Stock market is due for a proper correction in 2022: Paul Schatz

Heritage Capital President Paul Schatz joins Yahoo Finance Live to discuss his 2022 outlook and how investors should plan accordingly.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stick with the markets, though, and bring in Paul Schatz, president at Heritage Capital. Paul, happy new year to you. We are coming off--

PAUL SCHATZ: You, too.

ALEXIS CHRISTOFOROUS: --a pretty spectacular year, right? I mean, the S&P 500 up about 27% in a year when we had to deal with COVID, higher inflation, and the specter of higher interest rates. What are your expectations here for the new year? Do you think this bull run is going to continue?

PAUL SCHATZ: Always great to be with you. Hope you had a great holiday period, and happy, safe, prosperous, peaceful new year. Regarding the market, look, we've had three pretty good years in the market, '19, '20, '21. Momentum, you know, typically builds on itself. In markets, you don't see strong momentum just completely die.

Nevertheless, I don't think 2022 is going to be-- no one thinks it's going to be as easy as last year. I haven't heard anybody, for that matter. But I think a couple of things are going to happen. One, you're going to get at least one mid to upper single-digit pullback. We didn't really get one last year. We get a five-percenter. So that's number one. Two, I think we certainly get another pullback, which we'll call a correction, 10% to 15%.

It's not going to be the great year for the stock investor. It's not going to be the year where you close your eyes, rising tide lifts all boats. It's going to be more difficult. Volatility is going to be on the rise. Fed's going to raise. I think GDP growth slows down. I think earnings growth slows down.

It's not going to be an easy year, but I think, worst case, could you be down low to mid-single digits? Yes. I think, best case, you could be up mid-single digits, we should say. In the interim, tons of opportunities. Just because everything's not going up doesn't mean you can't make money. It's just going to be a little more tactical, if you will, a little more short-term in your thinking. It's going to be a year where investors need patience.

- Hey, Paul. Happy new year to you. I'm going to call you "bull-ish," because it's not going to be quite the year that it was last year, but still expecting some growth. Want to turn your attention, first of all, to what's going on in the bond space right now, if you can pull up a look at the numbers right now. The 10-year yield is up by 1.62. That is some of the biggest moves we're seeing in bond market, you know, in the last several months, up about 11 points. Wondering what you make of that, and where do things go from here.

And then I want to ask you, you know, we hit the highs, basically, 1.75 on the 10-year yield much earlier in the year, around March. Do we see it creep up to two? When does that happen? And then is it a shot up, or does it happen gradually?

PAUL SCHATZ: There's a lot in that question. So thank you. I'll tell you, so my thinking for 2022 is it's going to be a year-- it's an easier year to be a bond investor than a stock investor. And by that, I mean so early in the year, I think the best opportunity for the 10-year rate to go up is now. Q1 is-- if you're looking to buy bonds, if you're looking for higher coupons, I think you're going to get it in Q1.

Now, but the rest of the year, when I do see earnings slowing and GDP slowing, I think the 10-year goes down. I do not think this is a huge year in the bond market either way. It's going to be a year of digestion. But when the bell rings 12 months from now, I think bond investors are going to be rewarded.

Can we get to the 2%? That's probably the ceiling. I-- you know, the Fed, no matter how you slice it, there-- we're going to be on $30 trillion in national debt. They're not going to let the bond market really settle for itself. They're not going to lose control of the bond market. They're not going to let yields go to where they naturally may be, which could be 3% or 4%. The Fed is going to keep a tight lid on that, in a variety of ways.

Yes, short-term rates are going up, and long-term rates probably peak early. So they may not let the yield curve invert, but you may get towards some kind of neutral or flat yield curve. So if you're a bond investor, use the weakness in price now and during the first quarter to buy bonds for the rest of the year. Not sexy, not exciting, but on a risk/reward basis, as inflation, which is one of my huge themes, inflation dies this year, benefits the bond investor.

ALEXIS CHRISTOFOROUS: I think preservation of your capital always sounds pretty sexy to me, Paul. But I want to go back to stocks for a minute, and get your take on high tech in the new year. You know, we got this Goldman Sachs note out. They're giving us their top tech picks. Their heavy semiconductors, they think Advanced Micro Devices has more room to grow. They also like Analog Devices, Micron. What's your thought on big tech for the new year?

PAUL SCHATZ: Well, we just sold Analog Device to close the year. I was super happy with how it performed. I am not tech bullish for 2022. That's one of my-- so one of my many stakes in the ground, again, inflation collapses, supply chain issues go away. Tech is not going to be rewarded like it has been in 2022.

I'm not going to talk about valuations because, frankly, they're a horrible timing tool. Valuations are bad for years on end. But it's a super crowded trade. It's been rewarded year over year. And there are plenty of other areas in the market, which should garner attention from those who actually look at risk versus reward.

So if I had to look in tech, I would pick semiconductors. However, the rest of the tech I would certainly underweight, if you want to play it that way. But again, I'm not a lover of tech for 2022, especially the last three quarters of the year. I think you'd be rewarded elsewhere.

- And where are those other places that you think people should then look? And how does the emerging markets look to you?

PAUL SCHATZ: Where you should be rewarded, so sector picks, if I move away from tech, I do love biotech. I mean, biotech had a horrible 2021. That's one area. And we could talk about stock picks in there, as well. So one, consumer staples, for sure, because I do think the economy is going to slow the last three quarters of the year.

Staples should get rewarded, along with probably utilities, and also consumer discretionary, which may seem a bit odd if I think the economy is going to slow down. But let's remember, there's $2.5 trillion still excess savings that the consumer is going to lap up, if you will, and put back to work. We're a horrible savings country. We always have been. So 2.5 trillion is where we probably should be, but we're not going to. The consumer is going to spend that money, and it'll be front loaded in the year.

You asked about emerging markets. Look, emerging markets did not have a wonderful end of the year. And the primary culprit is the dollar. The dollar was super strong in the last half of 2021. I do think you'll see somewhat of a reversion to the mean, where the dollar is stronger the first half of the year, weaker the second half of the year, which means, for an emerging markets investor, you'll be better rewarded later in the year than earlier in the year.

The emerging market space still has headwinds, but with that, one of our other stakes in the ground is I love China this year. I think China recovers, it grows. That's one of our strongest picks of the year, whether you want to look at it in an ETF like PGJ or any other of the China ETFs, KWEB, KBA, you know, pick your poison. China was decimated last year. We should have, at worst case, a pretty strong rebound, 20%, 30%, but it could be one of those years where China gets going and returns 50%.

ALEXIS CHRISTOFOROUS: Wow, all right, big-- high expectations there. Paul Schatz, president of Heritage Capital, thanks for joining us. Thanks for bringing your picks along for the new year.