Investors are ‘overloaded’ with mega-cap tech stocks: Heritage Capital President

Heritage Capital President Paul Schatz joins Yahoo Finance Live to discuss the outlook on the market, Big Tech stocks, and Fed policy.

Video transcript

ADAM SHAPIRO: Let's bring in Paul Schatz, Heritage Capital president. Always good to have you here, Paul. And just want to put into context a little bit of what we're witnessing here. Nobody likes when they see the value of anything they've got go down, unless they're defrauding the insurers.

But here's the deal. When we look at the S&P 500, it's down a little over 1% if you look at the past month. It's up if you go back three months, roughly 1 and 1/2%. You are expecting and you're telling people, get ready. There's going to be a 5%, you know, drop, maybe even greater. And the way you said it to us was there's going to be some damage, and it's going to take time to repair it. So as an average investor, what should we be preparing for looking forward?

PAUL SCHATZ: And it's good to see you, too. Look, I was on with you a couple of weeks ago to begin the year. The market was at an all-time high. And what I said was I fully expect a 5% plus pullback in the first quarter. I think the S&P is probably down roughly 4 and change right now, along with the Dow. The other indices are down much more. And the road-- my roadmap would be something like a pullback in the first quarter. We regain it in the second quarter. The bigger decline comes in the third quarter. We regain it in the fourth quarter. The year is all about patience, frustration, and quality. So that could be a fun year.

But regarding right now, the market's trading-- there has been damage done, and it's going to take time to repair. But given what the Fed has thrown at it, the market's done fairly well. Given the inflation numbers, the market's done phenomenally well. The average investor, if you're nimble enough to prune, to take some-- harvest some acorns for the winter, I think you'll be well served. The problem, Adam, is that the average person is overloaded with an overown, and over anything else you want to call it, with the mega-cap tech stocks.

And so many those people, similar to the refrain I heard 20 years ago-- well, 21 years ago now-- I'm not selling them. They've been great. Well, you quoted returns, and it all depends on the context. Are you looking at the one weel, the one month, the one quarter, the one year? So some of these tech stocks are going to be in for some hurt this year. So the individual investor, you shouldn't be overweighted in megacap tech. Use what rallies we get to feed the ducks to sell a little bit. But don't sit back and think that this year is going to be hugely rewarding for big tech. It's not.

EMILY MCCORMICK: Paul, as you mentioned, we have a Fed that's set to start raising rates and tightening financial conditions. We've received disappointing earnings results from many of the big banks and other early reporters so far. Are there positive catalysts you see coming up for the market? Or should investors be bracing for more volatility for a while?

PAUL SCHATZ: Yes, to answer all your questions. So, one, bank earnings are notoriously difficult to read. Way above my pay grade. But let me-- and we own JP Morgan and some others. I would not overreact because of what happens right around earnings. Bank earnings, difficult. You normally see a pullback. I wouldn't read too much into that. Regarding everything else, yes, I mean, earnings are going to slow. GDP is going to slow this year. The Fed is the main culprit here. It's not omicron.

I said this back on October 28 with you guys. The spin can be omicron. It's not. This is all about the Fed. They should have begun the taper in the summer of 2020 very slowly and gradually so they could slowly and gradually raise rates, so they can slowly and gradually feed some of their assets into the market. They denied inflation was an issue. Now they're playing over catch-up, just like they did in Q4 of '18 when the stock market went down 20%.

And while I don't think 20% is a decline in the cards for the first quarter, any decline we get, the volatility, we're going to have a volatile year. You want to blame someone? Blame Jay Powell. And this is all at Jay Powell's feet. He saw what the government was doing. The government was stimulating the economy and overstimulating it. And I get it. It's not a partisan statement. Both Republicans and Democrats did it. But the Fed just kept pouring gasoline on it, and they're fully to blame for this and what comes the rest of the year.

ADAM SHAPIRO: You know, when we talk about these kinds of things, especially interest rates, most of us experience interest rates through the loans, whether it's a car loan, credit cards, or mortgages. We have a video up right now, the housing market demand driven by millennials aging into homeownership. I want to get your analysis of what should, again, as average investors, how do we play what we know is coming?

There's going to be increasing interest rates. But we also have, on the other side, mortgage rates going up. We have great demand from a whole class of people who are forming families and want to get out of their parents' homes or out of their roommate situation. Is there a way to appropriately use that very on the table fact to invest?

PAUL SCHATZ: So you brought up interest rates, and you specifically said, you know, mortgage rates, I think credit cards, and auto loans. Our thesis for this year is the bond market is going to form a low in the first quarter. Whether or not the 10-year gets above 2%, we can argue it doesn't matter. I think you can buy any yield spike above 2%. And I think you'll be rewarded this year. I think mortgage rates will actually trend lower the second half of the year and reward those millennials-- or actually, there's a generation behind it. I can't remember the name of it because they call me the boomer now.

But I would not be-- I would not worry if I were younger, looking to get out of my parents' house, my roommate situation, buy a car, take out a mortgage, because I think those rates-- short-term rates the Fed controls are going to go up. I think those long-term rates are going to stabilize and then trend lower last three quarters of the year and reward everybody. So I'm not so concerned there. The big problem, frankly, for those folks is real estate prices are outrageously expensive. So patience is a virtue in the real estate market.

ADAM SHAPIRO: OK, boomer. You set yourself up for that when you called yourself a--

PAUL SCHATZ: My kids call me it all the time, Adam. I can't get away from it.

ADAM SHAPIRO: Well, I'm almost a boomer. I'm actually early Gen X, but you know, behind us, Gen Z, millennials--

PAUL SCHATZ: Me, too. I'm 55. I'm not really a-- I'm not a boomer. But--

ADAM SHAPIRO: You're Gen X. If you're 55, you're Gen X.

PAUL SCHATZ: --that's a big disparagement in the house. Right, we're insane.

ADAM SHAPIRO: Lower their allowance. Paul Schatz, the president of Heritage Capital--

PAUL SCHATZ: Thank you. Good seeing you.

ADAM SHAPIRO: --all the best to you. Thank you for joining us.