Market comeback underscores ‘underlying faith in this economy’: Strategist

RBC Capital Markets Head of U.S. Equity Strategy Lori Calvasina joins Yahoo Finance Live to discuss stock futures as the market moves, the economy, growth concerns, labor shortages, and the outlook for the 2022 stock market.

Video Transcript

BRIAN SOZZI: Investors are still trying to catch their breath after getting railroaded on Monday to a certain extent, even though we did see a rally into the close here. Let's check with Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Lori, nice to see you. Look, let's start on yesterday's session here. As a veteran strategist, what are you thinking when you see that type of reversal into the close? And what are you thinking about markets here in the pre-market?

LORI CALVASINA: So I think it's really interesting that the market, we sort of got to that down 10%-ish, a little bit more kind of peak-to-trough drawdown. And then the market decided, OK, maybe this is a little bit too much and tried to stage that reversal. And that's very important because the rule of thumb that we use as a garden variety pullback is 5% to 10%.

Now if you look back post-financial crisis, whenever we kind of move more than 10%, it ends up being about 15 to 20 aside from the recession scenario. And those 15% to 20% downticks or downdrafts rather have all been associated with growth scares, big changes in monetary policy. We saw these in 2010, 2011, 2018.

And what I think is really interesting about late 2018 is that there was a genuine recession fear that was brewing from the trade war. Now there are challenges to growth at the moment. But I do think it's very different back from 2018. But I think the market kind of took a beat yesterday and said maybe this is far enough.

And we'll see if that holds. I wouldn't be surprised if it does. I wouldn't be surprised if it won't. We're going to have to take our cues from the market from here. But that 10% the market's saying and kind of pushing back a little bit was telling you that there is still some underlying faith in this economy.

BRIAN SOZZI: Well, Lori, just staying on that, do you think the market is trying to price in a potential Fed interest rate hike driven recession?

LORI CALVASINA: I think that there have been growth concerns. And if you go back to December, and I know it seems like ancient history at this point. But right after the December Fed meeting but before Christmas, we did a survey of investors. And it was based on commentary I had been hearing from investors in my marketing meetings in December.

And we asked people what do you think the risk of in terms of Fed policy error is. And we didn't just ask about Fed policy error because there are two different kinds. We said is the risk that the Fed is being too aggressive or the risk that the Fed is not doing enough? 29% said the latter, that the risk was that the Fed was not doing enough. Those are the people concerned about inflation.

But 40% told us back then, and again, this is well over a month ago, but 40% told us that the risk was that the Fed was being too aggressive. I would guess that 40% number has increased. And some of the things we heard and have continued to hear is why would the Fed be getting so aggressive at a time when inflation is likely to peak and moderate later this year anyway? Why would the Fed be getting so aggressive at a time when there's short-term economic disruption going on from Omicron?

And I think those fears continue to be out there. I think, ultimately, the economy is going to be fine. But I do think that's an important kernel of sentiment in the market right now.

JULIE HYMAN: Lori, a couple of questions for you. But first of all, let's look very short-term. As you said, maybe encouraging that we bounced yesterday. But we're right back down this morning.

LORI CALVASINA: Yeah.

JULIE HYMAN: I mean yes, things could change during the session. But what does that tell you? I mean normally, you would expect after seeing that kind of a bounce, maybe to have an extension of that bounce. That is not happening.

LORI CALVASINA: Yeah. And look, we're going to have to see where the trading day takes us. I will tell you what I heard from my traders yesterday was that a lot of the move late in the afternoon was hedge fund-driven short covering, and that we were better to buy for [? as ?] [? guests. ?] So that is encouraging but there was a lot of short covering going on in the tech space, on the healthcare space, the industrial space.

That is often the first step to stability, but it's not always the step to stability. I think it's important to keep in mind that we have an avalanche of earnings coming out this week and next week, well over 200 companies in the S&P. We've all been focused on the Fed. But we're going to be getting a lot of boots on the ground color from companies in the next few weeks. And that, ultimately, I think could either exacerbate this weakness or it could help add to some stability of the market depending on what companies say.

JULIE HYMAN: So I want to go back to the Fed for just a second. Do you think that the market is over-judging the negative implications of the Fed here? Do you think that, I mean, it feels like there's an awful lot of pessimism after yesterday.

LORI CALVASINA: You know, and I've been going back and forth with people about the lesson of 2018 because that was the year that started out with a lot of volatility to start the year. Then we had that massive drawdown at the end of the year. The reason that massive drawdown happened at the end of the year wasn't just because the Fed was getting tighter. It was because there was a view that the Fed was just going to keep policy on autopilot.

And it was also because we had the onset of the trade war which was a new, big, scary thing that investors really didn't understand what the implications were going to be. And post-Labor Day, in particular, there was a view that it could lead to a global recession that would drag the US economy down with it. Now we were at the beginning of that story. We are hopefully getting to the tail-end of this pandemic story. And I think that's really the key thing to keep in mind that, yes, we do have some short-term Omicron disruption here.

It frankly may have been greater in the first quarter than anybody anticipated. But we are really kind of coming out of that. And I think that's going to be the key thing to keep in mind, regardless of whether or not you think this is a buying opportunity in the market. The market's grappling with it, but it does seem like we're at a very different place than what we were back then. And I keep telling people if you look at consensus economic forecasts, they've been around 3.9% in terms of real GDP. Even if those estimates get cut, there's a lot of cushion in those views before we can really even be talking about the dreaded R-word.

- And let's talk about something else that maybe got lost in the shuffle with all of the Fed concern, and that's earnings. We're like in the midst of earning season. Right. Fast and furious. We got a bunch more numbers this morning. What's your read on what we've heard so far? And not just your read on what we've heard but the reaction to what we have heard?

LORI CALVASINA: So if you look at the stock price reactions-- and we haven't analyzed anything that came out today yet-- we've really just gone through the end of last week. But companies that are missing are getting hit much harder than they have in prior quarters. And we're particularly seeing big weak reactions on companies that are missing revenues.

I think that's important because if you look at the demand discussion so far, it's not that the companies are saying anything bad at the moment. It's just that they're not waxing poetic about how fantastic underlying demand is the way they have been the last few quarters. So there's a real sensitivity around that revenue outlook.

I'll tell you the other things that are kind of my big takeaway so far, Julie, is number one, labor, labor, labor. It used to be supply chain, supply chain, supply chain. I'm reading all about labor and compensation right now. I really sort of struggle to find as much commentary on supply chains as I used to. But I find plenty to talk about on labor.

The other thing is that we saw companies really offer a stark contrast to what they said post-Thanksgiving regarding Omicron. Post-Thanksgiving, the message was, hey, we got this. It's two years into the pandemic. We're going to manage around this just fine.

We actually saw one company say last week, "Shame on us," because we didn't manage around the vaccine mandate very well, and we didn't manage around the quarantines that kept people out of the workforce. They said we simply did not plan adequately for that. And we heard echoes of that from a number of other companies as well.

So I do think it's going to be really interesting to see what happens with 1Q numbers where we've only got 6% growth baked in for this quarter. I think that's going to be a real sort of key to determining how this reporting season goes is whether or not that 6% number holds up, and if it gets trimmed, how much it gets trimmed by.

BRIAN SOZZI: Lori, you're so on the mark. I talk to a lot of executives. I'm talking to a lot of folks right now, and they are being surprised by the upside on labor prices, the cost to get labor into their offices, their virtual offices, wherever it might be.

As one of the more levelheaded strategists out there on the street coming into this year, think your S&P 500 target was 50-50. And just given where we're seeing things on volatility, do you think you're going to lower that target? Do you think we'll actually see returns this year below your prior outlook of about 7%?

LORI CALVASINA: So if you look at the 50-50 number, it's basically a 6% return on the year. It's obviously higher from where we are now. But we came into the year saying that we expected volatility to start the year. And we expected it to be a sub-trend kind of year.

And I'll tell you, if you go back and you look historically at down years in the S&P, they are usually associated with the onset of a recession or a major crisis. And so the question is, do we think that we are getting that this time around? And again, we think that we're more at the tail-end of this pandemic story.

We do think we're going to get some multiple compression most likely from the Fed. We think it's going to be a challenging tough year. But I have been telling people I'm actually glad that we're getting a lot of this out of the way at the beginning of the year because it does give us a good setup for later in the year.

And I'll give you one other thought. If you look at the retail investor survey by AAII, net bullishness last week fell back down almost I think it was minus 25.7%. It almost got back to March 2020 lows which were around 28%-29%. And that's extremely important. Because historically, when net goals are below minus 10%, we're obviously far below that right now, markets are up 86% of the time on a 12-month forward basis with a 15% average return.

And if you go back to 2020, we saw net bullishness just really in the toilet for about three months. For about 12 weeks in a row, we were below that 10% threshold. But we got there in March right around the market bottom, and it ended up being a very, very good signal in terms of keeping people in the market. So that is something that gives me a lot of comfort. That even if we haven't seen sort of the downward move play out fully yet, that we are still going to make some modest gains in this market before the end of the year.

BRIAN SOZZI: Certainly appreciate a little bit of optimism after yesterday's really just crazy session. Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Always good to see you.