The “honeymoon” phase of the stock market bull run is coming to a close, and as yields head even higher, stock indices could see a correction on the scale of 10-15%, said Gareth Soloway, chief market strategist of InTheMoneyStocks.com.
Gareth Solloway chief market strategist of in the money. stocks.com is back on popular demand to talk about the equities markets and trays, Gareth. Welcome back. And thank you, David, for having me. It's great to be back. You and I are speaking on a day when markets are not very volatile, there's just a lot of flat action everywhere, equities, commodities.
And, uh, I like to get your take on the general macro landscape. So as you know, the equities markets have had a very good run in 2020 up till. Now my question for you is, is the honeymoon phase over, or can we see more upside from here? Yeah. So, so I think, you know, there's a chance that you could see a little bit more upside in the S and P I think the honeymoon phase is over for technology.
Um, even if you see some more upside in the S and P 500, uh, everything I'm seeing is it'll probably top out at 4,000 on the S and P and that's if we get there. And when I say the honeymoon phase is over, you know, you have to look at valuations. Valuations are factoring in this monstrous reopening. And they're not looking at yields going up even further, which I do think they will do.
And I don't think they're also looking at the possibility of taxes. I mean, even this morning, um, you know, you had, you had talk about a wealth tax. You're going to get taxes on capital gains. Raised lightly for the top 1%. And you're also going to get the corporate tax rate to go up later this year and potentially starting in next year as well.
So I think the market's a little bit in LA LA land thinking that everything's great with the reopening. Um, I think it's kind of factored in already at this point. Yeah. What about the argument that earnings growth will be spectacular this year, especially considered considering that we had COVID last year.
So relative to last year, earnings will be very good this year. Yeah, so they, they will be great this year, but then if you look at the PE ratios of where they were, you know, at the lows of COVID versus where they're going to be, that's really where you have to say, okay, what's the issue here? And if you look at PE ratios, they've gone up quite a bit just since last year.
I mean, markets are up substantially, I think 25% on the S and P approximately. From, uh, you know, just the last 12 months or so. So, you know, taking that into account, you have to say, okay, do earnings growth. Do they justify even a higher levels at this point? Well, what's your answer to that question. You asked a very good question yourself.
You're doing my job for me. Excellent. Um, my answer is they don't mainly because you have to factor it in. I mean, what happens if the tax, the corporate tax rate gets raised to 28%? What if loopholes get closed? All of a sudden, you know, you can't tell me that's not going to take away from the earnings power and the earnings growth of these companies.
So again, earnings have to be factored in, but you also have to look at the whole picture about potential for, uh, Uh, taxes to rise. Okay. Let's come back to specific companies and earnings. And just a bit, I want to talk about yields now, offline. We're talking about yields. This is a topic. This is an issue that I've discussed many times with economist and Alice over the last two weeks.
And the consensus that yes, rising eels is a problem for the equities markets, but most likely the federal reserve will step in with some sort of intervention and cap, the long end of the curve from rising even further. What do you think? Yeah. So they're going to try, there's no doubt about it there.
They're not worried about it. Yields going up little by little, very slowly over the course of months or years, they're concerned about what we saw last week, which was this meteoric run in yields where we topped out at 1.6%. And I think we went from like 1.2, five to 1.6 in a matter of a day or two. Well, that's what they're concerned about.
Right? So, so they stepped in and there's actual, you know, there's, there's proof that they stepped in and around 1.5, 1.6% and kept yields there. The problem is, is when you have the rest of the world saying, Hey, Yields need to go up because you're printing so much money. And then the federal reserve is on the other side.
The fed can only stand in their way so long. So my guess is the fed is going to pick their spots. The next spot, probably being 2% on the 10 year. And they'll step in. If we push through 2%, push us back down again, just like they did in this situation here. Okay. Well, I, I like to speak, I've been speaking to economists about this.
I'd like to get a trader's input on this issue. What was your initial reaction when we saw that? In your words, meteoric, spike up in yields last week, what you saw, what you saw that on your screen, what did you do right afterward? I, I, I picked up, we picked up TLT with my traders, which is basically a, an ETF that you can short yields with.
Anytime you see a spike like that, where it's that quick. Um, and again, I remember looking at yields and if we were like at 1.49, and then a second later, we were basically at 1.6 and right away, we started buying TLT to play, play for the pullback in yields. Um, and, and just knowing the fact that the fed doesn't want the yield curve or the yields to rise as fast as this.
You know, they're going to help you on that trade on being short on yield. So, so we saw pull back. I already exited the trade as I think we're getting to a point where yields will probably bottom out before we start heading back up again. I remember in December early December, the tenure was around 85 basis points.
And now it's well, as you know, it's going up way past that. It touched 1.5, not too long ago, 1.6, even, but you know, if you look at the S and P 500, let's take a look at an S and P 500 chart. Now, Gareth as yields have risen, uh, steadily over the last two months, the SFP really didn't take a huge head. Yes.
We've had some periods of volatilities on some sessions, but just taking a look at February, for example, we're still up on the month. Yeah, absolutely. And I think it's important to recognize that the market doesn't mind yields creeping up a little bit. It seems to be this 1.5% on the ten-year that's the concern for the markets.
And that's really why you saw, you know, if you just look at this last little bit over the last week or so, where we were right around one word. 1.5%. That's where the market started to stumble and the reasoning for the 1.5% up being so important on the tenure is that that's the approximate dividend yield for the S and P.
So, you know, if you're getting a dividend yield of a 1.5% on the S and P, but now you get the bonds the 10 year, 10 year yields be offering that same amount. You know, it starts to make an interesting kind of hypothesis. Do you want to stay in the market at these lofty valuations with risks of taxes going up?
Or do you want to move into something, you know, 1.5% paid somewhere else? Yeah. Uh, well, I've noticed, well, when I talk about the markets, I use the S and P 500 as an example for the benchmark. If you look at specific sectors, tech has been hit quite a lot, actually. So Tesla, for example, it just taking a look at one of the, one of the thankless T stocks, Tesla it's down considerably in the last month.
Uh, I'm looking at, yeah. I'll let you comment on that. Oh, well, number one, you know, the last couple of times I've been on like, you know, I'm short that stock. So, so I'm not, I'm not upset that it's fallen off a cliff here. Um, I actually think it's. Yeah, absolutely. Yeah. Um, and doing a lot better than we were when, when it was trading up near 900 that's for sure.
Um, but I still think it's got more downside. You can see this up sloping trend line, enact the lows, uh, for the last, you know, year or so. You have a nice trend line here just below $600. That's the next stopping point for this stock. And I think it'll get there within, probably within a month. So Tesla.
Absolutely. And these are the high growth stocks that when bond yields go up, they're the ones that are going to see the biggest reduction in price, because they're the most priced in for future growth. Yeah. It's not just Tesla. You good, good point. Thanks stocks, Amazon, Apple. I'm looking at, I'm just taking a few out of the things they're all down on the month.
More so than the S and P why, why are these tech stocks leading the charge on the downside? Why are they more valuation of, of stocks and you get you there's this formula that institutions use, which is basically taking the, the tenure or the bond yield. And they basically say at this bond you'll price, you have to value stocks at this level when they have this type of growth.
And the lower heels are tech stocks that have a lot of growth, longer term, you know, major upside. Their valuations can go a lot higher with low yields. But as yields rise, you see this rotation out of those, and this is all institutionally based, and this is all really algorithms that are even doing this.
So it's all programmed in. And that's why, if you're someone that thinks yields are going to go higher, which I don't think, I don't understand why anyone can say they're not going to go higher considering the printing of money and the inflationary pressures that should come around. But if you think that.
Then you have to be very conservative on tech stocks right now. Yeah. So, uh, okay. On yields, we'll touch on yields in just a sec. Now, tech stocks, I think one of the, there's a lot of funds emerging around the, the tech sector, right? Kathy was arc innovation funds, for example, they're, they're doing really well.
And the whole thesis there, the theme of technological disruption is based on the fact that these companies fundamentally are going to outperform the competitors, just because of how well. Advanced, they are technologically in how well their products are placed in the market. And so if you, if you think of it from a, that kind of perspective, long-term right.
Uh, Ryzen, uh, yields from one, from 0.5, even to 3% really shouldn't matter that much. Yes. So you're going to see if you discount the cash flows. You're going to see a drop in the evaluations, but the fundamental value is still there. Right. Would you disagree with, I agree with that statement right? Longer term, longer term.
It is. I mean, if you have a horizon of five or 10 years and you want to bet on Tesla being the King out there, then that's totally understandable. But remember the markets don't. Phew. When they value, when stocks value themselves and investors value, they really look about six months in the future. And I think one of the things that a lot of people are missing is that.
When the federal reserve came out in 2009 in 2008 and bailed this market out with tons of QE and all that stuff, it started what I referred to as, as drugs in the market. And the market has been addicted to these drugs for a long period of time, since 2009. And it's one of the reasons, if not the main reason the markets have gone up.
From 2009 to where they currently sit. So now you're talking about yield, starting to move up, which is going to force, especially if we get inflation a big inflation, it's going to force that Fed's hand to tighten or remove the drugs. And I mean, you're talking about, you know, a market that could convulse in that nature.
Uh, so it's not surprising to me to see the market concerned about even higher yields, even if the long-term impact. Is not effective. How high could yields go? Also, I'll give you an example. I had a guest on not too long ago, and he said that suppose yields go to 5% historically. That's not really high, but let's suppose it goes to 5% at that level with the $30 trillion debt level that the U S government has 30 trillion of 5% of 30 trillion is $1.5 trillion of just interest expenses.
That's half of GDP. That's going to bankrupt the entire nation. Yeah. I mean, this is, this is what concerns me so much and why I'm so bullish on gold, why I'm so bullish on other things is because, you know, the only way out of this is printing more money and printing more money is going to increase more inflation, which is going to raise yields.
I mean, it's this vicious cycle. That to me is something that the country cannot sustain for endless amounts of time. So it's a very big concern of mine. It's something that I do think about constantly. It does keep me up at night when I think about the future for my kids. Um, and it's, it's all I can do is just prepare ourselves, you know, for, for it, by buying other assets, to kind of Kush and pushing it.
Okay. So I promised the audience, we talk about specific trades and their earnings and their potential. So let's go through some companies you do, like right now, I know you don't like Tesla. We've talked about that extensively. Let's talk about some trades. You do like. All right. Yeah. I mean, if you're going to be looking for some training opportunities, I keep an eye on something like Kraft, Heinz.
I brought this one up in the past. It's actually had a beautiful move up since we've talked about it. It looks like it's making a little bullish consolidation. What I liked so much is that it's a clear breakout here. So if you look at this area where it bubbled up to, and then pushed back down, and then it caught up here, pushed down again here, and then finally it broke out and it's consolidating above this area right here.
So ultimately I think this could, I mean, look at this gap up here. And I've always said to our traders, that gaps are generally meant to be filled. I mean, you can look at gaps on a chart. 90% of them will eventually be filled. And this chart is just begging to trade back up to that gap fill, which would be an awesome gain.
$48 and 35 cents as a target mean. You're talking about a 33% move there, approximately. Uh, so that's one. I do like quite a bit here on the long side. I also love gold. I did a huge amount of buying and gold. Uh, just over the last couple of days, I bought GDX, which is the gold miners. Uh, the reasoning here is you've done this three 82 feminazis retrace on gold.
And it's also right into this little consolidation level and look at this beautiful consolidation level, going back to, you know, March, April, may, June of last year, which creates a ton of support. And if you look at the lows on the GLD, just in the last couple of days, it's exactly the mid point of this consolidation.
If you take this high to this low high to low it's right at the mid point. So I'm a big buyer. I also think this is a longer-term bull flag pattern. And you can see here that this is the bigger move up with a bold flag in it. Eventually to me, gold is going up. If you think money is going to continue to be printed, you got to have exposure to volt here.
Okay. Uh, let's talk about gold now. I'm surprised you're in the equities markets at all, Gareth because you, you, you said that $4,000 or sorry, 4,000 points is your target for the S and P 500. That's pretty much where we are now. It's at 3,900. So where we're pretty much at your top. And what happens after we used to have top Garrett, are we, are we just stay there or are you going to be flat?
Are we going down? I think it's going down. And I, I still, I think when we talked in January, I talked about a 10 to 15% correction. I think you're still talking about that. Um, you have to be prepared for that type of move down in the markets, maybe even more. And again, you know, just think about it, right?
If all of a sudden we start hearing about this new infrastructure bill that they're going to, they're going to bring up and how are they going to pay for it? Uh, it's going to be taxes and, and, you know, I don't know why investors are ignoring the fact that corporate taxes going up is going to really dig into some earnings earnings potential.
For some of these companies, even as a company like Apple is going to get, uh, you know, reduced in terms of their outlook for EPS. Okay. 10 to 15% sounds like a scary number, but if you look at it from the grand scheme of things, let's just zoom out again, 10 to 50%. We're still up from last year. It's not a significant correction compared to last year's levels.
Yeah, that's true. Are we in a bull market still? Would you say that's going to be the big question. So this is my, this is my general target here on the, on the spiders. Um, it's you could see this previous, all time high before COVID that's where I think we get down to very easily, probably within the next month or two on the, on the equities market, on the S and P, which is right around three 40 or 3,400 on the S and P.
So that would be your first corrective move. You'll then have a lot of support where the market tries to write itself. And I wouldn't be surprised if at that point we start to see the fed coming out more and trying to assist this market down the line. I continue to think that. It does concern me about our debt situation.
Like you were mentioning about, you know, if interest rates rise, can the U S even stay solvent, how much money will they have to print? How much devaluation of the dollar? So it wouldn't surprise me to go lower, but in all fairness, I'm a relatively shorter term investor, you know, three to six months out.
So that's, that's the target. Right. Okay. Why do you like Goldman in a rising yield environment? We know that gold is inversely correlated to real. Interest rates. So if nominal yields rise very fast, perhaps even faster than inflation, that's going to bring gold down. We know gold is negative and correlated to the U S dollar.
If yields rise, technically the dollar should be rising as well. All else being equal. So what's the trick. What's the idea here. So this is, this is, and it's a great question because a lot of people don't quite fully understand this. Uh, so basically you have two reasons why yields would rise. In my opinion, one is growth.
Now that's the one we're seeing right now where the economy is getting back on its feet. You're going to have a lot of pent up spending going in. That's going to just naturally. Push yields higher. Again, if you look at where the yield was on the ten-year pre COVID in December, 2019, it was around 2%. So it makes fully obvious sense that we would go back to about that level of pre COVID interest rates.
Now, the key is where gold comes into play is how much the market expects the yield rising to be inflation based. And as you get more and more inflation in the fear of printing of more and more dollars, that's where gold is going to pay off. So I wouldn't be surprised if by year end, the inflation fear has really come into play.
And that's where you could see gold really taking off in the second half of this year. Okay. So it's only in the second half. What happens? Uh, what happens still then? Gareth we've already seen gold drop considerably since last summer. Yeah, I don't, I don't expect much more downside on bull because I think smart money is already accumulating.
So you're talking institutional money is accumulating gold at these levels. Uh, so, so for me, it's, it's buying here. Like I said, I bought GDX, that's more of a short term trade for a bounce, but my GLD holdings, I'll be looking for a bigger gain on that. Um, and looking just for movements to the upside, probably staying within the 2100 range.
So from here to 2100 until the second half of the year, And then in the second half, at some point I do expect a breakout above 2100. Okay. So, uh, last question, just looking at your aggregate portfolio here. Are you net net, are you short? Are you still long? Are you more cautious? Defensive? Um, are you, what's your position?
Yeah, I'm definitely more defensive and short on this market, which has been paying off recently, especially in the tech sector. Um, you just got to, for me, I just can't get my head around. Valuations at the current levels. And again, people will tell you all what, what about the growth? But the market is already factoring that in the one thing I've learned about the market, the market knows what's going to happen three to six months in advance.
So the big reopening trade, if you look at stocks like American airlines and Southwest, they're already at crazy levels to the upside, there could be a little bit more upside left, but they're already factoring in the reopening, which means what happens after we reopened. That's what you're trading. So when I'm shorting stocks, We're shorting the market.
Now I'm looking at what's going to happen after we reopened. All right. Fantastic Gareth. Well, uh, we'll keep us updated on your trades. I be happy to follow up with you in a few weeks and see how they're doing. Thank you very much for coming on, too. Thanks for having me, David, take care. Thank you for watching Kitco news.
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