Stock Market: 'This should be a seasonally strong period and so far it's not,' Heritage Capital President says

Paul Schatz, Heritage Capital President, joins Yahoo Finance to talk about what he thinks is to blame for the falling stock market.

Video Transcript

ADAM SHAPIRO: We are going to jump right into this with a well-known friend of the program. Let's bring in Paul Schatz, Heritage Capital President. It's always good to have you here, Paul. I'm looking off to my other computer, I'm just betting we're going to accelerate into the close with the selling.

And what I think a lot of us want to hear from you is because you tend to look out further than those of us who are more shortsighted investors but we keep saying hair on fire, Omicron. And you say this is not necessarily an Omicron selloff. Help us understand what you think is truly happening.

PAUL SCHATZ: Always good to be with you. Thanks for having me. So as you know, there always has to be this assigning of blame-- blame and credit, blame and credit. So Omicron is the easiest thing to blame on the market sell-off but when you look at the sectors and you look at what's declined, not just in one day but over the last couple of days, you know, the work from home stocks aren't exactly lighting the world on fire, which if this really was about Omicron you'd see a complete bifurcation of the market. You don't see that now, the selling has been broad-based today and it was disappointingly broad-based on Friday.

So when you look a little deeper, today you've got, you know, industrials and materials taking on the chin but industrials and materials on Friday were one of the leaders. So to me, this is not Omicron, and it's certainly not Build Back Better failing. This is just continuing on from what Jay Powell said and what the Fed did, and what we expect to happen in 2022.

The Fed is tightening, you want to call it quantitative tightening or you want to assign some cute name to it, anyone could be my guest, but the bottom line is, there's going to be less money in the system. And when there's less money in the system the rising tide no longer lifts all boats. The decline is not the death knell of the bull market but we shouldn't be having it seasonally, this should be a seasonally strong period and so far, it's not.

EMILY MCCORMICK: Paul, this is Emily here. You mentioned that Omicron is perhaps just a scapegoat for today's decline that we're seeing across stocks. But at the same time, we're seeing the travel stocks getting hit again, we're seeing crude oil under pressure, energy, the cyclical sectors. So should investors be thinking about the Omicron variant and these renewed concerns over stay-in-place behaviors when they're thinking about where the stock market might be headed in 2022?

PAUL SCHATZ: So I will say, absolutely, positively not. Omicron is, if you look at all the charts from all the quants, it's happening much faster. We've got on a percentage basis, less hospitalizations, a lot lower death rate. I'm not-- and I'm not trying to minimize the health crisis but from a market perspective, Omicron is going to be fleeting.

So you mentioned the cyclicals were down today and they were leading on Friday. When you combine them both together, it doesn't equal a market that's-- and look at the tech sector, I mean, frankly, the tech sector has been under pressure. If Omicron really was the reason behind this, tech would be-- I hate to say it, a little bit of a safe haven. You said 2022, now I do think 2022, it doesn't have to be from the get-go on January 3rd or 4th or 5th, but tech is not going to be the place to be in 2022 as it was in 2020 and 2021. So I agree with you there, we're going to have some probably massive sector rotation in early 2022.

I will argue that things like utilities, and staples, and biotech will get a lot more attention, some of the lower volatility areas in 2022 than they have seen in a long time. But I don't think we're going to have a repeat, unfortunately, I don't think we'll have a repeat of 2022 stock performance.

ADAM SHAPIRO: You know, for most of us, it really just boils down to, how do I make money you know, next year, 2022? And you've just alluded to that in some respect when you talk about sector action. You've also I think pointed out to your clients that perhaps small-cap may be someplace to focus. But for those who are seeking shelter right now in bonds, even with interest rates going up next year, would that necessarily be the best place to be going? Because you're going to wind up getting burned aren't you?

PAUL SCHATZ: That would be conventional wisdom, Adam. But let's remember, you know, bonds-- although bonds, the bond market itself is only going to be down let's just round and call it 2%, 2.5% in 2021. And that-- and with inflation really at not-- levels seen since what, the early '80s, the bond market should have been hit a lot more.

I will go out on a limb, I'll be a contrarian, I'm going to say bonds get rewarded in 2022. And I don't love bonds I wouldn't buy them for the next three to five years, for the next two to four quarters would I trade bonds? Absolutely, and I think you can go back to some plain vanilla you know, bond funds. You may not make 10% but I don't think on a risk-reward basis you'll be as worse off as you will in stock.

So I think bonds are going to get a bid in 2022 because I feel strongly as I mentioned, with Alexis on October 28th, there's a five-month period where I feel strongly that inflation is peaking, you're going to have inflation going down next year, the Fed raising rates on the short end of the curve, and most importantly, I think GDP growth is going to come in a lot. I think GDP growth is going to be disappointing next year. So all that's a recipe for bonds doing OK.

EMILY MCCORMICK: Paul, you alluded to the Build Back Better plan, which potentially is going to be scuttled in your first answer here. But Goldman Sachs economists earlier today downgraded their quarterly GDP outlook for next year in the event that this bill does not pass without Senator Joe Manchin's support. How much does that lack of additional government spending impact your outlook for the economy and for stocks next year?

PAUL SCHATZ: For me, that was already baked in the cake. I didn't think it was going to pass and, it didn't pass. I don't-- I can't believe that someone like Goldman Sachs went to sleep on Friday with this really bullish view of the economy for 2022 and because Build Back Better didn't pass, which was going to get boiled down to somewhere around $1.5 trillion, and all of a sudden they woke up and they downgraded on Monday. That to me, that seems kind of odd and curious.

So is it going to impact my thinking? Well, I've thought about it for a while and I didn't think it was going to pass in its current form pre-Friday. So could they put something forth next year? Of course, they could. They could put forth a little tiny bill. But don't forget, you only get a couple of bites at the apple if they're going to try to put it through reconciliation, which is so you've got a bunch of different factors floating. But the idea that taxes across the board are going to go up, I think that's pretty much shelved, you're going to get closer to the election, could they put forth a small bill with some spending in it? Yes. Do I think it's a needle mover? No. And I don't think it's going to juice the economy.

ADAM SHAPIRO: Paul Schatz, Heritage Capital president. Have a happy holiday and a healthy, happy new year, Paul. Look forward to seeing the next year.

PAUL SCHATZ: Be safe and peaceful.