‘You need to be an investor, not a trader’ right now, BMO’s Belski explains

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Brian Belski, BMO Capital Markets Chief Investment Strategist, joins Yahoo Finance Live to discuss the market outlook amid volatility and the Russia-Ukraine war.

Video Transcript

All right. Well, let’s get some more context on what’s been happening in the markets with our guest, Brian Belski. He is BMO Capital Markets Chief Investment Strategist. Thank you for joining us today. Now, as we saw, another wild swing in the opposite direction today. And in your notes, you talk about this correction and conflict combo, this convergence of predictions trying to be made about Ukraine, about how aggressive the Fed will be, and what we’re going to see with inflation. Now, you advise clients to control what they can, stick with their disciplines and process. How might the retailers, the retail investors out there who are buying the dip or panic selling, how should they navigate this correction and conflict combo?

Well, good afternoon. Thank you so much for having us. It’s always great to be on “Yahoo Finance.” You know, the market does not like uncertainties. And we cleared up, one, we meaning the market, cleared up one uncertainty when the Fed came out and was very clear about raising interest rates during its meeting here very soon by 25 basis points. So the market liked that.

But the market on a short term basis in terms of the US stock market was obviously very oversold and due for the snapback. And part of it was the pullback a little bit in oil here. We’ve also seen bond sell off. So I think some of this is very near term. I think that’s what we talk about control, which you can control, stick with your process and discipline. You need to be an investor, not a trader.

I think many retail clients have had this luxury of a momentum market. We warned investors in November of 2021 when we published our year ahead for 2022 saying the market is in the process of transitioning to more of a fundamentally driven earnings driven market where we have more volatile returns. And I think that still holds true.

Obviously, we have the headlines of the conflict, with respect to Russia, Ukraine. That will go on point. We’re hopeful and prayerful that is the case. Then we kind of get back to Good old fashioned bare bones investing. And I think the main, main, main double underlying topic is when inflation is going to roll over. And I think this conflict, obviously, with the spike in oil prices has, at least, prolonged it at least for a short term effect. But this could unwind very, very quickly.

Brian, even with the rise in stocks that we’re seeing today, the S&P 500 is still down about 10% for the year to date. Could the S&P 500 still deliver a solid return this year, despite this rough start? And is that what you’re expecting?

Absolutely, Emily. And we are not changing our forecasts, we’re not going to be reactive. If you take a look back at history when we’ve had corrections, we’ve had 29 corrections since 1970 in the United States stock market as defined by the S&P 500. And 12 months following, the average rebound is 27%.

And so, again, the market was way overdue for a 10% correction. We’ve had some other extraneous events, obviously. We’re not looking for a black swan, ladies and gentlemen. The black swan was COVID. And now, we’re getting back into this transition of normalcy.

I’ll caution investors by this. Recessions in bear markets come when you least expect them. If everyone’s looking for a recession in a bear market, one rarely comes. And so, I think this transition to normalcy, Emily, is going to be a process that people are going to have a hard time dealing with, normalcy in terms of going back to the office, in terms of investing, interest rates normalizing, whatever that looks like, and earnings normalizing. And I think that’s what’s going to make returns more normal as well to the tune of, let’s say, 8% to 10% for the next three to five years on average.

Ryan, what a lot of investors may be wondering to themselves is why isn’t the geopolitical tension that we’re seeing right now, especially the war between Russia and Ukraine, which is pulling in other major international developed and developing markets as well, why is that not a black swan event?

It’s a great question, Brad. Remember, the end of the World Trade can only be happened once, it can’t be collected on. So we have to stop talking about that, that’s number one. Number two, the resilience of US stocks cannot go unnoticed. And the power and strength of the US dollar and bond market cannot go unnoticed.

We, the US, are still the world’s safe haven in terms of investing. And we believe over the next three to five years, whether or not we’re heading into a new Cold War, whether or not we’re heading into East versus West, we believe that the themes of increased defense spending, on shoring, and Capex favor the North American market, Canada and the United States, with respect to earnings, consistency, and stability. And that’s why I think you’ve seen assets flow to the United States.

And just quickly, historically, given what we’ve seen with corrections and rebounds historically when it comes to things like geopolitical fallout, what would signal a turning point to change strategies or rotate out of value stocks into growth? What factors are you looking at?

Another great question. There’s an old adage on Wall Street. “When growth is scarce, growth outperforms.” And that’s why technology, in particular, it was doing so well in 2020 and 2021. However, earnings are beginning to see much more broadening effect across sectors. So that’s why value makes sense.

However, if we do see a rapid recount in terms of earnings pulling back, that’s going to favor growth stocks again. So that’s why our advice is own both, growth and value. Own small, mid, and large together. Be very balanced and moderate across all of those asset classes inside.

And, Brian, tomorrow we’ll be getting the next consumer price index out from the BLS. I’m wondering, how do you expect stocks to potentially trade around this event? Do you think, potentially, a fresh 40-year high rate of inflation is being priced into markets adequately at this point?

Another great question. Yes. And it almost is a moot point, Emily, because the Fed is really the key. And the Fed’s come out and said 25 basis points. And our great economics team says, still, 125 basis points this year. But I would be surprised if we see a new high. But given where oil prices have been, remember, CPI is a lagging indicator. It happened, already happened. So going forward, we may have a little bit more inflation pressure, but we do think that’s more of a short term effect.

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