Eric Lynch, managing director of Scharf Investments, joined Cheddar News to discuss market trends and what lies ahead as the Federal Reserve paused interest rate hikes.

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Analyst Discusses What Lies Ahead in the Market As Fed Pauses Rate Hikes

Joining me now to break it all down is Eric Lynch, Managing Director of Sharp Investments. Eric, thanks for joining. Thanks for having me today to talk about in the stock market. Our viewers see a mixed market today. The fed as expected, a pausing on rate rises. What do investors need to know? Yeah, I think it's quite clear. Fed has basically said look, our priority is inflation. We're going to bring it down. We don't care about full employment and that was basically Chairman Powell's first statement in the press conference. We're worried about those that are suffering from inflation. What happens next? Where do stocks go from here? And how does the economy factor into that? You know, I've looked back at the last four rate hike cycles and all the way back to 1989. And it's been basically kind of shockingly surprising that there's about a 12 month lag between when the fed pauses, not when it increases the rate for the first time, but when it pauses the hike for a recession to occur. So if that's the case, the implication is that this kind of bull case sentiment that the second half of 23 is going to be a re acceleration of the economy and earnings could be premature. And especially now after today, because I think Powell basically said in no uncertain terms, we are here to slow it down, we want employment to go down. Do you see a recession on the horizon? Yes. The question is when that's not profound. We've all been wondering this for a long time now, but you see it in the leading indicators, you're seeing it basically, even though people are kind of excited that the economy is hanging in there. Remember that its GDP and employment. These are always the last two generals to fall in every economic cycle. And so it's just a matter of time because the Fed has basically said in no uncertain terms today, we will slow this down. So the takeaway for investors is really what do we do? Where do we find opportunities to still get price appreciation if the market itself is going to be facing some significant headwinds? And what are some of those opportunities that you see in the market? Yeah, I think it's an earnings recession playbook, right? And the bad news is this earnings recession we're in probably is going to continue as this credit tightening continues to impact the economy. But there's always ways to make money, right? That's the good news. And what you want to do is find companies that are still growing in this environment one way is to basically shift play, the shift and spend from goods to services. So the revenge travel space, right? Booking holdings is doing great Target Home Depot or bring guidance down. That's one way another way is to invest in businesses whose earnings are GDP in sensitive health care is a name that grew its earnings double digits in 8 2009, the heart of the financial crisis because they just ship pills from A to B. And then finally, a third way is really to invest in companies with a lot of cash. Cash is king because it gives you three levers, you can buy back shares and increase your profits. That way for share, you can issue dividends or you can buy companies. So all those allow you to grow your earnings even in a economy. So for investors dipping their toes back into the markets right now, those are some of the sectors that you would suggest short term or long term. I would say intermediate term. Yes, they should all do. Well, I expect the economy to slow. The fed is going to make it slow. Earnings are not going to bounce back. And so you got to find non GDP correlated earnings growth. Those are good opportunities. Let's talk about cash because for some people even in a high yield savings account, they're getting 4% maybe even a hair more in certain high yield savings accounts. Should that money stay there? Parked in cash at 4% or do you think it is time to perhaps unload some into stocks. It's probably wise to make small reallocations along the way. So you're not making this binary decision. It's a great question. I think, you know, obviously the problem is if interest rates do start coming down back after this year or next year, let's say next year you're going to have reinvestment risk, right. And the client or investors are going to have to put that money to work at lower rates. So it probably would be wise to slowly build some equity, particularly if those clients or investors are kind of underweight in equities. And in terms of what we see globally, I also want to talk about the international market because us stocks obviously are a place to play international stocks, developed markets, emerging markets, of course, oil, these are all options as well. Any particular views on those asset classes. Yes, it's a great question. This looks a lot like the set up in 2000, Kristen where at that point, tech stocks the world in the late 19 nineties and so international stocks value stocks, small cap stocks all lagged terribly. But then from 2000, the financial crisis, the non tech leadership assumes leadership of the market and so international looks great. Those valuations are several, multiple terms less than the US. The S and P 500 is trading at 20 times 23 earnings. The MSC aqui U is trading at 12.7 times so much reduced valuation. Japan is also very interesting that Japan has been this great hope for years that they would get focused on corporate governance. You just saw the Toyota news here today, but it is happening. They're getting some teeth and I'll tell you why the Tokyo Stock Exchange is now basically threatening delisting in 2025 if Japanese companies do not improve their corporate governance. And so what you're seeing is already some significant share buyback announcements. Citizen watch basically announced a 25% reduction in their share count. Stock went up in proportion of 25% this year. Sony just did a big buyback announcement. Honda just did that as well. So I expect Japan which has had a good run so far, but the multiples are still cheap to continue to outperform in the years ahead. Yeah, there's been a lot of talk about Japan. I think in the wake of certainly the banking crises that we saw this year. Buffett coming in saying Japan looked attractive, one of several markets guests just that I've had on the show in the past few weeks that do say Japan looks attractive so maybe our viewers can give it a look as well. Eric Lynch, Managing Director of Sharp Investments, Eric, thank you. Thank you.