Eric Lynch, managing director of Scharf Investments, joined Cheddar News to discuss Thursday's market session as stocks closed lower, dragged down by Tesla's earnings miss, amid economic fears.

Closing Bell

Analyst Breaks Down Market Fears as Stocks Close Lower

Joining me now is Eric Lynch, managing director of the Investment Advisory firm Sharf Investments. Eric, great to have you Daddy on the floor of the Stock Exchange. Thank you for joining us. It's great to be here today, Chris. Thank you. Look a lot of somewhat mixed messages. I think you could say from the stock market or investors at least trying to parse through where we go from here for the major indexes. What is your take? Yeah, I think this is a Wayne Gretzky markets. And what I mean by that is, you know, Gretzky said I skate to where the clock is going, not where it is. I think too many investors are complacent about lagging indicators, economic indicators in the market instead of leading. So what do some of the leading indicators tell us what are they and what do they signal about the path forward for the economy and stocks? Yeah, it's a good question. There's tons. A shortcut is a conference board leading economic index that printed today this morning, its 12 monthly year over year decline. If you break that out, what it really is is instead of just being so focused on lagging indicators like employment and GDP growth. It's focused on leading indicators like credit contraction, new orders, consumer confidence, weekly hours worked. These are more leading indicators and that conference board has accurately forecasted recessions the last 20 years. So is it forecasting a recession? What can we glean from these leading indicators? It is 12 months of year over year declines is typically associated with a recession. And so, you know, we're positioning our portfolios for that to occur sometime in the next year. So what does a portfolio position for a recession look like it's time to play defense, let's keep the sports analogies going, you know, defense wins championships. If you look at, I think the concern going forward and you just mentioned Tesla basically saying, hey, profit margins are being contracted. We're bringing down prices. A lot of other earnings releases are meshing the same thing, profits are coming down. We're already in an earnings recession. You want to be in businesses that have low operating leverage. So as sales go down, profits don't get dis partially impacted because the cost base is lower. So defense means things like health care. So for people who have money on the sidelines, right? And they're wondering how do I put this to use? Maybe they don't feel confident enough picking stocks per se in this environment. They want to invest in broad market indexes for their 41 K or something of that nature. Do you think it's too early in this environment to be investing in broad market indexes. That's a great question. And I think it's a great question because this market looks analogous to 2000 where the 1990 s built a huge market concentration, leadership in big tech growth stocks. It's similar. Now, if you look at the S and P 500 has an 18.5 for P, not that cheap relative to history. If you take out the top 20 market cap names, the average is closer to 15. And so I think if you kind of stay away from the elevated multiples of that concentrate the leadership value stocks, international stocks, mid cap stocks, small cap stocks like 2000, there's a lot of opportunities. OK. So we talked about one opportunity, obviously defensive health care, you said was one, what are some other opportunities including international sectors or international markets? Yeah, you know, ever since the financial crisis, there's been this big disconnect between us multiples and international multiples. So at this point, we're at historical highs and that spread and so developed markets particularly look intriguing because you're getting the same kind of multinational with even U revenue exposure at four or five, multiple turns less and as good or better growth prospects. So Europe looks interesting to us, East Asia looks interesting to us Korea and Japan. There's plenty of opportunities there can stocks still rise during a recession. It's difficult for stocks to rise, but I'll give you a good case in point again. 2000 to 2000 to the financial crisis, even 4002 S and P 500 was down. Three years in a row. Stocks got hit even harder. But value stocks made money. Small caps made some money. International stocks made some money. So I think this is a time to diversify away from the market leadership for the last 5 to 7 years and find opportunities there. Cash cash is actually now an asset class. Yeah, for sure. Good point T bills at 34 or 5%. Yeah, there's a place for that in the portfolio. All right, Eric Lynch, Managing Director of Sharp Investments. Eric, thanks so much for coming on.