Investors face a ‘basket of concerns’ about the future: Strategist

Art Hogan, National Chief Market Strategist, joins Yahoo Finance to discuss the latest market moves and outlook on the tech sector.

Video transcript

- Time now for our market outlook presented by Northern Trust. I want to welcome in Art Hogan, chief market strategist at National. Art, always good to see you. Let's talk about what's happening right now. Does today's sell-off feel any different from what we've been seeing recently? Do you think today is the start of that correction that so many market watchers have been predicting?

ART HOGAN: I don't think it's a start a correction necessarily. But certainly, we've seen rotational corrections throughout the entirety of this year. I think this feels much more like a realignment. And so obviously, we get strange machinations in the markets towards the end of a quarter. And that's knocking on the door tomorrow.

We certainly have enough of a basket of concerns, in general, about the future, whether it's inflation and how sticky that will be, the Fed's taper and what that might mean towards earnings, inflation, what that means towards the margins, and certainly what's going on in Washington and what they can and what they can't accomplish this week.

I think you bundle all that together with a yield on the 10 year that's risen pretty significantly in a short period of time. And I really think it's about the pace, not the ultimate level. I don't think you and I should be sitting here on ironically talking about a 1 and 1/2 yield on a 10 year somehow being a detriment to markets.

But what it often causes is a shift in sector allocation. So if you're a long duration technology company with cash flows that grow rapidly and need some sort of value for those cash flows out into the future, your net present value calculation obviously changes with higher interest rates.

So, you know, in August, we were at 1.29. Last March, we're at 1.75 or kind of in the middle of that range right now. I don't think a lot has changed. But it's just-- it's changed pretty rapidly. And I think investors are taking a step back looking at that basket of concerns, tying a bow around it with the yield on a 10 year. And I think the biggest losers in that tend to be the high flying, rapid earning-- rapid revenue-growing technology names.

- And then how worried are you for those rapidly-growing technology names about the fact that the Fed signaled pretty clearly that they're looking at raising interest rates as early as next year? If you have that with a backdrop of sustained higher prices, what does that do for tech in your portfolio?

ART HOGAN: Well, I would tell you this. I think you need to look at the reasons both why interest rates, the yields on the 10 year are going higher and why the Fed might think it's a good idea to raise rates. And if those are the right reasons mean they're manifestations of better economic activity-- we don't need emergency stimulus right now. We need to normalize rates-- then I think there's less of a fear that technology, which is going to continue to grow. It's revenues but might get rerated lower at some level.

So I'm less concerned about this being the end of technology. I certainly think you want to have technology in a balanced portfolio. I just want you to be aware right now why this is happening. We've seen this happen before. Last March when we got to 1 and 3/4, tech basically sold off about 10% and obviously close the year at all-time highs.

So we can see these kind of rotations. They can be very sharp. And we're going through one this week I would offer for the last six trading days. And the good news is a lot of the money except for today has rotated into the economically-sensitive cyclicals, which have lagged for several weeks.

So I think when you look at that, I think it's healthy at the index levels. But I think that that's, you know, telling you the reason why it should be diversified with both growth and cyclicality.

- Let's talk about one of the most immediate catalysts possibly for this market is the US government defaulting on its financial obligations if lawmakers can't get their acts together and raise this debt ceiling. If that were to happen-- we heard Janet Yellen today tell lawmakers, it would be catastrophic. What is an investor to do, Art?

ART HOGAN: Well, I hope an investor is to do what we should be doing and is ignoring this. We've seen what's happened when we pressed too far to the edge on this. Back in 2011, the S&P downgraded our debt. We had a quick 10% drawdown in the S&P 500. Again, we closed that year at all-time highs. Washington came to their senses.

I don't think they want to tap dance this close to the edge. I think the Democrats have a way of getting this resolved. And whether it happens sometime this week or over the weekend, I think that there's a big difference between a partial government shutdown and defaulting on any of your debt payments. And I don't think we're ever going to let that happen.

- I hope so. Oh, we'll see what happens in the coming days. Real quick before we let you go. Inflation we know has made this big comeback this year. Are you worried to what extent that's going to cut into companies profits when we get earnings season?

ART HOGAN: Yeah, it's going to be very interesting third quarter earnings reporting season and how many companies have to talk about that and how many of those actually have pricing power and can pass that along in those companies that don't, because the logistical bottlenecks that we've seen have been very obvious to-- are taking longer than we anticipated for them to clear up. So I think that there's going to be some persistence in this inflationary pressure. You want to pay very close attention to those companies that don't have that pricing power and lose margin in the third quarter.