U.S. stocks closed Thursday's session higher, despite the Bureau of Economic Analysis reporting the U.S. economy contracted for the second straight quarter from April to June.  The Dow finished up 1%, the S&P 500 up 1.2%, and the Nasdaq up 1.1%.  Joseph Zhao, Chief Investment Officer of Millenia Capital, joins Cheddar News' Closing Bell to discuss.

Closing Bell

U.S. Stocks Close Higher Despite Q2 GDP Drop

So joining me now is josie chief investment officer at Millennia Capital joe. Thanks so much for coming on your reaction. This is certainly a nice rally that we see. Do you think it can last? Well what's happening? I think the last couple of days um is a is a reflection of the market a little bit more certain about the path of the rate hikes. I think with the decision yesterday, that's one certainty removed. And I think you're seeing that investors are beginning to kind of come back, come back into the market, investors coming back into the market. What is it joe? Is it the earning season? Is it the Fed chair and the president saying we're not in a recession? What's causing the buying impetus that we've seen of late? Yeah. So I think it's important to look at one native cost sort of the correction that were in one is valuation multiples and policy. The second is earnings. So from a policy perspective what happened yesterday is they've laid out sort of their plan for the next few months. And so with that you're you're beginning to see sort of the what the plan will be here for the next few millions. We may have seen people Fed what that means is they it looks like they're going to slow down their rate of rate increases so that the acceleration of rate increases gonna help put a floor on valuation multiples now on the earning side. Um You're seeing some of the earnings are have not been as bad as some some feared. Some of the earnings are have actually been pretty healthy, pretty strong. So when you multiply earnings times and evaluation multiple, I think you're getting this market where you know our view is we're beginning to see the beginning of the bottling process in this year. Well, here's the question, joe is this a relief rally that we see in what is otherwise a bear market, a bear market rally as someone call it? Or do you think we might have put in the bottom and that stocks can go sideways or higher from here? Yeah, no, it's a look at our view is we're entering the bottoming process and during this process, you know, equity markets may fall. But if you look at sort of the the S. And P. 500 price to earnings ratio 17 times to this year's earnings, that is actually below the last of the historical average for the past five years in the last 40 years. And so, you know, I think we're entering into sort of the next 12 months from a position of strains where the economy is actually outperforming and trying to slow down. So from a position of strength, I think, I think you know, any sort of reception you may get maybe more mild than than people than the market may expect. So certainly the market may go down. But we think that any sort of significant dips will be buying opportunity when you were kind of 12 months out earnings will probably grow about 5-9% this year. I'll probably grow 69% next year when the Fed sort of pauses that will basically put a floor on the valuation multiples. So our view is you know price earnings ratio will probably normalize from current levels back to somewhere between masters and this year's. So when you put the two together, you know, our view is the S. And P. Will probably be hired by the, well I think that's good news to a lot of investors. I do a lot of people on the cusp of retiring. A lot of investors looking at their own portfolios. 401k. S. And iras as well. And it sounds like your tone obviously is is optimistic that things will get better from here. I think the U. S. Is learning to live with covid more and more. But clearly there are still factors out of our control like Russia's invasion of Ukraine and the way that other countries, for instance are dealing with the coronavirus. What are some of the risks out there? The investors should at least be prepared for? Um In case we do take another turn lower. Yeah. So you know, there's the elephant in the room is this Fed policy and that's a function of um inflation. And the second risk that I see the market is quantitative tightening. So let me, you know, touch on the first point. Um You know if you look at some of the key inflation uh you know the targets many inflation um look at many inflation numbers but one of the key metrics to look at is the core pc inflation. So that number is actually peaked a few months ago and it's actually been coming down. It's actually sitting right now About a little bit about 4%. Um so you know where that trend uh continue to come down over the next few months I think you're gonna see peak inflation that that may actually go slower. The risk of that kind of thinking is what if the inflation persists longer because of status in wages and other uh prices. I think the number one risk is the Fed may have to go further than these are the terminal rate they forecast in their sp which is 33 quarter and 3.5. The second race is probably quantitative tightening. Um that's basically removing liquidity from the market place. There's $5 million dollars removed. But I think you know if the if the inflation comes down and the Fed can sort of control the withdrawal of liquidity, I think that would basically remove two huge barriers to the to the market on the earning side. Um Again we're coming from a position of strength so any declines for Moderations were adjustments earnings, it might contribute to moderate. It would not be the severe sort of um contract with crisis