Transcript:
Caroline Woods:
Joining us now is Kristina Hooper, chief market strategist at Man Group. Kristina, great to have you back at the desk. Great to be.
Kristina Hooper:
Back.
Caroline Woods:
All right. So you were last on in May, and at that time you were calling for a 10 to 20% pullback in the market. We saw that in some stocks but not in the overall market. Is it still coming out.
Kristina Hooper:
I think it is absolutely still coming. And I think there’s a greater chance that it comes in the next few months just because we have so much going on, so many headwinds really for stocks.
Caroline Woods:
So talk to us about what you’re more concerned about now than you were a few months ago.
Kristina Hooper:
So first of all, yields on the rise. This has been a long term theme, right. This fear about fiscal unsustainability. But it seems as though our chickens are coming home to roost. And of course, there are other factors pushing up the yields on the long end. It’s not just about fiscal unsustainability. It’s about the war in Iran and the potential for inflation to get worse, not better.
Kristina Hooper:
So for a variety of reasons, we’re seeing yields go up. And I think they’ll continue to go up. And of course, they’ve historically depressed or had the tendency to depress equity prices, especially what are called the long duration equities. Those those stocks with higher valuations that tend to take longer to see the profits. So think about tech especially I think of some of the eye names where we’re waiting for a payoff.
Kristina Hooper:
But we don’t know how long it’s going to take.
Caroline Woods:
So those tech names would be most vulnerable in a sell off.
Kristina Hooper:
I would anticipate that just because again valuations are high, their price for perfection. And we don’t know when we’re going to see all the great revenues coming in, all the profits coming in as a result of the big spans that are going on now.
Caroline Woods:
But here’s the thing. The ten year yields at 4.7% today in the market is higher. The war with Iran is nothing new. The market has sort of shrugged it off all year. Higher oil hasn’t really seemed to spook this market. What is it that finally breaks and sends things lower?
Kristina Hooper:
Sometimes it’s just time. Keep in mind that a sense that especially at the start of the war, what we saw was markets looking past it. Well, as each month passes and we’re not out of it, and also we’re actually seeing diesel prices go up, gas prices go up. We might be getting to the point where it actually does have an impact, where markets can’t look through it.
Caroline Woods:
As you look at current valuations, do they look stretched to you right now?
Kristina Hooper:
They absolutely do. If we were to look at the Shiller cyclically adjusted PE ratios, we are not at the highest level we’ve been, but we’re at the second highest level after the tech bubble. So very, very stretched well above what’s considered expensive. And if we were to look at the Buffett Indicator, which Warren Buffett has been known to use, he thinks it’s the most accurate indicator of of a potential selloff in the stock market.
Kristina Hooper:
That looks at the total market capitalization of the Wilshire 5000 relative to U.S. GDP. And what we see there is that it’s at the highest level it’s been since 1980. So there are reasons to suggest that valuations are quite stretched. Now, of course, valuations are rarely predictive in the short term, which is why I was wrong when we spoke in May.
Kristina Hooper:
But I do think we’re getting closer. And there are more headwinds that are likely to tip, stocks over and cause them to fall, including the midterm elections.
Caroline Woods:
I wouldn’t say you were wrong yet, because we were talking between then and your end. So we still have a couple more. Fair enough. Not that we necessarily, although some might actually be waiting for that, that pullback for a better entry point. Is that what you would look at it as like is a 10 to 20% pullback the entry point to get back in.
Caroline Woods:
And what do you do while you wait for it.
Kristina Hooper:
So I wouldn’t advise being out of the stock market. I certainly think we’ve seen something of a rotation. And there are opportunities and lower valuation stocks, especially those that are paying dividends. You’re getting paid to wait. But I do believe there is the potential for, attract more attractive entry points for higher valuation stocks like technology. If we were to see that pullback.
Caroline Woods:
So if I have cash on the sidelines right now, am I putting any of it to work right now if I’m already invested but I have extra cash, would I be putting any of it to work right now or am I just waiting for those better prices?
Kristina Hooper:
So I think there are certainly opportunities and places you could put it to work now, including European equities. Okay. I think they often get overlooked. Lower valuations, higher yields, than than U.S. stocks and less exposure to technology, less exposure to I. So a nice complement to one’s U.S. portfolio. I also think there’s opportunities and it makes sense to have adequate exposure to alternatives.
Kristina Hooper:
So that would include hedging strategies and gold. We need to be prepared for a variety of different scenarios, because we really are at a crossroads, where markets could go in a variety of different directions.
Caroline Woods:
What’s the best way to get exposure to Europe? Hedging strategies and gold. Is that all through ETFs.
Kristina Hooper:
I think, actively managed ETFs in particular. Makes sense. Yeah, I think that’s certainly one, one, very attractive way to do it.
Caroline Woods:
With risks this elevated, what areas of the market would you avoid?
Kristina Hooper:
So I am very concerned about U.S. tech, especially the hyperscalers. They’re taking on more debt to fund this CapEx buildup. Now, that doesn’t mean that, all have, you know, cloudy futures. But I do think they’re starting to increasingly resemble the telecom companies of the late 90s and early 2000, in that they’re taking one for the team.
Kristina Hooper:
They’re the ones spending, to build out this infrastructure, these data centers, just like the telecom companies, built out the fiber optic network. They took on debt to do it, and they benefited there. What they did, benefited so many different industries in the overall economy. I think what we’re seeing now is something similar where the hyperscalers are doing an awful lot.
Kristina Hooper:
They’re taking on debt. They’re spending their free cash flow, most of it, or in some cases, all of it. And they’re building an infrastructure, but it they might not be the greatest beneficiaries of it, just like the telecom companies weren’t.
Caroline Woods:
So what does that mean for investors who have a lot of exposure to the S&P 500? Because we know that those big tech companies doing on the spending make up a large portion of the S&P.
Kristina Hooper:
Well, I think that’s that’s a call to be well diversified. So perhaps pare back a little exposure to the S&P 500 or just add to exposure elsewhere to European equities. Add to exposure to alternatives, hedging strategies so that you can participate. But in some ways, find the potential for downside protection.
Caroline Woods:
And just dig into the hedging strategies or, I’m sorry, the alternatives, because the second time you mentioned it, if somebody says, what do you mean by alternatives? What do you mean?
Kristina Hooper:
Well, there are a variety of different strategies out there that can be accessed, for example, through ETFs, managed accounts, that enable one to for example, utilize options, to have some exposure to the stock market. But have, you know, have what’s considered to be some potential downside protection. So, you know, one needs to, you know, do a lot of research and find something that they’re comfortable with.
Kristina Hooper:
But there are a lot of options out there.
Caroline Woods:
As you think about, you know, the fact that you think, basically I capital spending is unsustainable and that could make I stocks vulnerable. Does that mean you avoid it altogether or you just have to be more selective and stock pick within the tech stocks.
Kristina Hooper:
So what I would qualify I would first just say that I don’t think I spending is unsustainable. I think the level could be unsustainable. I think certainly this is a technological innovation that is transformative. So I’m sure that we’ll see continued funding of it. But it may slow. Right. We have so many different reasons why that opposition to data centers in different communities, electricity usage, water usage, scarcity of some materials, like for example, the very sophisticated chips, that prices have gone up so much so it could easily slow, but I certainly don’t think it comes to an end.
Kristina Hooper:
And I think it is transformative, but it does mean for investors they need to be selective and discerning, look for the areas of opportunity, because there always tend to be some areas of opportunities. They might not be the ones that are obvious, for example, right now. And what we could see is that those industries that benefit the most from this build out are in places like manufacturing, industrials.
Kristina Hooper:
Certainly, that’s what China’s focus has been with EI is to, help benefit the manufacturing industry in its country. Also, just looking for where the problems are, where the the pitfalls are in the AI data center build out, and the companies that are addressing in the industries that are addressing those issues. For example, now hyperscalers are looking to build their own power sources.
Kristina Hooper:
Those companies that are involved in that infrastructure, could be great beneficiaries of this continued, CapEx spend on AI data centers.
Caroline Woods:
If we do get that 10 to 20% pullback, is that when you would start scooping up tech again? And what specifically within tech would look most attractive? If we start to see valuations shrink a bit?
Kristina Hooper:
And and I should also say that if we could see a 10 to 20% pullback in tech, let’s say we don’t see it in the overall stock market. But we see that, I think that’s a enough of a trigger, to go in and look for opportunities. Number one on my list is actually cybersecurity. You know, survey after survey of CEOs shows that is one of their biggest concerns.
Kristina Hooper:
And it’s consistently, a major concern for them over time. There’s a lot of headline risk with it. And what we tend to see is that companies do not cut back on their cybersecurity budgets, whereas I think there’s more flexibility in cutting back or increasing one’s AI related budget. So that would be number one on my list, but also, of course, out the AI food chain and looking for the opportunities there.
Kristina Hooper:
Also, I don’t think the epitaph has yet been written on software stocks. So being discerning and thoughtful about that space, I don’t think I is going to replace it entirely. But we need to be very thoughtful about an approach there.
Caroline Woods:
Okay, but waiting for a pullback for any of those at this point. Absolutely no mention of health care, financials, energy stocks, utilities. When does any of that look more attractive to you?
Kristina Hooper:
Well, I think that’s part of the rotation. We’ve seen to a certain extent already. And I think there’s certainly a lot of opportunity there. That’s where the lower valuations are. So particular health care pharma where we’re seeing nice chunky dividend yields for the most part and relatively low valuations. That’s an area of very significant potential.
Caroline Woods:
And you’d put fresh money to work there.
Kristina Hooper:
Now I think I would I certainly again would be discerning. I wouldn’t I wouldn’t throw it in blindfolded. But I would certainly, look to add exposure there.
Caroline Woods:
So just to kind of some things up, what is the strategy for the everyday retail investor who sees the S&P 500 is still pretty close to all time highs, despite the fact that we have all of these risks, and despite the fact that September is a, you know, seasonably a weaker month, although not necessarily if it’s a, you know, strong month heading into it.
Caroline Woods:
What is the strategy?
Kristina Hooper:
So I think, first of all, retail investors need to recognize the critical role that behavioral finance plays in a lot of the emotions they have and also the decisions they make. And sometimes just knowing the role that behavioral finance plays, that psychology plays, can help us moderate our reactions. So, I say that because, we tend to be greedy when the stock market is at or close to highs.
Kristina Hooper:
But that tends to be when stocks are most vulnerable. We tend to be most fearful when stocks are very low after a big selloff. I’m old enough to have lived through the global financial crisis, and I remember what it was like in early March of 2009. No one wanted to touch stocks. And yet that was a far more attractive time to get in them, than, for example, the peak, before, that, selloff that began really in 2007 and accelerated in 2008.
Kristina Hooper:
So I say all this to say, just be careful. Recognize that stocks, at least some stocks in the U.S., are close to being priced for perfection, that we could see a sell off. And that the most prudent approach, is typically one in which investors focus on being well diversified both across and within asset classes. So there’s exposure outside the U.S. so there’s not, overexposure to one particular scene, like for example, I and of course, alternatives, can help smooth out returns, by actually producing lower returns when stocks are moving higher and and also holding more of their value typically when we see stocks falling off.
Kristina Hooper:
But again, we don’t know exactly how all these different asset classes will react given a different, you know, macro scenario. We could be headed for a stagflation environment, for example. So I think it’s really important to again, be well diversified and have, a variety of different asset classes in one’s portfolio.
Caroline Woods:
And just finally, what would make you more bullish the next time we chat? What would turn Christina Hooper more positive on this market?
Kristina Hooper:
Well, certainly, a real end to the war in Iran, as well as a real end to the Russia-Ukraine war. I think that often gets overlooked. But what we’re seeing is refinery is being damaged and or destroyed at a pretty fast clip that’s impacting that crack spread. That’s why we’re seeing, for example, diesel prices so much higher than crude oil prices.
Kristina Hooper:
So that’s a problem. And it’s going to be a bigger problem. The longer the these two wars last. So, so the end of one or both, the real end to one or both would make me a lot more positive in oil.
Caroline Woods:
At what level would make you more bullish?
Kristina Hooper:
Well, I just have to give the caveat that sometimes we do see a mispricing in oil. The paper prices of oil may not reflect the real issues. And of course what people pay at the pump, can be quite different. So when consumers are paying over $4 a gallon for gas, that can be problematic and add to the pressures on them.
Kristina Hooper:
Okay.
Caroline Woods:
All right. I think this is a great time to pivot to our rapid fire round of this year that you’ve played before. Quick questions, quick answers. No hedging if you can help it. Are you ready, Christina. Yep. Current market greedy or fearful?
Kristina Hooper:
What I think it is or where I am.
Caroline Woods:
What you think it is. Greeting September rally or reset?
Kristina Hooper:
The start of a reset.
Caroline Woods:
Valuations fair or stretched? Stretched stocks by year end. Higher or lower? Lower. How much lower?
Kristina Hooper:
I think around 10%. Maybe more.
Caroline Woods:
Bigger risk. Geopolitics or inflation?
Kristina Hooper:
Well, let me say geopolitics doesn’t matter to markets until it’s all that matters to markets. So I think right now it doesn’t matter that much. Inflation is the bigger issue. But they are interrelated.
Caroline Woods:
Bigger risk inflation or recession.
Kristina Hooper:
Inflation.
Caroline Woods:
Best defense defensive stocks or the S&P 500.
Kristina Hooper:
Defensive stocks.
Caroline Woods:
Consumer staples or health care? Health care I boom or bubble.
Kristina Hooper:
We take very what we can a little of both.
Caroline Woods:
What when does I spending become a problem 2026 2027 or later?
Kristina Hooper:
It’s already a problem in terms of impacting inflation. It’s one of the forces driving up prices.
Caroline Woods:
The biggest risk in oh, finish this sentence quickly. The biggest risk in September is.
Kristina Hooper:
Is, that we see a perfect storm where yields continue to rise. Oil prices go higher, diesel prices go higher. And and earnings, and earnings start to be downwardly revised.
Caroline Woods:
The ten year yield breaks this market at.
Kristina Hooper:
I think when it gets above 5% it adds a lot more pressure to markets.
Caroline Woods:
The smartest move to make on a pullback is.
Kristina Hooper:
To not sell but to, stay diversified and look to add in areas of opportunity.
Caroline Woods:
Stocks are priced for perfection and perfection breaks when.
Kristina Hooper:
When one of a few different things happens, like, the ten year yield gets to 5% plus.
Caroline Woods:
The part of the market I’d avoid is.
Kristina Hooper:
Areas, with very high valuations.
Caroline Woods:
The part of the market with the highest valuation is.
Kristina Hooper:
Mostly technology.
Caroline Woods:
The I trade cracks when.
Kristina Hooper:
When we start to see, budgets for I Spence downwardly revised.
Caroline Woods:
And finally, one word to describe how your feeling about the market for the next one year.
Kristina Hooper:
Cautious.
Caroline Woods:
Kristina Hooper, always a pleasure. Thanks so much for flying along and for your insights. Really appreciate it.
Kristina Hooper:
Thank you.
Caroline Woods:
That’s Kristina Hooper, chief market strategist at man Group. So you hear the other side of the coin. Tune into my interview with Sylvia Jablonsky. She’s still bullish on tech and explains where she’d put money to work right now.
