Investor fears 'are a bit exaggerated': Strategist

State Street Global Advisors US SPDR Business Chief Investment Strategist Michael Arone joins Yahoo Finance Live to discuss the latest market action.

Video Transcript

Let's bring in our first guest for the hour. We've got Michael Arone, State Street Global Advisors-- Advisors, US fighter Business Chief Investment Strategist. Michael, I mean, it's tough to sort of break down where the market is right now given it is a pretty ugly picture to kick off the week. What are you seeing as the biggest catalyst to the sell off? Is it really just about the Delta variant and the concerns around the rapid spread?

MICHAEL ARONE: Well, I think Jared did a great job with the technicals. And they've been signaling caution for a few weeks now.

So if we look at it in terms of kind of the advanced decline line has failed to reach new highs, the equally weighted S&P continues to lag the broader market. Russell 1,000 constituents. The average stock is down about 10% from its three month high.

So there has been some enduring underlying signals of weakness from this market, even though it stayed at all time highs for a number of weeks now. So I'm not surprised with this particular sell off given some of the weakness we saw in those technicals. It was looking for a spark. And that spark has been the rise in the Delta variant and fears.

So as you had been highlighting, new mask mandates in Los Angeles County and other places, news out of the Tokyo Olympics has some as folks a bit concerned.

- So Michael, I mean, if you're not necessarily caught off guard here with this sell off. I mean, how do you look at maybe the duration of what we're seeing? Because we have seen kind of failed breakout the VIX before. And now we're seeing quite a pop the day. I mean, do you see this as kind of the spark that could trigger a pretty substantial move to the downside, or is this just kind of a fear blip in your mind?

MICHAEL ARONE: I think kind of a normal correction in that. 5% to 10% area given kind of the seasonal weakness, the technical weakness, and some of the headlines is probably appropriate. But I do think that longer term, the bull case still remains pretty solid.

So the fact that both you have this consumer pent up demand, you have business spending that's actually accelerating. We're seeing the Zoom acquisition today. I think businesses are either returning capital to shareholders or spending in terms of on M&A or on new capital expenditures.

I think that to continue to support the markets. So I'd see it as a bit of a normal or typical correction perhaps in that 5% to 10% range. I'm not surprised given the technical weakness, and I'm not surprised given some of the more recent headlines and concerns about the second half slowdown.

Now that said, Zach, I do kind of anticipate that the fears are a bit exaggerated here. And I do think that the markets will find firmer footing after a healthy correction.

- From an investment standpoint, do-- do you see this as an opportunity to buy on the dip? Or do you sort of hold your position right now in anticipation of a further pullback let's say a few weeks from now?

MICHAEL ARONE: I-- I would stay the course here perhaps be able to add at the margin from investments that we've been keeping an eye on, for example. So we could get one of the things I think is interesting is that the cyclical trade has started to soften for the last couple of months.

So as 10-year Treasury yields have fallen, the cyclical trade, the reflation trade has seen some weakness. Now many of our clients and many investors that I meet with have benefited from the cyclical trade, the pivot towards value, and small cap really since last fall through the end of March. And those positions have grown in portfolios.

So now I think you need to pivot towards more of those secular growth opportunities, which in some instances have been down pretty considerably. So your innovation, your disruptive tech, your exponential growth, I think are opportunities to add here at potentially lower prices.

- Yeah. That has been going on. And we talk about maybe today some of those standout names when it comes to maybe the lockdown on trade. And you know, I don't want to say that we're headed back towards that. We'll be discussing it later on in the show. And with a number of our doctor guests.

But when we talk about those standouts, you can look at Wayfair. You can look at Peloton. Some of those names that had been levered to, you know, working from home and the rest. I mean, I wonder if that seems short lived in your mind and kind of this rotation away from some of those names.

Now back, coming back again. How do you look at that as maybe proof of all this being triggered by some of those COVID fears arising again?

MICHAEL ARONE: Well, I think just a couple of months ago, we were talking about, is the market price for perfection? Has it priced in all of this very rosy good news? And so from my viewpoint, things are never as good or as bad as they seems.

So I think that our recommendation is continue to keep a foot in both camps. So kind of we expect as the economy recovers and exits a pandemic that those cyclical trades. Your energy, your financials, your industrials will continue to perform well as we exit the pandemic. It just won't be a straight up kind of rise from that standpoint.

Now longer term. We do believe that some of the secular trends are likely to continue, and that debt deficits demographics, the disinflationary forces of technology, fiscal policy, benefits that are beginning to fade. And the fact that monetary policy will have to be addressed at some point or limit as to how high rates and inflation can get. Perhaps this is a bit earlier than we anticipated.

But for those reasons you want growth. You want innovation, you want disruptive, tech in your portfolios.

- And Michael, we haven't talked too much about the moves we're seeing in bond yields today. But the 10-year T note right now hovering just around 1%, 2% after dipping a little below. What does that tell you about the sentiment in the market? And how significant a gauge is it?

And is this really just about investors seeking yield in-- in a global bond market where the US treasuries are really the only ones? Or is this something larger in terms of where the sentiment is?

MICHAEL ARONE: I've been uncomfortable with the narrative explaining the fall in 10-year Treasury yields for a while now. I've been asking colleagues and clients a little bit about their views. So it could go I think it's well the Delta variant could signal a second half slowdown.

The Fed prematurely brought those interest rates hikes forward. That's going to prematurely end the economic expansion.

I've heard kind of seasonal effects of back in February and March, non-US buyers of treasuries were on the sidelines now kind of like you're saying. They're back buying the higher interest rate differentials.

And of course, we've all heard the fact that kind of futures positioning on treasuries is net short. And those shorts are getting squeezed. And the more they get squeezed, the further yields are falling.

So I think it's a confluence of a number of things. But to me, it signals that for a while now that treasuries are suggesting that the economic growth coming out of the pandemic isn't likely to be as robust as some anticipated.

It also underscores what the Fed has been saying about the fact that inflation is transitory. To me, that's the biggest surprise. And that last week we had the CPI and PPI come in much greater than expected, and yields went lower. So that says to me that markets are anticipating perhaps less strength in the economy going forward.