The amount of money printing is really extraordinary: Strategist

Tony Dwyer, Canaccord Genuity. Sr. Managing Director & Chief Market Strategist joins the On the Move panel to discuss the economic reopening rotation.

Video Transcript

JULIE HYMAN: Let's talk about what all of this means for markets and what it could continue to mean for markets. We're joined now by Tony Dwyer. He is Canaccord Genuity Chief Market Strategist, joining us from upstate New York. Tony, it's good to see you.

So we look at these numbers, which obviously look very dismal. There has been a lot of talk about how the market's perception seems to be things are going to improve from here. And in a recent note, you also wrote what I'm going to boil down to say is sort of that old saw-- don't fight the Fed. Am I interpreting that correctly? In other words, with all the stimulus out there, the path of least resistance is probably still higher for stocks?

TONY DWYER: Well, the real turn for us, Julie, came twofold. When the Fed at the-- after the last FOMC meeting, and at the press conference, the Fed chairman said literally there is no dollar limit to the support we're going to give to the credit markets. That's an extraordinary statement. That says that any credit problem that emerges, they're going to be there to backstop you.

And what that did-- what most people don't realize when they talk about the market is there's been two different markets here. There's been the stay-at-home market, which was the first incredible leg up on the S&P and the markets coming off of the March 23 low, led by the mega cap stocks that benefited from working and staying at home.

What's been transitioned since that FOMC meeting, and then even more so after the "60 Minutes" interview, where Powell said, where the Fed chairman said not only is there no limit to the amount we're going to print, we don't worry about that till later. I mean, he's officially telling the world that he's printing money and not to worry about it. He's just going to keep doing it.

And it was at that point that that second different kind of group started to rally. We called it the value stocks, the banks and the tanks, the economic reopening trade. After that "60 Minutes" interview, what had happened before it-- and just that Thursday before it, do you remember Wells Fargo was rumored to be going-- to be in trouble, bailed out by Goldman Sachs and having to cut their dividend? "60 Minutes" happened and that shifted. That comment, that don't worry about it, we're going to print money, that really did it.

ADAM SHAPIRO: Tony, it's Adam. Good to see you. So when you folks at your firm make a move to, as you said, to being more offensive in your investment strategy, what's your time horizon? And is it different than the horizon for those of us who might be individual investors? You have much larger pools of capital at your disposal than, say, someone like us.

TONY DWYER: I appreciate the question, Adam, because I think all too often, people like me come on TV like we're telling individual people what to do. The only person that can decide what to do-- my job is to give an idea of what could happen. And then you work with your own risk management and financial advisor to figure out what you should do. I advise institutions.

So the offensive trade, we weren't defensive. We just hadn't-- we were market neutral, which meant you're indexed. I couldn't really understand what to do, given the uniqueness of the environment. When the Fed chairperson tells you he's going to print unlimited money, literally using the term printing money, and don't worry about that for the future, you want to be exposed to the economic reopening stocks.

So just as an aside, the S&P is up 5% from that move we made early last Tuesday morning when the market opened after the Memorial Day holiday. And then banks, or the financials and the industrials, are up 13% and 11% respectively. So the mega caps, work-from-home, worked up until maybe late April. And now it's all about the economic reopening.

JULIE HYMAN: Tony, I have a bit of a random question for you, which is I'm curious how much retail versus institutional has played a role in this rally. I mean, someone recently said to me, with all these people working from home, a lot of people who wouldn't necessarily have time to might also be trading from home, right? Just lay people, retail people who have stocks and have been trading them. Do you think that that has-- I mean, I know normally retail is not sort of a big needle mover.

TONY DWYER: I think it's garnered a lot of attention, Julie, and I'm really glad you brought it up. Because I think this narrative that the Robin Hood traders that are home figuring it out and day trading because they're sitting at home, I don't think that works here. And here's why.

Prior to that Fed "60 Minutes" interview, emerging was underperforming developed countries. Economic reopening was underperforming mega cap, predictable growth stocks. Since the Russell 2000 was performing really poorly relative to the S&P-- so the point of that narrative is if all of those areas are doing better, that's just too big for the day trader sitting home doing Robin Hood.

It's not just a few stocks. It's currencies. It's bonds. It's sectors. It's capitalization. It's too broad.

The market shifted-- this is so important-- the market shifted from we're going to be working at home for far too long and staying at home, so buy these mega cap names, to whoa, the banks just retest of the low in mid-May. They haven't moved yet. I mean, the banks are up almost 20% in under two weeks.

So it's a catch-up trade. The market being up over 30% in May wasn't the conclusion that the economy's in a V-shaped recovery. I think it was more a conclusion that it wasn't. And now you're starting to discount that economic vitality through this quote unquote reopening trade.

- Tony, when you think about the stay-at-home trade, of course, Zoom Video Conferencing came out with really blow-out earnings. We should expect Slack earnings out after the bell today. I mean, I hate to be the cynic here, but is it the kind of paradigm where kind of good news is bad news now, because this means it will be the full peak? We can't really expect those kinds of numbers in the months to come.

TONY DWYER: Well, I think something we were talking about before we came on air is when's everybody going to go back to work, and what's that going to look like? So I'm not so sure that-- it's not a black or white situation. Our call over the last month has been if you're significantly overweight these stay-at-home stocks, bring it back toward neutral.

They've had such an incredible move. But that's not go short or underweight. Just go back to neutral.

Where you wanted to focus new buying was on those areas that hadn't done well. We called it the value, the banks and the tanks. It could be consumer discretionary. It could be materials-- anything related to economic reopening and the vitality that that brings.

JULIE HYMAN: Tony, in the last hour, we talked to a guest from the Global Association of Risk Professionals who is concerned about the leverage loan default rate, which he said could be as high as 25% and could pose a systemic risk down the line. Are you concerned about that? Or do you think that the Fed is in there enough that that is not as high a risk?

TONY DWYER: There's a lot of credit issues that I could come up with. I could craft a really negative scenario based upon commercial real estate leverage, based upon private equity revaluations after the drop, and based upon things like that. What the market is focused on is so far that the Fed has said that they're going to step up and solve any problem that comes up. And interestingly, they have.

As you know from our most recent note, you've done about a trillion dollars now in corporate credit new issuance in just two months, since the March 23 low. That funds companies getting through this crisis. So if you do actually reopen the economy, you have the ability to eventually grow again.

These credit issues are there. They're real. At some point, somebody is going to have to pay back the money.

And that really hasn't been a focus of mine. I'm not one of those oh my god, the deficit is so big, run-for-the-hills kind of strategist. But the amount of money printing is really extraordinary.

But for now, like I said, the move is don't fight the-- Marty Zweig, don't fight the Fed. Don't fight the tape.

JULIE HYMAN: And for you guys, strategically, what does that mean for you on the credit side? Are you staying in investment grade and away from sort of further out the risk profile?

TONY DWYER: When the Fed announced that they were going to buy various areas of high-yield debt, that was a good news item. But the market, it spiked that day, and then it kind of didn't do much in corporate land. It kind of went sideways. Spreads went sideways. Absolute yields went sideways.

When the Fed made that comment after that-- the "60 Minutes" interview, where we're going to print money-- they didn't even use quantitative easing. They actually said we're printing money. And there's no limit to what we're going to do, and worry about that later. All of a sudden, you got a massive rally in investment-grade and high-yield bonds that has continued.

So our call has been for the last-- since that time, which was May 12, or May 16, you want to be buying corp-- buy what the Fed is. The guys printing the money told you what they're buying. So you've seen a solid rally in corporate, both investment-grade and high-yield.

It may be honestly a little bit excessive at this point. But again, the guys printing the money are still buying it.

JULIE HYMAN: Yeah, all right, good points here-- follow the Fed. Tony Dwyer, Canaccord Genuity Chief Market Strategist, always great to see you, Tony. Be well. And thank you for joining us.