Markets: ‘Credit’s going to have to deteriorate’ for things to get worse, strategist says

Baird Managing Director and Market Strategist Michael Antonelli joins Yahoo Finance Live to discuss the state of the stock market, investor trends, Fed policy, and the outlook for credit.

Video Transcript

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- Welcome back. A positive week for markets so far-- we will see if we can break the current seven-week stretch of losses. And for more on this, we're going to bring in Michael Antonelli, managing director and market strategist at Baird. Michael, always, always great to see you here. And here's your thesis. We're not gonna see a V-shaped recovery. I couldn't agree with you more, but spell out your reasoning please.

MICHAEL ANTONELLI: I was gonna say, Jared, you stepped all over all of my content--

- Aw.

MICHAEL ANTONELLI: --with these sessions.

- I'm glad you're a listener of the show. Thank you.

MICHAEL ANTONELLI: I appreciate that. Listen, so there's this notion of, you know, how are we gonna get out of this? When are we gonna get out of this? Are we gonna have a V-shaped bottom? Are we not gonna have a V-shaped bottom?

I've definitely been going out, not only on my content with my clients, about the fact that there's no V-shaped bottom here. V-shaped bottoms are completely comprised of the Fed getting really super friendly, putting a tailwind to us, some sort of fiscal impulse, something out of the government that's gonna stimulate the economy. So neither of those are happening. We just know that.

And, by the way, the more the stock market rallies, the more the Fed doesn't probably want to see that. They want to tighten financial conditions. So I got to get into people's heads-- hopefully, your viewers here, my clients, everybody-- that this is not gonna be a V-shaped bottom.

It's gonna take us some time to get through this. But that's OK. We are going to get through this.

- How long are we gonna take to get through this, Michael? Because I know you're a student of history. You like looking at what we've seen before in these types of pullbacks. So what's sort of the average duration of these things?

MICHAEL ANTONELLI: I'm a big evidence-based investing guy-- just means kind of looking at the evidence of history, every data point that we have, and saying, you know, what would happen in an average bear market? How long would an average one take?

Doesn't mean it will be the average, but I think it's a good place to start. So if you're looking to peak to trough, the average bear market's about 338 days, so a little bit less than a year. If you're talking peak to trough back to peak, that's about 600 days, so a little over a year and a half. That's a good place to start.

Could this be worse? Sure. Could it be better? Sure. We don't know what the eventual outcome will be.

But there's a couple of indicators right now, Julie, that lead me towards not being worse. Number one is the move in credit recently. Look at the move in some of these high-yield indices. We could talk about that if you want. But credit is not deteriorating at a worsening rate.

And you've also started to see the terminal rate for the Fed start to come down. It's kind of hanging around the 3% rate right now. At least that's not out kind of-- out of control. The terminal rate's not rising daily.

So I do think that if we're gonna think about how long it might take to get out of this, a year is a good place to start. That's the average kind of bear market time frame to get to the bottom.

- Mike, I want to get back to that V letter. If you think about it, half of it is the down move. How far do we go down? Because I haven't seen capitulation yet. And we've been talking about these research analysts notes-- Citi kind of joining the fray here, saying that we should expect lower prices for equities.

MICHAEL ANTONELLI: It's tough where you get into these situations. You're a strategist. You need to make a call for your firm. Stocks are down, you know, you downgrade them. Stocks are up, you upgrade them.

You know, we've seen kind of not only bearishness happen at the lows. You can see bearishness happen on the way back up, too. So I'm an intraday guy, my friends. I'm intraday.

- Me, too.

MICHAEL ANTONELLI: We were down 20% intraday. So that's a bear market. So we're not doing any semantics on whether it's a bear market or not.

You know, how much deeper can we go? I guess you only think it goes deeper if you think you're in the terrible, terrible recession camp, and I am not. That's deeper. Deeper-- the worst of worst of all bear markets lie in the really bad recessions, and I don't think that's the case.

I talked earlier about the recession of 1949, which was kind of a mild recession after a really inflationary period and a monetary tightening period at the end of World War II. I think that's a good analog, in my opinion. Can we get much worse? Sure. But credit's gonna have to deteriorate.

I think kind of the near-term low for stocks is in. Credit-- like I said, look at the high-yield indices. We'd have to get much, much worse, I think, for us to keep making new lows from here. I can't say-- it's possible. But credit, I think, would have to lead the way down. And right now, it's got a tremendous three-day bounce going.

- So, Mike, do you cover your eyes and continue to not look at your 401(k) for the next year and just kind of, like, ride it out?

MICHAEL ANTONELLI: I was saying the other day, I think I looked at my 401(k) twice this year. It's definitely one of the behavioral tricks your viewers need to understand is that the more that they look at the stock market, the more they look at their account, the worse of an investor they probably are. You're prone to making bad decisions.

So what I looked at is, my friends, the 11 worst years, OK? The 11 worst years in stock market history, calendar years. And, by the way, down 10% counts as the 11th-worst year. Can you believe that?

Anyway, so if you were to look three years and five years out, three years out, there's only one negative return. Five years out, there's no negative returns. We just come down to the fact that in these sell-offs, future returns get better. The 11 worst years in history, five years out, there are no negative returns.

So I'm trying to focus people a little bit further out the curve and remind them that, yeah, this stinks, you know. It really stinks. At least we're gonna break this seven-week losing streak. That's good to celebrate that. I hope I didn't jinx it. But I think we need to focus on--

- 5% down.

MICHAEL ANTONELLI: --a little further out.

- We would need a big drop today.

- Mike--

MICHAEL ANTONELLI: You would, yeah.

- --real quick here. You said you're an intraday trader. Day trading, what do you like to trade?

MICHAEL ANTONELLI: Listen, I did NBA Top Shot for a little while during the bubble. But, you know, I-- you know, when I think about intraday trading, it's probably more along the lines of, is there some sort of technical analysis or some sort of trend analysis I can use? I try to keep that stuff to a minimum. The more you do, the worse your results are.

But I am definitely still a stock guy at heart. And if I was gonna day trade, it would definitely be, you know, probably in a large-cap tech stock with some technical trend. But I try to keep that to a minimum.

- One more thing here-- I do a Yahoo Finance Plus webinar every month, and I think you would be perfect for the next one or something in the future. I'm just wondering. I'm putting this out there. You don't have to say yes. But we definitely want to target you.

MICHAEL ANTONELLI: Contact my people. I'm in. I'm in.

- Thank you.

- Have your people call his people, Jared.

MICHAEL ANTONELLI: Yeah, exactly.

- I hope you got an NBA Top Shots at the right time--

MICHAEL ANTONELLI: I did, yeah.

- --by the way, Mike. All right. I hope you have a great holiday weekend. Do some barbecuing. Listen to some yacht rock.

MICHAEL ANTONELLI: Yeah.

- And have a good one. Mike Antonelli, managing director and market strategist at Baird, thanks so much. Appreciate it.