Upholdings Portfolio Manager Robert Cantwell and Scott Clemons, Brown Brothers Harriman Chief Investment Strategist, joins Yahoo Finance Live to discuss expected market volatility amid geopolitical tensions and Fed interest rate hikes, spiking oil prices and energy market unrests, companies benefiting and hurt by market behaviors.
- And that is the closing bell this Monday, March 7th. We've made it through yet another volatile day on Wall Street, with all three major indices sharply in the red. The S&P 500 down nearly 3%, the Dow Jones Industrial average, now down more than 800 points or about 2.4%. And the NASDAQ composite, the biggest laggard during today's session, down 3.6%.
But let's now bring in our market panel to help make sense of the moves that we've seen over the course of the past day. Scott Clemons is chief investment strategist at Brown Brothers Harriman, and Robert Cantwell is a Upholdings Portfolio Manager. Scott, I'll start with you. Just taking a look at the price action and the volatility that we saw in today's markets, do you think this was an overreaction to the downside or does this move make sense to you, given the uncertainty that we still have on the geopolitical front, especially?
SCOTT CLEMONS: It makes sense, in a couple of contexts. The first and the most obvious of which is what's populating headlines, today. But if you take a step back and broaden the picture out a little bit, it's worth reminding ourselves that this market rally that began in the dark days of late March of 2020, went all the way through January third of this year, without any real correction to speak of.
Certainly no 10% pullback, or anything of that nature. What we're seeing, and have been seeing since the beginning of this year, is the reminder that volatility is a feature of financial markets, it's not a bug. It doesn't always need a reason. There's a very good reason being presented today, obviously. So this, within the context of larger market trading terms, makes all the sense in the world. Particularly when you layer the geopolitics on top of it.
- So Scott, I want to bring you in here, then. In terms of the companies that you would really back here, when you look at the volatility and we don't know how prolonged it's going to be you have the interest rate hikes, you have inflation, you have the Ukraine-Russia crisis. What companies are you watching? Where do you see the best investments right now?
SCOTT CLEMONS: Well, if that question's to me, I'll be brief. It's really across the board. One of the features of the market, last year, was that the rally we enjoyed was pretty narrowly led. There were plenty of companies that got left behind in that rally. So our portfolio managers and analysts are finding opportunities that have sold off far more than the market has, pretty much across the landscape.
Energy might be an exception, because energy, obviously, has moved in the opposite direction, this year. But other than that, there are a wide breadth of opportunities on offer.
- OK, and so Scott, when we think about the opportunities that are out there right now and perhaps those that you would be stepping away from, because, that's where a lot of those rotation also comes into play, is where investors are trying to mitigate some of where they still do have exposure on the table. Where would those places be?
SCOTT CLEMONS: Well, I would be very nervous of energy in here. And not only because of how well it's done, but as a reminder, geopolitical unrest like this, can obviously lead to a spike in oil prices and they can be quite scary as the spike in oil prices are today, but they can also resolve rather quickly. We're seeing a lot of energy companies that have run away far on the upside, anticipating not just elevated prices of the underlying commodity, but extended elevated prices. And whereas, that is certainly a possible outcome of this, if this prolongs and these disruptions continue, oil could go right back down as quickly as it went up if there is a quicker resolution to these unrests in Ukraine than markets currently anticipate.
We would also avoid the larger capitalization technology stocks. And I know a lot of them have come off a long way. Jared observed that Facebook has halved in value, since its peak last year. But that's still an area that we're quite leery of. What we like are the good old fashioned consumer stocks, both discretionary and non-discretionary, coupled with information services and a little bit of technology services, as well. That's where we're finding most opportunities, at present,
- Robert, speaking of energy, oil prices are soaring as the Fed prepares to start raising interest rates. Now, in the past this combination of events has coincided with recessions. Is this time going to be different?
ROBERT CANTWELL: Well, every time is different. And I might actually be buying some of the stocks that Scott is talking about selling. When you get into market situations, like this, this concept of flight to safety is exactly the wrong moment to be buying the safe stock. Even Buffett cut his buybacks in half in the past six weeks. So the year to buy Berkshire was last year, it's not now.
Now's the time to go after a lot of those technology stocks that have gotten completely reamed over the past couple of months. Because as scary as it is, that's where there's a lot of opportunity. And the market sank like a rock, today.
What we're seeing is, as folks are trying to parse through all the data, is, the more growth that you have that is coming from outside of the United States, the more your stock is getting pounded. That's actually a little bit of a reversal where we've been, because a lot of the fastest growing companies inside the S&P 500, were actually generating more of their incremental growth from outside of the United States. And that's why that this event is causing so much turmoil in the market, is because one of the leading growth engines, for so many US domiciled companies, is now at risk.
- And Robert, just to follow up, with an eye on inflation, you've identified visa as one of the companies to own since it benefits from inflation. Which other companies or sectors would you also add to that list?
ROBERT CANTWELL: Now, Visa's an easy one. We've been spending more time on companies with sub $50 billion market caps. So the roadblocks, the data dogs, a handful of these companies that had really high flying valuations last year, they're still phenomenal growth companies that are generating free cash flow and have tremendous futures ahead of them. There's never been a better time to buy Meta and Facebook's platform. Everything we do is transparent. We manage the compound Kings ETF, the first actively managed fund of its kind. And all of our holdings with all of our position sizes are published, daily. So you can always see what our top ideas are.
- Rob, I just want to stick with you for a hot second because it comes back to something that you mentioned, in the difficulty of trying to call a bottom at this point in time. And as of right now, you've got state officials, local officials, even some federal officials that are trying to un-twine the amount of investments that Russia even has in some pension funds, here in the US. In some of just the financial capital that has been thrown around in the infrastructure. And so with that in mind, if there is that un-twining that takes place, how much more of this moves to the downside could we anticipate because of that forced selling activity that may be brought about?
ROBERT CANTWELL: It's wild. I mean, certainly in my lifetime, I've never seen a country slowly becoming a Cuba or becoming a North Korea, in front of our eyes. Being closed off from the world economy. Now, fortunately, Russia's share of the world economy has shrunk, massively, over the past 25 years. And the reality is, the world, Visa and Mastercard put their numbers out there. 4% of revenue in Russia, 1% to 2% in Ukraine. So you're talking about a 5% to 6% evaporation of cross-border activity that the economy was enjoying from the existence of that being a global player.
And if it gets completely shut off and become its own Island, frankly 5% or 6% of the world is not something that is really going to hold the rest of the world back from growing. And now, you're looking at prices that are a lot cheaper to buy into. And if you look at past crises of the past 25 years, 9/11 attacks, the war in Afghanistan, the invasion in Crimea, every single instance, the NASDAQ was up double digits 100 days or so after the beginning of the crisis.
So we look to moments like this as, the world's going to look really different a year from now, two years from now, three years from now, and there's really no reason to over-extrapolate from the moments, the things that we're reading about, day to day.
- All right, we do. Thank you all for your insights. Thank you so much, Scott Clemons the chief investment strategist at Brown Brothers Harriman. And Robert Cantwell, Upholdings Portfolio Manager, thank you guys so much. All right, we're going to bring it back to our very own Jared Blikre, for his final thought on how the day closed, Jared?
- I just wanted to continue the discussion here, about the bottom that we're all looking for in the market, it is it already there? And you can see in the WiFi Interactive, we have a year to date chart of the S&P 500. Just had one of the worst days of the year, yet again, and looks like we're heading down tomorrow to test these lows.
Doesn't have to happen, but what I do like about the situation, as opposed to in prior weeks, is sentiment has really turned bearish. And that's what you want to see in a market turn, doesn't mean that we're not going to take out these lows. It doesn't mean that we're not going to take out 4,000. But think about the news flow, here, we have a Federal Reserve meeting next week, probably going to have a little bit lighter touch than everyone expects.
We also have a CPI print coming out, for more inflation data and we also have a number of other things that are contributing to the new low. Just think if the tide were to turn in the Ukraine-Russia conflict, what that would bring, what those headlines would bring to the market. Now, what are people going to buy?
I think they're going to buy some of those quality, beaten down names. You look in the software space, one year performance, pretty bad for a lot of these guys, especially when you take it on a three month basis. So I think a lot of these names are going to get scooped up, here. It could be a buying opportunity.
Doesn't mean that we couldn't have materially lower prices. And that's in fact, if World War Three does erupt, yeah, the Dow is going to go down 10,000. But in the current environment, it looks like we're trying to find a bottom right now. Bottoming as a process, takes a little bit of patience, easy to get scared out so take that for what it's worth, guys.