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How to read this week's market whiplash: Investor Playbook

US equity markets (^DJI, ^IXIC, ^GSPC) have had solid footing in 2024 despite some hiccups, until the Dow Jones Industrial Average spilled 600 points in a single day this week — the worst trading day of the year for the average. Pernas Research Co-Founder Deiya Pernas and Mahoney Asset Management CEO Ken Mahoney join Market Domination to discuss the state of index investing. Pernas believes investors' biggest worry should be "complacency" in the indexes.

"The market's trading at 21 times forward. and it's somewhat typical of late-cycle that you see large cap quality do quite well and that's what we've seen this year," Pernas elaborates, pointing out small cap equities' value growth is flat and may not be participating in market rallies. "If you look at it holistically, there's some areas of the market where cracks are evident, but again, at the index level, I think there's a lot of complacency."

"Tere's a lot of examples this earnings season, especially in technology, so we don't need to be near airlines and autos or retailers or some of these other ones that are mentioned. We don't need to be in those industries," Mahoney explains, later going on to discuss big names in tech. "We're in the fast lane, we're growth managers. We accept the bumpy ride in the left lane, but that's where all the CapEx spending, that's where the excitement is. The multiples can expand when we have this type of opportunity..."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

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This post was written by Luke Carberry Mogan.

Video transcript

Markets hitting a speed bump recently following multiple up weeks for all major averages, the Dow Jones industrial average looking to bounce back from its worst day of 2024.

But it's a little change right now with the market whiplash.

We're looking at how to navigate the big picture with the Yahoo finance playbook, Perna, researcher, co founder Day Perna, along with Mahoney Asset management, Ceo Ken Mahoney are joining us now to discuss.

Thank you guys so much for being here.

Um Day, I wanna start with you here.

How, how should people sort of think we've, we were sort of up into the right for a while pretty consistently.

And lately things have gotten a little bit more volatile, especially now that the catalyst of earning season is over.

What's gonna be the next catalyst and which way is it gonna take us?

Yeah, I think that as far as the recent volatility, I think it should just be put in perspective if you look at just broader sentiment, if you're looking at pricing volatility like the V for the index, that's still quite near 10 year lows.

So if you zoom out a little bit the volatility is still quite low.

And the market is actually uh when you're looking at, at that broader perspective, quite complacent.

So I think that if there's any sort of risk, it's a risk of complacency, the broader broader index, if you look at uh investment grade spreads, if you look at high yield spreads, all of those are near 10 year lows.

So from my perspective, uh at the index level, there's been a complete departure of recessionary fears uh from broader market pricing.

And if there's anything investors should be worried about, it's complacency at the index level there, we have uh the indices at or near record highs while we just had a big sell off, but they're still pretty close within a few percentage points.

Do you think the markets have gotten too complacent here?

Well, how are you viewing things?

Yeah, I think look uh the market is trading at 21 times forward and it's somewhat typical of late cycle that you see large cap quality do quite well.

And that's what we've seen this year.

And if you drill down into some of the smaller cap names, the small cap index right now is uh small cap value is flat on the year, small cap growth is up a little bit on the year.

So the the other smaller type names have not participated.

And if you drill down into different sub sectors, like quick service restaurants like uh luxury goods, like staffing companies like real estate related sectors, a lot of those are struggling.

So if you look at it holistically, there's some areas of the market where cracks uh are evident.

But a again, at the index level, I think there's a lot of complacency.

So I I think investors should take a more holistic if you and realize that look, maybe uh large cap has done really well, maybe I should rotate some of the other uh you know, different, different type of sectors, maybe some of the uh traditionally lower quality stuff because there is some value there.

Well, we'll get back to you on what some of those specific ideas are.

But I want to get Ken's take on this idea of complacency and specifically Ken through the lens of valuation, which I know is something you've been doing some work on, right.

So at first again, it kind of sounds like cliche, but seriously, we went from April showers to May flowers and you know, the Bears really had a good opportunity.

I mean, really it was the perfect Storm Russell Crowe movie where, you know, you had higher interest rates, you had the federal reserves nonstop higher for longer, higher, for longer.

Oh, missiles flying around in the Middle East and the Bears only got what about 5 6% and the Bulls took over again.

I think the reason why it's happening is we're getting a very strong tailwind with earnings and earning estimates going higher.

We saw happened this week one example in the video, but there's a lot of examples this earnings season, especially in technology.

So we don't need to be near airlines and autos or retailers or some of these other ones that I mentioned.

We don't need to be in those industries.

We're in the fast lane, we're growth managers, we accept a bumpier ride in the left lane.

Um But that's where all the Capex spending.

That's where the excitement is.

The multiples can expand when we have this type of opportunity.

And I know there's a lot of similarities with the 19 nineties and stuff.

Um but you know, that was like eyeballs and clicks and valuations.

These are real contracts, these are real $20 billion contracts of me or $20 billion contracts with Tesla.

So to me, you know, you can, you can actually justify the valuations when you have top line growth like this and you still have a two or three year window for Capex spending.

Dale, let's go back to you.

Uh Just a couple of picks here.

Uh If you love big tech, we can talk about that.

But if you have other areas of the market, we'd love to hear that too.

Yeah, look, I think the best portfolio has a little bit of everything.

There's no reason to let dogma take over and focus only on one part of the market and have blinders on.

Uh There are large cap quality names that we really like, you know, Ken, uh I, I, you know, you mentioned meta and some of the uh huge spend that's going into uh GP US and the data center infrastructure that surrounds them.

And I think there's incredibly uh rational reasons to be bullish there.

Uh But, but as far as uh WW we try to, we try to look at different areas of market where there is value and right now where there is where we are seeing value is some of these smaller cap names that have a little bit more debt that have variable rate debt.

And uh you know, they don't have quite the all the levers that the large cap companies have to pull in order to smooth out earnings through a cyclical type environment.

So I think that if you look at some of the small cap names, uh there could be opportunity.

Uh you know, uh I know uh we're, we're Bush on several that I can discuss.

But uh but yeah, that's where we're at with our portfolio.

And, and what about you again?

I mean, you said you're a growth guy.

Where are you seeing the be the best potential for growth right now?

We still stay with the video.

I mean, they really haven't come out with the Blockbuster Helmet that's gonna come out later this year and look, I hear how expensive it is.

But again, a lot of that's pe which is rearview mirror for Pe which is looking ahead, you know, you're finding yourself 37 to 40 for, for the video.

And quite frankly, that's where it's historically last 10 years.

Sometimes it goes higher, sometimes it goes lower with great earnings.

You know, what's expensive to us is companies like Nike that afford PE S of 35 we're all gonna have 1 to 3% top line growth.

Uh Again, we also like Meta.

Uh we also like Apple, we think it's gonna be a huge upgrade cycle with, you know A I uh also buying back 100 and $10 billion worth of shares that gives some type of support on Microsoft, all the verticals you get and A I on top of a cloud and Amazon, I, I would say that was kind of a sleeper this quarter.

Um Those are really strong earnings particularly in advertising.

I don't think a lot of people put uh attention to that.

I think for Amazon, it's mostly about cloud.

It's the retail side, we trip over your boxes and prime members, but $12.8 billion in a quarter for advertising, that's very expensive real estate uh on their, on their site.

So again, we still like the big tech, we like these companies because let's face it, Meta has 3 billion.

Uh Facebook has 3 billion uh daily users, Microsoft 1.2 billion uh uh uh uh clients and for Apple 02.2 billion devices.

So we don't like small cap, we like large cap because they have wide modes and again, a little $5 here, $10 here for an upgrade is substantial to the bottom line for those companies that have these huge amount of customers.

Well, you do $3 billion to a couple of dollars and you got a lot of billion dollars.

Um I wanna get to uh something you're talking about in your notes.

Some of a lot of these pandemic companies uh really took a beating.

I'm I'm sorry, pandemic, darling.

Companies took a beating in 2022.

Along with the general market, they've either had trouble raising cash or they've just been kind of thrown out as you say, baby with the bath water.

Uh can so many of these companies be rehabbed?

What, what would that look like?

Yeah, as you uh you know, as you alluded to there, so many companies came public in uh 2020 2021 or, or even early 2022 and it was just a huge money grab.

There's a lot of euphoria ip OS were being priced very extremely.

And uh and you know, business owners were accelerating their time to market and what that, what that resulted in is companies that didn't quite have the full fledged communication departments, even the full throated business models that the street typically likes to see for publicly traded companies and the their, their earnings are way too cyclical.

They're, uh, they're not linked, like Wall Street really likes to see companies that are growing revenue very steadily year over year, even quarter, over quarter.

So that's what Wall Street really likes to see these companies.

They're just too small and even a bit too flimsy.

But that doesn't mean they're not real companies.

I, I'll make a concession.

A lot of them aren't and a lot of them shouldn't be pub publicly traded companies, but they are some, I think jewels and there and one of them that we really like is remit, that went public in 2021.

They're a cross border digital Remittance provider.

We think there's well over 100% upside from these levels best in class technology and the company just doesn't quite know how to digest their business model and they're still acting like they're a private company themselves.

They don't communicate the right information with the street and, and, you know, so there's still a lot of work to be done there, but it's a real business with a real business model.

All right, we're gonna have to leave it there.

We got the closing bell coming up day and Ken, thank you both for your time.