Strong labor market is 'confounding the Fed,' strategist says

Brian Belski, BMO Capital Markets Chief Investment Strategist, joins Yahoo Finance Live to discuss the Fed policy decision, the labor market, and areas of opportunity in the market, including streaming names.

Video Transcript

[AUDIO LOGO]

- And now we are mixed. And NASDAQ, actually, in positive territory, up just 15 points here. But the DOW off its lows of the session, now off just about 260 points. We had Brian Belski, BMO Capital Market's Chief Investment Strategist.

Brian, it's great to see you again. We had on the last Fed decision day. Here we are about a month and a half later, what do you think of today's decision?

BRIAN BELSKI: Oh, Shauna, thank you so much for having us. You know, the market really wanted to hear something they didn't know. Tell me something I don't know? And the Fed did exactly the opposite. Just said exactly the same thing.

And these preambles, the half hour prior to the Fed actually speak, it's just nothing but conjecture because we don't really know how hawkish he's going to be. Our bet is that he continues to be hawkish. And he didn't really like that risk assets have gone up in January, but that's OK.

We all know that the Fed's path is beginning to slow. That trend is beginning to change. And I think that's what the market is looking at, whether or not it's one more 25 basis point in March or two more March in May.

From our vantage point and from the longer term trend, it's a moot point. Because we actually think the lows are in place. That we're not going to see an earnings recession. And that the market is already priced in a recession given what happened, the bad market performance we saw last year.

So again, this is-- the trend is toward the end of the rising interest rate cycle. And I think that's the key takeaway.

- Good to see you, Mr. Belski. You got to play the game for us. Ongoing increases, tell me what signal you think Jerome Powell is sending by sticking with that language?

BRIAN BELSKI: Well, I think not unlike everybody else, Briggsy. No one can understand this employment situation. It's amazing because the textbooks would tell you that, you know, the market goes down 20%, earnings have to go down 20%. And then we see-- need to see a spike in unemployment and we're not seeing that.

And I think it's confounding the Fed. And I think the Fed receives so much negative feedback last year that now that they're probably overstaying their welcome, quite frankly. But at the end of the day, from our work, from an earnings recession side, we're not seeing it.

And I just don't understand how and where the big spike in unemployment is going to come from, which it actually caused the Fed to reverse notion. Maybe we just kind of settle in here. And maybe the Fed just has to live with that being what, quote unquote, would be, "normalization of employment."

- So Brian, then what does all this mean for equities in this year? You mentioned the fact that earnings recession. It doesn't seem like we are seeing at least from the reports that we've gotten so far. So what does that signal just in terms of what's ahead?

BRIAN BELSKI: It means quality, quality, quality, cash flow, cash flow, cash flow. I think it is very, very prudent to remain neutral, meaning market way technology because there's a lot of great parts of technology, can, will, and should own. Shouldn't own just a blanket technology ETF, I think. I think you need to own stocks, that's kind of number one.

And number two, I think from a contrarian basis, if you're looking for names that the market has hated but maybe have a big theme around it, we love the communication services sector from a thematic perspective, in terms we call it the three C's of communication services, Cash, Content, and consolidation. I think the streamers are going to consolidate.

And when you're looking at matching up a growth and value stock within a portfolio, there's no better sector than communication services. Overall though, for the first time in over 10 years, we're overweight small, mid, relative to large because we see a big displacement with respect to valuation but also earnings growth and discernability is very strong within the small mid-cap space.

And then lastly, value, Shauna. I think this isn't going to be a binary environment where you have to own either value or growth, I think you can own both. But from a fundamental perspective, if you want to look at fundamental value. Debt equity below 1, earnings that are above the market in terms of growth rates. PE is below the market. But you can also own a little Garpy growth at a reasonable price as well.

- Very casually snuck in some potentially huge news later this year as you talk about consolidation of the streamers. I like that tactic there, Belski. Who could consolidate? Who could be the winner?

BRIAN BELSKI: Well, listen, you know, I like-- not unlike all other Americans, I'll get like 10 streaming services, it's too much, right? So the winner in the one that we've stayed with all along and received a lot of negative press about it is Netflix. I think Netflix is the Kleenex of streaming, bottom line, period. Best run, cash flow. Now they're going to advertising. Fantastic. They will be the core, right?

I think Disney is going to be part of the core. What happens to Peacock, and Paramount Plus, and all of these others, I think, remains to be seen. And so I think that's kind of where you want to look with respect to potential consolidation. Especially, given the fact that the content is becoming much more-- much more expensive in the streams. And how we're going to deliver that content. Netflix has got it right.

- So we got what you like a lot. What about what you don't like? What do you say to investors right now, your clients that they should avoid at least in the short term?

BRIAN BELSKI: Oh, my gosh. That's a great question. Utilities and consumer staples, we just despise. And part of the reason why we despise it is that so many people have rushed into both those sectors for defense. And consumer staples are the most-- one of the most expensive sectors in the market. They had the largest relative increase in multiple Shauna, last year, in 2022, in the history of the sector.

Whereas, you think about debt, and bringing on debt, and high valuation, and long duration assets. Well, the highest duration asset from our view with respect to valuation in debt or utilities. And there's always going to be a stock that does not fit that. But from a sector basis, we believe that utilities and consumer staples, from a sector basis, are the most riskiest assets in the S&P 500.

- All right, Brian Belski, pleasure as always, sir. Thanks so much.

BRIAN BELSKI: Thanks for having us.