Market strategist: ‘You have to hate stocks less than bonds in this environment’

ProShares Global Investment Strategist Simeon Hyman joins Yahoo Finance Live to explain his preference towards stocks over bonds in an impressionable market easily affected by Omicron and discusses the 2022 outlook for investing and ETFs.

Video Transcript

BRIAN SOZZI: Simeon Hyman is a Global Investment Strategist at ProShares and is here with us now. Simeon, always nice to see you here.

I want to continue the conversation we were just having at the open of the show and really discussing why the market is rallying alongside really the pandemic that is clearly still raging on.

Do you think the market is underpricing the ongoing risk of the pandemic?

SIMEON HYMAN: Look, I think we're all crossing our fingers that the pandemic is becoming perhaps endemic, or at least less risky to the economy. Omicron clearly had an impact on the market initially.

But the notion that it's less virulent even though more transmissible has been coming across as good enough for the market. And the bottom line with regards to the equity market and the bond market is that you kind of have to hate stocks less than bonds in this environment.

Bonds are defenseless with fixed coupons in the face of inflation and rising rates. And it is equities and stocks that are coming to the party with tremendous earnings growth and the ability to persevere.

Even in the third quarter when the supply chain issues, staffing shortages were already there, earnings grew 40% year over year. And they were 35% up from 2019, lest you think it was just a low comp from the pandemic.

JULIE HYMAN: It's so interesting to me, Simeon, because we have seen bonds remain stubbornly-- the rates remain stubbornly below where you would expect them. What do you think is going to be sort of the turning point?

Is it going to be when the Fed actually starts to raise rates? Or are we going to finally see a move in advance of that?

SIMEON HYMAN: It's the tapering. So it's very important to distinguish between the tapering and the rising and the increase of the Fed funds rate.

Now, in context, by the way, we're sitting at about 150 basis points on the 10-year. That is a 60 basis point rise from where we were a year ago. So rates have risen this year. Treasuries have lost money.

But going forward, it is tapering the ending of the buying of the bonds that has artificially suppressed the long end of the curve that will allow those rates to normalize. Normalize means increase.

And even just halfway to normal would be well north of 2% on that 10-year. So yes, historically, when the Fed has increased the overnight rate, that has tended to flatten the yield curve. But that's from decades past.

This time around, we're unwinding that quantitative easing. And that's a very different story.

BRIAN SOZZI: Simeon, we were looking at some of the stocks hovering around 52 week highs. Right now, really it is a who's who's name of big name companies.

On your platform, are you seeing any crowded trades that you think are due for a pullback in January?

SIMEON HYMAN: Do we think that there are some certainly prudent ways to participate in what likely will still be a pretty good year for equities in 2022? Yes, we know the mega cap names and the mega cap tech names have run quite far over the last few years.

I'm not here to sort of ring the warning bell on that. But to suggest there are opportunities out there that are important. You've heard us talk, for an example, about dividend growth many, many times.

And one of the key advantages there is that's your inflation hedge. The ability to grow dividends and earnings is a key, key component of defense against inflation and rising rates.

So you know, there are pockets of the market that have been left a little bit behind. Small and mid-cap stocks are also one of those. So there are opportunities to participate but stay a little bit underweight some of the stuff that has been particularly high flying.

JULIE HYMAN: You know, and on that topic, we're showing one of the ProShares ETFs at your house. One of the other ones regarding what you're just talking about, the ProShares equities for rising rates ETF, which has been an outperformer this year.

Is that something then that is going to continue to outperform? And what's the positioning within that that makes it attractive?

SIMEON HYMAN: We do think that's a good call for 2022. It's earned its stripes in this past year as rates have risen.

And it looks for and it identifies companies that have-- and sectors that have historically outperformed when interest rates have risen. And so you're asking how it's positioned.

The biggest sector weights are financials and energy. That makes sense, again, a steepening of the yield curve. Remember, 60 basis points on the 10-year this year. Almost quietly, people forget about that.

And of course, the energy story, well-known. Importantly, this is about rising rates. So even if inflation mitigates a bit, back to that tapering story, the odds are that the longer end of the curve will continue to increase even if inflation moderates from this 5, 6, 7% level.

BRIAN SOZZI: Simeon, lastly, do you think the pump is primed for one more big push in the markets in January? Because the way that I'm thinking about it and just listening to you here, I would want to get long the market before the Fed starts to change how it thinks about interest rates or pushes through its first hike.

SIMEON HYMAN: I'm an old school trust kind of guy, an investment policy statement person. So tactical shifts for me are 18 to 24 months, not 6 or 8 weeks.

I don't think you have to be that careful about timing it. Because the overall level of rates is still likely to be quite low. You know, we're trading at 22 times 2021 estimated earnings.

That is very consistent with a 2% 10-year if you scatterplot the history. So yes, rates are going to rise.

But one of the other key elements in favor of stocks is they're still historically low. So even in the face of some steepening of the yield curve, it's likely to be well in the bounds of still supportive of equities.

So do you have to do it in January? I don't think it's so critical to be so sensitive to market timing to get in front of the actual beginning of tapering and perhaps even increases in the Fed funds rate.