Strategist: Yields will 'continue to fade a little bit before their next leg up'

Gareth Soloway, InTheMoneyStocks.com President & CFO, joins Yahoo Finance's Kristin Myers to break down the latest market action as stocks rally and bond yields decline.

Video Transcript

KRISTIN MYERS: But let's start with today's market action. We have Gareth Soloway, president and CFO of inthemoneystocks.com, here with us now. Gareth, always great chatting with you. So, let's talk with what we're seeing today, as the markets right now are rallying. The Dow up roughly 600 points right now.

Now we saw tech getting hit pretty hard in that sell-off. The NASDAQ, of course, is recovering up about 2 and 1/2 percentage points right now. I'm wondering if you think we're going to see some of those investors come roaring back into tech, or do you think we're going to see tech continue to be held under pressure throughout the year?

GARETH SOLOWAY: I think in the beginning here of the month, you're going to see some money flow come back in. Yields probably continue to fade a little bit before their next leg up. You had such a mega spike last week. So, again, just coming back off of that is giving tech investors a little bit of calm.

In addition, the first of the month-- it's important to remember that the first of the month, you see new money flow, whether it's into 401(k)s or investors that got paid at the end of the month putting money into the market. We know that last week, $80 billion went into ETFs from average investors. So I continue to think that the first few days of this month likely a little bit stronger for the tech side of things.

KRISTIN MYERS: So then let's talk about some of those yields you were hinting at just a second ago. I'm wondering how much you think that they're going to continue to present a headwind or a risk to equities this year.

GARETH SOLOWAY: I think it's going to be the main risk to equities. That coupled with inflation, which is, obviously, part of it. So you're going to look for yields just in the short-term pullback after such a meteoric rise. But if you look at where we were on yields pre-COVID, you have to get towards that 2% marker to get back to where everything else is in alignment.

So whether it's a week from now or a couple of weeks from now, I do expect yields to push back above 5%. And that's going to continue to put pressure on technology. There's no doubt about it. The valuations for technology stocks will have to come in if yields continue to go higher.

KRISTIN MYERS: So then, to that point, as I had mentioned, we saw this rotation out of tech. I'm wondering what other kind of rotations you think that we might be seeing throughout this year. And if tech continues to remain under pressure, where can investors, if they are looking at that tech space, find some gains?

GARETH SOLOWAY: Yes, so it's definitely hard right now to find some good returned assets. But I do think that gold is presenting itself as an interesting opportunity down here. You know, 1750 on spot, generally in that vicinity right now, a little bit below. So I think gold is an interesting level, where I think once inflation really shows itself in the next few months to the next six months, you're going to see gold outperform.

In addition, value stocks, you know, stocks that present a good PE ratio with also a high dividend, those are the ones where investors will kind of head to, which has been the common theme from what most people have been saying lately.

KRISTIN MYERS: And of course, gold right now, as you mentioned, a little bit below 1750. It's about 1725 right now. Of course, we had seen gold surging higher than 2,000 not too long ago. So if you are an investor, Gareth, that's really concerned about these higher rates, how should you be positioning your portfolio to really mitigate against some of those risks? We did see in a note from Goldman Sachs that investors, they say, should be boosting exposure to short-term stocks.

GARETH SOLOWAY: Yeah, so I think that if you're looking at investing in the tech sector, look for the best of breed-- the Apples, the Google's, the stocks that are going to continually accumulate good profits and have generally low PE ratios. And then I think you want to look at stocks like Kraft Heinz that's been really starting to perform well recently, but is way down from its multi-year highs.

AT&T is an interesting one, although their debt is a little concerning. But I think, again, that they can probably right that ship if they sell portions of their assets off. Stuff like that would be really interesting, along with, like I said, gold. And even Bitcoin, if it pulled back enough, I would start to get interested in because of my worries about inflation in the future.

KRISTIN MYERS: Well, then what is your overview of the markets in 2021? I think most folks continue to hold this bullish view of equities. What are you anticipating this year?

GARETH SOLOWAY: So I'm not as bullish as most of the average investors. In fact, the fact that the average investor money flow has been so strong, I liken that to previous major tops in the market. I don't mean to be a debbie downer here and kind of talk about the negatives here, but with the SPACs, I mean, you could just name so many issues. The crazy runs in EV stocks and GameStop and those type of names, those are concerning things because of how they mimic major tops in previous markets.

So for me, again, it's more on the short side of the market right now, looking to accumulate more shorts and also pick up quality value stocks, gold, things like that. I do worry that in the second half of the year, inflation is not going to come down as much as the Fed thinks. And I worry that once this initial reopening surge abates, you're going to see something more along the lines of stagflation in 2022. In fact, I think that term will start to be used even as early as late 2021. And that's the boogeyman for the stock market. That is not a good thing for the stock market.

KRISTIN MYERS: OK, so then you were mentioning some of those Reddit trades, right? And we have seen a fair bit of volatility in the markets lately around those Reddit trades. We've seen it around cryptocurrency, just over the last couple of weeks. How much volatility then do you think that the markets are going to be going through this year?

GARETH SOLOWAY: I think over the next few months, it's going to be a lot of wild chops. So you're going to have these surges in yields where the stock market is going to take big pops and big drops. And then it's going to bounce back as yields pull back, and investors will gain confidence over the reopening trade. My worry is in the second half of the year. Once we kind of get to this reopening and we see these great economic numbers coming out, what comes next? And that's where I worry that things will start to slow down just a little bit.

And then you have to relook and say, OK, well, where are yields? Where's inflation? Are yields going to continue to go up because of inflation? Is that going to put pressure on the Fed to actually kind of curb their easy money policy? And if they don't do that, do we see inflation getting to the point where it really does hurt valuations on stocks in the short-term?

KRISTIN MYERS: OK, so that actually makes me think about this next question, which is stimulus. It's something that we kind of have been talking about obviously quite a bit, but there's been a lot of, will they, won't they, when it comes to Congress. How much of a catalyst do you think stimulus is going to present to the upside if the Senate does pass this bill in the coming days?

And then just looking out, even to the second half of the year, as you were, you know, a little bit mentioning, what do you think is going to present some of the biggest catalyst to the upside for the markets there, once they start searching for something to send them higher?

GARETH SOLOWAY: Yeah, and that's the great point, is that the market has really built in this reopening trade in terms of valuations, where they're already anticipating this robust reopening, which I do think will happen. I mean, people, even myself-- I want to get out there. I want to do fun things. I want to travel. But it's what comes next because that valuation is already mostly in the markets.

And with this stimulus, this is the crazy thing about stimulus. Prior to yields going up, stimulus was a net 100% positive for the market. Now it's kind of a positive and negative. Because the more stimulus we get, yes, it puts money in people's pockets that they'll spend. But then on the other side of the coin, it's going to push rates higher as well, which then takes away from stock market valuation, especially in technology.

So there's a double-edged sword here. And I do worry that, again, that second half of-- late second half of the year could present an issue for what's the catalyst to continue to push us up. What pushes the valuations on stocks even higher than they are, where they currently sit?

KRISTIN MYERS: Do you think that we could see markets going to some kind of correction territory in the second half of the year?

GARETH SOLOWAY: I do. I do. I even think it could happen sooner if yields get to 2%. I do think that the question of whether the Fed has ultimately done this market a service versus hurting it in the long-term is going to be raised. I do worry that what they have done has created systemic and long-term issues that are not as easy to fix as we all hope they are.

And everyone just believes in the Federal Reserve, that they can cure every ill of this market. That's almost a negative because it makes the market think that nothing can ever take it down, which puts small investors in the position of putting all their money in using record levels of margin. All these things, again, are issues that, if they unwind, could be very rough for the markets.

KRISTIN MYERS: And that could be a whole separate topic of conversation. Gareth Soloway, president and CFO, InTheMoneyStocks.com, as always, a pleasure to chat with you today.