield. And we're also keeping extra cash on hand as well to be opportunistic.

RACHELLE AKUFFO: So Linda, as you're looking at the signals, whether it's the yield, whether it's what the fed is doing, what about keeping an eye on what's happening with China? How is that factoring in with their supply chain issues and their latest data into how you're advising clients?

LINDA DUESSEL: Well, China is the second largest country in the whole world. And they've been probably much weaker than they've said for quite some time now. It's really interesting that they remain locked down in a pretty decent respect because the president is going to want to get reelected here in the fall. And we actually think that you're going to see more now. They just started with Shanghai, more opening of that economy.

And that's a positive catalyst that could really help us, particularly we have on the top of our shopping list the energy patch and the energy stocks, which are well under owned truly. And that price of oil is going to continue to go up and really could go up if you see China really opening.

I just love what Konstantin said about PATTY. I think I may have to steal that PATTY idea. Because we've been suggesting to as part of our shopping list, the high quality, dividend strategy, which has truly been ignored for the last five years, remains quite inexpensive. And you're going to want to get your yield if we're looking for some tough slogging in terms of the markets ahead.

SEANA SMITH: I liked it too, Linda. PATTY, pay attention to the yield. Chris, another thing you're paying attention to I know are some critical levels, especially when it comes to the S&P. So we saw another slight movement today to the downside. What's the next real level that we need to keep an eye on?

CHRIS KONSTANTINOS: Yeah, so 4,000 is a huge psychological level. But what concerns me a little bit is that we've what I would call definitively broken that. Of course, we're now back around 4,000. So it's acting a little bit like a magnet. But I would suggest that we've broken 4,000. And now you've got to look at next level support, probably around 38.50, which by the way, 38.50 from a valuation multiple perspective also makes sense to me.

Because now you're starting to get back to the valuation multiples we saw in the S&P at a time when you had real interest rates that were positive and an economy that was not super fast, but not recessionary either. So think 2013 to 2019. you basically had valuation multiples on the S&P between 14 and 19 times. And with us trading at about 17 and 1/2, you went-- you go down to 38.50, it'd be even cheaper. That to me starts to be a relatively reasonable valuation level for the backdrop that we're foreseeing.

DAVE BRIGGS: OK, so we'll pay attention to the yield. But Linda, I'm also paying attention to what ex Goldman CEO Lloyd Blankfein had to say, that a recession is a very high risk factor. Do you agree with that characterization?

LINDA DUESSEL: Well, I think a recession is very likely in as much as day follows night. We're supposed to have recessions every now and again. What I think is unlikely is a recession any time soon here. And so that's what makes this all so very interesting to try to navigate. Because nobody knows if we're going to have the soft landing, the soft-ish landing as Jerome Powell said recently, or the recession. And so that's why we have to have our shopping list. That's why we have to be patient investors and say, you know what? I'm a long term investor.

I do have some cash on the sidelines. And lots, and lots, and lots of people do. And so I find this to be relatively inexpensive. I like that 38.50 level that Konstantin suggested. That figures in a soft-ish landing already. If that's what you believe, nobody knows, then that's a good place to get involved. But still keep some powder dry in case Lloyd is right and we do end up in a recession.

It's a tough, tough tight rope though that the fed is walking because we have persistent inflation.

RACHELLE AKUFFO: And obviously, speaking of inflation, you have consumers, they're looking at their 401(k)s. They're wondering at what point some of this pent up demand is going to continue to start waning. At what point, Chris, do you think we're going to see that sort of starting to bite into earnings if inflation persists at this level?

CHRIS KONSTANTINOS: Well, Rachelle, I think you asked the $60,000 question right there. And that's the debate every day at my shop is when is this going to start manifesting itself in earnings? Because if you look at the 12 month forward earnings stream, it's actually improved from the beginning of the year till now. I think it's somewhere around, let's call it, 230, 235 bucks.

So the question is is that the next shoe to drop? We've now gotten this-- we've gotten the multiple to contract because of interest rates. Now is the next leg of the market downward trend going to be all about earnings? Right now, we're not seeing it. And if you look at the past earnings season, which we just got through, yes, the percentage of beats was a little bit less than historical, but is still a pretty decent number.

And the overall earnings stream, the earnings power of the S&P 500 is actually still pretty good. So we're watching that very closely. We're watching earnings revisions trends not just in the US, but also in Asia and across Europe and other major geographies. But right now, the US still has one of the strongest earnings revisions patterns. And it's still slightly positive. So right now, I'd say no red flag yet on earnings.

SEANA SMITH: Linda, when it comes to the cyclical versus the defensive trade, I guess, what do you expect to lead us higher at least from here?

LINDA DUESSEL: I think what would lead us higher is probably the more, I don't want to say the cyclical theme, but those areas of the economy, think financials for example, a big piece of the S&P 500 is generally an early cycle play. But it's very inexpensive. And the banks are really quite inexpensive right now.

So I think you might see that with kind of a burst of feeling good about things looking away from technology. But energy is our favorite sector. And just followed by financials, materials, industrials, these are all sectors that are not suggestive of a recession any time soon on the horizon. And they are really quite inexpensive right now. Technology just getting creamed. And it's still is historically expensive.

So and I think this is the right way to invest too. Because when we look at forward earnings expectations for the S&P, they've only recently slipped off of a record high. And that's really only because of Amazon. You still are seeing many companies able to push through those higher costs because the consumer still has a ton of cash that he can spend.

DAVE BRIGGS: A silver lining. All right, Chris Konstantinos and Linda Duessel. Appreciate you being here. Thank you both.