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‘Hard to believe’ the U.S. will end up defaulting on debt, says Canaccord’s Dwyer

Tony Dwyer, Canaccord Genuity Chief Markets Strategist, joins Yahoo Finance Live to discuss how markets are moving this week and what to expect from the Fed raising interest rates in 2022.

Video transcript

- All right, for more on the markets after Fed decision day, our friend Tony Dwyer is here. He is Canaccord Genuity's Chief Market Strategist. Tony, always good to see you here.

You have, really, a heck of a feel for the markets. Now there's been a lot of technical damage done to the markets, really, this week, but going back a few weeks before this week. What's your sense on how that will-- do you think the markets will rally back after that damage? And why are we seeing rally today?

TONY DWYER: So, Brian, it's-- you know how corrections-- when the markets are going up, people like me are famous for coming on TV and saying, oh, yes, a correction would be natural, normal, and healthy. And, of course, they only feel natural, normal, and healthy until you're in the midst of one. And we definitely had that feel that we were in a pretty sharp correction as of Monday. Less than 10% of stocks in the S&P 500 were above their 10-day moving average, the VIX was spiking.

All the telltale signs were there. There were some calls for major declines on Wall Street. And all the telltale signs were there for an oversold rally that could develop. And truthfully, it's been a heck of, I think you said it before, a rip your face off rally. From the intraday low on Monday, I believe the market, according to the S&P 500, is up the better part of 3%. So it's already been a pretty good oversold rally.

- Hey, Tony. It's Julie here. At the same time, you know, the measures you were just talking about might have indicated a correction. But on absolute magnitude basis, it wasn't a huge one, right? We didn't get-- I don't think we even got to 5% on that correction.

So I'll ask you what I asked a guest earlier in the show. Was that it? Or are we still poised to see another correction, maybe even a worse one, before the end of the year?

TONY DWYER: Well Julie, I think you could have one, but you-- I've got short-term and intermediate-term indicators that I use both from a macroeconomic and tactical market framework. So I think the biggest mistake that's being made is that this year has been portrayed through the summertime as strong because the S&P 500 was going up. Even on the rally that we've seen, if you look at the Russell 2000, the Mid-cap Index, the Advance/Decline Line for the New York Stock Exchange, or the NASDAQ, the McClellan Summation Index, all these things that tell you what the average stock or the majority of stocks you're doing, it's actually down from where it was in May.

So I think that the depiction of the market is strong is really reflecting the S&P 500 and the NASDAQ composite due to the mega-cap secular growth theme. So all of that is the backdrop. Are we there yet is the question that you asked. And I think from a short-term standpoint, yeah, we could-- we're obviously having an oversold rally. My intermediate-term indicators just aren't there.

This is the third longest streak so far that I can find in the last 40 years where the weekly stochastic for the S&P 500 have remained overbought above what I consider overbought, at 75%. So we're still not-- and it was nasty. It was 4%. The average stock was down more.

Was that it? I think we could have another push lower, which you'll get the intermediate-term indicators where they need to be. But regardless of all that, I think we're gonna have very similar 2004 and 2010. I think we're gonna have a run back up in the market into year-end, predominantly in the cyclicals, and we're seeing a little bit of that today.

- Tony, this is Emily. Given where you think the market is heading in the near to intermediate-term and four-year end, where do you think the biggest opportunities are right now for investors?

TONY DWYER: Emily, I really think it's gonna be in the cyclicals. Remember, when we downgraded our market view in April and we downgraded the financials in March and the overall view in April, and literally, it's gone sideways since. And the reason for that was I think the rise in rates, up to 174, and the extreme outperformance in the cyclical sectors, really the whole economic recovery theme, that move had already been discounted in the market by the excellent growth that was coming. Remember, in February we hadn't had the growth yet, and we were still rolling out the vaccines. So the excitement had already been discounted.

I think the 1.12% a few weeks ago in the 10-year note yield and the relative underperformance of the cyclicals going into the last couple of weeks I think also is discounting some of the Delta variant and global slowdown we're seeing. So regardless of what the S&P 500 does in the next 15 minutes or 15 days, I think the opportunity is in the economic recovery theme going into year-end.

- Tony, are you a little bit surprised-- you know, we're seeing this rally today off the Fed meeting. But, look, they singled rate hikes might be coming next year. They're getting ready to start a tapering program. Is it surprising that stocks would rally on this type of news?

TONY DWYER: Not given how oversold it got, Brian. Sometimes, you know-- so the way I've been phrasing it is when you look at what the market's doing, it shows you how powerful a deep oversold near-term condition can be when it more than offsets, it looks through the Fed tapering announcement when it looks through the chaos that we have in DC that doesn't look like it's gonna get better anytime soon. So I love the graphic that you showed from Goldman that showed the real market performance. But those fears are being more than offset by the oversold condition.

Obviously, people got caught a little bit too short, and they're trying to catch up. But, you know, the move is predominantly in the cyclicals, which is truly, if you think about an oversold bounce, that's the areas that were the most oversold. And, you know, up 3% in three days, I'm not sure that I'm chasing it here, but I definitely look to stand ready to add exposure into the economic recovery theme on any more indigestion.

- And lastly, Tony, when you talk to your clients, do they have any concern right now on a potential US default on its debt or just not getting a deal done on the debt ceiling? Really, you're seeing two arguments happening. You know, I mentioned Moody's Chief Economist Mark Zandi really calling for a catastrophe in markets if that isn't pushed through. But, you know, as you just mentioned, you know, we're highlighting Goldman Sachs data saying that the markets have done well during the government shutdowns.

TONY DWYER: Yeah. Either way, I'm not a big fan of these highly emotional market predictions on no data, right? So I'd probably go with the Goldman data. I think what's different this time is there really is a bifurcation of opinion in Washington.

I find it very hard to believe that Mitch McConnell is gonna cave in any way. I also find it very hard to believe that the US is gonna end up defaulting on its debt. I think that would be showing up in the credit markets, and you would have that kind of drop that Mark talked about. So again, I think among the client base that I've talked to in the last week on the topic, there's a feeling like it's gonna be a little bit indigestion, but it's gonna eventually get resolved. The bigger issue is-- so the thing that's the most interesting, I think, in the marketplace is how the Democrats, which have the majority fairly, are infighting to a degree that puts the entire package, the $3.5 trillion or even the $1 trillion infrastructure package, at risk.

- And, Tony, just to follow up on that point. If that doesn't happen-- I mean, the market has sort of taken that as a given that it is going to happen at some point, even though it seems like the expectations keep getting delayed and pushed off. If it doesn't happen, what then? I mean, people have been buying infrastructure stocks for months now.

TONY DWYER: Yeah, but the inde-- so, Julie, I literally had a call with one of the best industrial portfolio managers, two of them that I have, that I know. And they were pointing out is the charts were pointing out how bad the industrial sector has done, especially relative to the S&P 500. It's making a relative performance low. The material sector is making a relative performance low over the last few days. You're not looking at a very strong-- if the market was discounting this monster package that was gonna put huge spending into infrastructure stocks, somebody better tell those stocks because a lot of them are not acting so well.

So I think it's really when we look into year-end, there is a better opportunity given the oversold nature and the economic recovery theme. Remember, in March, you felt like an idiot if you weren't along every cyclical stock that existed. And now, you feel like a dummy if you are along those cyclical stocks. And that usually sets the stage for a switch.