Robert Cantwell, Upholdings Portfolio Manager, and Scott Clemons (Brown Brothers Harriman Chief Investor Strategist), join Yahoo Finance Live to discuss market volatility amid geopolitical tensions, Fed interest rate rises, spiking crude oil prices, energy market unrests and companies being affected by market behavior.
Video Transcript
[CLAPPING]–This is the closing bell for Monday, March 7th. We’ve survived another volatile day of Wall Street with all three major indices in the red. The S&P 500 is down almost 3%. The Dow Jones Industrial average is down more than 800 points, or 2.4%. The NASDAQ composite, which was the largest laggard in today’s session, is down 3.6%.
Let’s bring in our market panel and help to make sense of the changes we’ve seen in the past 24 hours. Scott Clemons, chief investment strategist at Brown Brothers Harriman and Robert Cantwell are both Upholdings Portfolio Managers. Scott, I’ll start by saying hello. Take a look at the volatility and price action in today’s markets. Do you think this was a reaction to the downside? Or does it make sense given the uncertainty we have on the geopolitical side?
SCOTT CLEMMONS:It makes sense in certain contexts. The headlines are dominated by the first and most obvious. It’s worth taking a step back to see the bigger picture. This market rally, which began in March 2020, continued through January 2013, with no correction.
There is no 10% pullback or anything of the sort. We are seeing the same thing since the beginning of the year: volatility is a feature in financial markets. It’s not a problem. It doesn’t always require a reason. It is clear that there is a very valid reason for the present situation. This makes sense, especially when it is considered in the context of larger market terms. It is even more so when you add the geopolitics.
–Scott, I would like to bring you in now. If you think about the companies you would really back here, you will see volatility. You have inflation, interest rate hikes and inflation. What companies are you following? What companies are you watching?
SCOTT CLEMMONS:If you have a question, I’ll be quick. It’s pretty universal. Last year, one of the characteristics of the market was that the rally was very narrowly led. There were many companies that were left behind in the rally. Our analysts and portfolio managers are looking for opportunities that have sold off more than the market, across the entire landscape.
Energy is a possible exception to this rule, as energy has moved in the opposite direction this year. There are many other opportunities.
–Okay, Scott. When we think about the opportunities out there right now, and maybe those that you would be stepping aside from, because that’s where a lot rotation also comes in play, it’s where investors are trying mitigate some of the exposure they still have. These are the places.
SCOTT CLEMMONS:I would be very anxious about the energy here. It’s not just because it’s been done so well, but also because geopolitical unrest such as this can lead to a spike of oil prices. These spikes can be very scary, but they can also resolve quite quickly. Many energy companies are taking advantage of the opportunity to profit from rising commodity prices. While this is certainly possible, oil could drop as fast as it rose if the unrest in Ukraine is resolved faster than markets anticipate.
We would also avoid stocks with higher capitalization. I know that many of them have made great strides. Jared pointed out that Facebook’s value had fallen half a million dollars since its peak last January. We are still cautious about this area. We like the old-fashioned consumer stocks, both discretionary as non-discretionary. They are complemented with information services and a bit of technology services. Those are the most lucrative areas we see right now.
–Robert, when you speak of energy, oil prices have soared as the Fed prepares for raising interest rates. This combination of events has often coincided with recessions in the past. Will this time be any different?
ROBERT CANTWELL:Each time is different. Scott might be selling stocks that I might actually buy. This notion of fleeing to safety is not the right time to buy safe stocks when you find yourself in market situations like this. Buffett even cut his buybacks in half over the past six weeks. The year to buy Berkshire wasn’t last year.
This is the perfect time to grab a lot technology stocks that were completely reamed in recent months. This is where there’s great opportunity, despite it being scary. Today, the market crashed like a rock.
As people try to sort through all the data, we are seeing that the more growth you have from outside the United States, then the more your stock is being pounded. This is actually a slight reversal of what we have seen. Many of the fastest-growing companies in the S&P 500 were actually generating more incremental growth from outside the United States. This is why the market is in turmoil. One of the top growth engines for many US-domiciled companies is now at risk.
–Robert, I just wanted to follow up. You’ve identified visa, which is an inflation-friendly company, as one of your top choices. What other sectors or companies would you add to this list?
ROBERT CANTWELL:Visa is an easy choice. We have been spending more time with companies with market caps below $50 billion. These companies, despite having high valuations last year and being able to generate free cash flow, have great futures ahead of themselves. There has never been a better time for Meta and Facebook to invest in their platform. All of our activities are transparent. The compound Kings ETF is the first actively managed fund of its type. Daily, all of our holdings and all of the positions we hold are made public. So you can always see our top ideas.
–Rob, I just wanted to stay with you for a second because it comes back down to something you mentioned, the difficulty in trying to find a bottom at this time. As of right now, there are state officials, local officials and federal officials trying to untwine the amount that Russia has in certain pension funds here in the US. Some of the infrastructure capital has been used to finance some of the other investments. With that in mind, how much more can we expect to see the un-twining of the infrastructure?
ROBERT CANTWELL: It’s wild. It’s amazing. Being isolated from the global economy. Fortunately, Russia’s share has fallen dramatically over the past 25 year. The truth is that Visa and Mastercard have their numbers. 4% of Russia’s revenue, 1%-2% in Ukraine. This means that there was a 5%-6% loss of cross-border activity due to the existence of a global player.
It could even become an Island. But if it does, then 5% or 6 percent of the world isn’t going stop the rest from growing. Now, prices are much more affordable to purchase into. When you look back at the 25 years of crises that have occurred, like 9/11 attacks, Afghanistan war, and the invasion of Crimea, you’ll see that the NASDAQ was up in double digits for 100 days after the crisis began.
We can look at moments like these as, the world will look very different a year from today, two years from tomorrow, three years from tomorrow, and there’s no reason to extrapolate from the times, the things we’re reading, every day.
–We are all good. We are grateful for all your insight. Scott Clemons, chief investment strategist at Brown Brothers Harriman, thanks you so much. Robert Cantwell is the Upholdings Portfolio Manager. Thank you, guys. We’re going back to Jared Blikre for his final thoughts on the day.
–I just wanted you to continue the discussion on the bottom we all want in the market. Is it already there? WiFi Interactive has a year-to-date chart of the S&P 500. We’ve just experienced one of the worst days in the year. Tomorrow will be a test of these lows.
It doesn’t have to happen. But what I like about this situation, in contrast to previous weeks, is that sentiment has really turned bearish. This is what you want in a market turn. However, it doesn’t mean we won’t take out these lows. However, it doesn’t necessarily mean that we won’t take out at least 4,000. Think about the news flow. Next week’s Federal Reserve meeting will be a bit lighter than everyone expects.
We also have a CPI Print coming out, to get more inflation data. And we also have a variety of other things contributing to the new lowest. Think about what headlines that could bring to the market if the tides turned in the Ukraine/Russia conflict. What are people going to buy now?
They will buy quality names that have been beaten down. One year performance in the software industry is quite bad, especially when you consider that it’s only three months. These names will be snapped up here, I believe. This could be a great opportunity to buy.
This doesn’t mean we can’t have significantly lower prices. If World War Three does erupt, then the Dow will go down 10,000. In the current environment, it seems like we are trying to find a bottom. Bottoming is a process that requires patience. It’s easy to get scared so take it for what its worth.
