Dryden Pence, Chief Investment Officer at Pence Capital, joined Closing Bell to break down the major factors driving stocks lower, ahead of some big earnings and the upcoming interest rate decision from the Federal Reserve in early November.

Stocks Close Lower Thursday Ahead of Big Earnings Week

Okay. But I'm excited. I've got my markets guest on set today. So stocks ending the day in the red once again, is that 10 year treasury yield does surpass 4.2% in fact reaching its highest level since 2008. So joining me now is Dr Pence Chief in officer at Pence Capital. Thank you so much for joining Dryden. Always a treat to have guests with me on set down here on the floor of the stock exchange. Happy to be here. It's wonderful to be back live. Wonderful. Well, we take a look at the stock market as our viewers see on the screen here and losses really across the board today, but ending off of our worst levels of the session. What do you make of the current state of the market? Well, currently, I think the market is in this configuration between figuring out what it's gonna do and what it's not gonna, it's hyper reacting to everything that happens. Companies that get a little good earnings are really affected positively and negative earnings negatively. So the point of the matter is is everybody has hyper it's like the frazzled cat syndrome right now where everybody is hyper reacting to every piece. Good news. And I think people have to kind of take a step back and look at the good things that are going on. The fundamental economy as we move through this, this hyperactivity period and as we again turn to the major indexes that our viewers of course see on the screen there. I guess the next question that I have is, do you think we're oversold at these levels? Clearly because we've seen a massive pullback in stocks so far this year. I do think for right now that we are a little bit oversold and the reason why is earnings are beginning to actually show that the economy is quite resilient, consumers still has a lot of money and they're spending it. So you're beginning to see some strength. And we saw some of this in second quarter where, you know, everybody was thinking it's gonna be earnings Armageddon and it wasn't. And so we're actually seeing the same kind of thing happen now. So some of this bad anticipated news isn't working out in reality. So I think that we're in this period of time where people have been a little too pessimistic about what's going on, right. I remember the warnings obviously from Bezoza this week, Jamie Diamond, the week before Cathy Wood as well, saying that the apocalypse is near the recession is in fact on the horizon. But some of our guests actually in fact have said that they don't think a recession will be as dramatic as we've seen in the past, given the current strength of the labor market and the consumer as you mentioned. So if we do in fact see a recession, what would be the magnitude of it that you are forecast show. I think it's it's generally going to be what we would call a small our recession and it doesn't come until next year. So things are pretty decent this year. We even probably get a rally into the end of the year of the market and the economy. But then when we get into next year, people are probably a little too pessimistic for this year and too optimistic for next year. So as we get into next year, we think we have a small recession, but it's one that will probably be over with by the time people really feel it. It's like you driving a car at 90 miles an hour for a long time, you slow down to 50 you feel like you're going nowhere, but you're still moving five times faster than you can walk. And so I think that that's kind of what's gonna gonna happen. So we are a small, shallow recession that we come out of. Okay, that's good, shallow. I like to hear that. I think our viewers probably like to hear that as well dried. In My other question is we follow patterns obviously and chart movement very Closing Bell, as do many technical analysts are based on what you're telling me? It sounds like we could see something similar to last year. A rally into the end of the year. Does that include or is it followed by selling in fact at the start of next year, as we did dramatically see, in fact at the start of 2022. I think you do get a rally into the end of the year markets usually go up about 8% after a midterm election and we're gonna have One of those, so you're gonna see a catalyst for a rally to the end of the year. People should take advantage of that to probably trim the things they've been wanting to get rid of for some reason and then strengthen their portfolios going into next year. So that's kind of where you want to reposition to a stronger portfolio going into next year resiliency. I think that that should be the key word, right? The theme word of 2022, certainly heading into 2023 as well. How do do investors make their portfolios more resilient as you're suggesting? Well, I think when you think about this year has been about market multiple next year, it's going to be about earnings, it's kind of a tale of two years. And so when we think about looking at fundamentals for next year, you're making your portfolio resilient. You've got to look for companies that have very strong fundamentals, very strong cash flows. Also, you have to recognize the dollars exceedingly strong. So you have companies that import into the United States and then sell into U. S. Markets. I think that's going to be very important because they're going to be able to see margin margin expansion and those are the things to pay attention to who can maintain or increase margin in an inflationary environment. So that that's where I think you focus, you know, for a lot of americans watching this show, I think they're probably wondering if their job is in jeopardy, right? Of course job losses do tend to come with the recession. And so for people simply budgeting here, wondering if they need to sell stocks because maybe they're worried that they might lose their job. Any sort of estimate as to the pullback that we might see in the labor market. I think I think jobs are in pretty good shape that hopefully that that make sure your viewers feel pretty good. The point of matter is we could lose four million jobs and still be at a 3.5% unemployment. We're still at this moment where labor force participation is lower than it was pre pandemic. I mean if you took all the people that are not in the labor force right now added up that potential income, you would have another $198 billion worth of income going into the economy. So I don't think people need to be overly worried about their jobs. You're going to see the kind of the slowdown and maybe not as much wage inflation as you would, but I think jobs continue to be plentiful next year. And I think the fundamentals of the economy are actually fairly strong. Okay, what about dividend stocks? That's been another key one that we've heard on this show that many investors, in fact have been turning to dividend paying stocks this year. As interest rates have been rising to those dividend paying stocks look attractive to you next year. They do in that you have two things going on. Companies that pay dividends typically have very strong resilient earnings, particularly if they're in the consumer based areas. So when you are looking at that, these kind of companies are able to increase their earnings or maintain mark and continue to pay dividends. And we're seeing two big phenomenon going forward. You now have an interest rate, you haven't had interest rates for 10 years. And so people who are able to actually make a little money in fixed income and then combine that with dividends, they're going to be able to have a portfolio that's more of a fortress going through into next year and the year after as it creates, you know, 345% income, it's a good buffer for them going forward. The most important question that I have for our segment today are the market lows behind us. I think the market lows for a number of companies are behind us. It's a company by company, but I couldn't say that the actual bottom is in because there's such a disparaging going through. But I think we're ready for a better quarter as we go through. Some good news as we like to call it here on cheddar news? Dryden. Thank you so much for joining me today. Of course. That's Dryden Pence, chief investment officer at Pence Capital.