Financial Advisor Explains Importance of ‘Short Duration’ in Markets Right Now

Eric Diton, Chairman and CEO of The Wealth Alliance, and Jay Hatfield, Founder and CEO of InfraCap, join Yahoo Finance Live to discuss stock sell-off, short-duration asset classes and emerging markets.

video transcript

Here is the closing bell for today, Friday, May 6, at the New York Stock Exchange.

[APPLAUSE AND BELL RINGING]

There you have it, your closing bell for May 6th. Cheering there, but there is very little to cheer about today as we see all three major indices in the red. The Dow Jones was down about 0.3% there, down 96 points. The S&P 500 was also down more than 0.5% there, down 23 points. And of course, the day’s biggest laggard, the tech NASDAQ, fell 1.4% there, shedding 173 points.

Well Seana and I are going to digest what’s been going on in the markets today with our guest Eric Diton. So Eric, I want to start with you first in terms of what you’re seeing here. The enthusiasm that we saw after the Fed announcement versus what we are seeing now, what is the overreaction?

ERIC DITON: That’s a great question. First of all, thanks for inviting me back. Thank you.

What happened was that there is a saying on Wall Street, buy on the rumour, sell on the news, or sell on the rumour, buy on the news. We knew that the Fed was going to raise rates by 50 basis points. It was the most telegraphed walk in the history of mankind. But the markets were sold. And then they finally did it and it’s like, OK, it’s done. And then you had a lot of short covering and you got a big rally.

That wasn’t the real deal. The real deal was what went on yesterday and went on today, and that is that there is a tremendous amount of uncertainty out there. Yes, we know that the Fed is going to rise. How many times will they walk? There is a huge disparity between where the rates are and where the rate of inflation is. Will the Fed have to go up to 6% or 7%, or will inflation go down, will they meet in the middle? That uncertainty is one of the big factors driving this market to keep falling.

SEANA SMITH: It certainly has been. We are seeing that they weigh on the markets. We also want to bring in Jay Hatfield. He is the founder, CEO and portfolio manager of InfoCaps.

Jay, it’s great to have you. Just your comments. As we look at the losses over the last two days, certainly a reversal, as Eric just said, of the initial reaction that we saw in the market on Wednesday afternoon. Is the sale done?

JAY HATFIELD: Thank you, Seana, for having me. Well, there is one key indicator that I would focus on, which is the 10-year bond yield. Therefore, we were of the view that it would bottom out somewhere in the 3% range, mainly due to the $52 trillion of global pension assets that are under-allocated to bonds. But also, the tendency for the yield curve to flatten when the Federal Reserve tightens.

But we haven’t seen that. In fact, yesterday, she bounced back from the lows. The 10 year old was really in a little accident. He went down like $3 or $4 at one point. And we think that’s what unsettled the market after the slightly dovish comments from the Fed. And then again today, the market was trading, if you really look closely, very sympathetic to 10-year bonds. And so he saw that weakness at the end of the day. A bit of a rally as people cover their shorts at the end.

So I urge investors to look at the 10-year note because that really drives the valuation. Our fair value at 3% in the S&P is $4,100, but at 4% it is $3,600. Such a huge difference.

And Eric, I want to get your thoughts on what you’re seeing in the bond market and how investors really should digest this information.

ERIC DITON: So the two words I want to leave you with are short lived. I don’t care if we’re talking about stocks or bonds, you want short duration. That’s where you wanted to be for a long time. For us, that means short bonds, two years or less, you can get a decent return there. Variable rate, bank loans, private credit. Then into stocks, dividend stocks, MLPs, things that will give you good income that you can reinvest for more return.

You want to stay away from the long lasting. That means long bonds. It also means stocks where they are not making money, and maybe in 3-5 years they will make money, who knows? Those are the kinds of stocks that are owned in… you know, Cathie Wood owns those stocks. And they had a great run a while back, but they’re getting hit. Short duration is where you want to be across the board.

SEANA SMITH: Jay, when we take a look at some of these stats here, the S&P 500 ends its five-week losing streak, the longest streak we’ve seen since 2011. NASDAQ 100 sinks for its fifth week, the longest streak we’ve seen since 2012 And some of the conversations you’re having with customers, how are you reassuring some of those skeptical investors?

JAY HATFIELD: Well, what we do is focus on the dividend yield. We think the key theme in the market when the Fed is tightening is that it wants lower risk stocks that can pay dividends. And then even if those stocks drop, that in this more aggressive selloff dividend stocks have started to decline, you can take your dividends and reinvest. We especially like preferred stock because it is superior to common stock. And we really focus on the ones with the highest dividends. They have lower durations and are quite defensive in defensive sectors.

So we think it’s an easy decision to avoid dead-end tech stocks. They have super high betas. They are the riskiest actions. And we don’t think the key factor is really interest rates. We think they were in a bubble last year due to Fed liquidity and now they are probably the sector that will continue to sell, along with Bitcoin, when the Fed really starts to reduce liquidity. But dividend stocks should benefit from the rotation. And even if they don’t, like I said, you can reinvest the dollar cost average of dividends down and you have great companies with low multiples and high cash flow.

So Eric, as people continue to look for some of these safe havens, maybe looking at things like buying Bitcoin or maybe even looking at emerging markets, what do you have in mind in terms of those spaces?

ERIC DITON: Not Bitcoin. I can tell you right now. Bitcoin is trading lower with those long-lived assets. So not where we want to be.

Very intrigued by emerging markets. If you look long term at various points in market cycles, 2000 and 2010 were a great time for emerging markets, and then 2010 to 2020 was not. But we’re sitting here after a huge rally in the US and the US makes up 62% of the world’s market capitalization but only 26% of the global economy, while emerging markets make up 11% of market capitalization and 35% of the world economy. . Sharma recently noticed it at Rockefeller.

So there is tremendous value in emerging markets, low PE, high dividends. Also exposure to commodity assets in many of those markets, like Brazil, for example. So I think it’s a very intriguing part of the world right now.

SEANA SMITH: Good. Eric Diton and Jay Hatfield, thank you both for helping us wrap up what has been a crazy week for the market.

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