What ‘wild card’ investors should look out for in the market: Clearnomics CEO

James Liu, Clearnomics Founder & CEO, joins Yahoo Finance’s Kristin Myers and Alexis Christoforous to discuss market outlook.

Video transcript

KRISTIN MYERS: I want to continue this market conversation. We're joined now by James Liu, Clearnomics Founder and CEO. James, always great to have you here with us. I want to pick up on this point that Jared was mentioning just now about cryptocurrencies.

A bit of a two-part question for you here. First, do you think that we've returned to this environment yet again where investors are really looking more at these high-growth speculative trades? And looking at cryptos, how should investors be approaching them right now, especially as we saw Bitcoin right now under pressure? Dogecoin, however-- which was based off of a meme-- has absolutely been on a tear lately.

JAMES LIU: Hey, Kristin. Good to chat with you. Well, I am very bullish on all the memes around Bitcoin and Dogecoin, for sure. I think it's tough to be an investor in this environment, because there are two major things happening.

One is that you have all this liquidity in the system and all these technical factors-- including around crypto, including around US treasuries, including around growth stocks and tech stocks-- that are kind of whipsawing the market one way or another every single week. And so that's kind of happening right in front of our eyes.

But the bigger backdrop is that you take a look at the economic data we've got just over the last few weeks, these are blockbuster reports. In some cases, these are the best numbers we might see in our lifetimes, because of the bounceback from last year. And you think about what the market is trying to factor in, and it's not just a kneejerk recovery or a mechanical recovery. It's also not just the stimulus going through the system.

It seems like markets are basically valuing some sort of huge acceleration, or what we might call animal spirits-- in the past, we've talked about this as a multiplier effect-- that would take shape. And so you both have this whipsawing of markets that's happening day to day, but longer-term, there are very high expectations built into the market.

Now, we think investors, especially everyday investors, should stay invested here. But they should also stay very disciplined. Think very carefully about the sectors you want to be in. And if you're going to be in very high volatility asset classes, including crypto, to make sure you size that properly from a risk perspective.

ALEXIS CHRISTOFOROUS: James, you talk about a big, robust economic recovery already being priced into the market. So then what's the wild card for investors? Is it inflation that's going to start to heat up? And do you think that investors have properly priced that into the market at the moment?

JAMES LIU: Yeah, it's a good question, Alexis. To us, inflation is the symptom and not the cause, per se. So really, the wild card, as you put it, is, will there be not just stimulus that goes through the system, but will that somehow culminate in these animal spirits?

I think that's what investors are always looking for. In other words, the market, starting last April, was already expecting this recovery. And so at this point, for this to continue-- even with expectations that GDP and earnings will regain their footing by the end of this year-- you would have to see that wild card factor take into effect.

And at this point, we think that the economy could increasingly accelerate here, especially as it reopens. Again, these numbers that we're seeing are absolutely amazing. But this is not a reason to kind of take your guard down and not focus on risk management in your portfolio.

KRISTIN MYERS: James, just looking at this environment right now, where are you seeing opportunities for investors if they want to put some fresh money to work? What sectors, what industries are you liking right now?

JAMES LIU: So Kristin, we still think the rotation trade is relatively early. And there are two parts to that. One is just the rotation from last year from growth in tech. We think that we're still fairly early in that, because that's very much tied to the other parts, the epicenter parts of the economy bouncing back. So that's one area.

So things like financials of course, we had blockbuster earnings last week. Blowout numbers from some of the financials. We think that will continue the rest of this year and into next year, as well as energy, materials, industrials-- those types of sectors.

But then you also look at the inflation trade. And we don't think that's over yet per se. There are going to be hiccups along the way, but we're going to continue to get data and acceleration in the inflation numbers the rest of this year. We don't think it'll be runaway inflation like some fear, but we think that that trade is still here to stay.

ALEXIS CHRISTOFOROUS: And lastly, I just want your thoughts on earnings season, which is really going to be wrapping up this week with a number of Fortune 500 companies reporting. We're going to hear from IBM after the close. P&G. Netflix also on tap. What are you looking for from these earnings, and are you rejiggering the portfolio at all as earnings season continues to unfold?

JAMES LIU: Yeah, earnings season is a critical time, just to make sure that the economic growth that we're seeing and we've talked about is filtering into corporate performance, and also consumer behavior. And so we are looking for confirmation that that rotation is happening across the sectors that we just talked about.

But I think the bigger picture for everyday investors is the question of, will earnings get back to pre-pandemic levels by the end of this year? And right now, projections are that it could exceed it, in fact. So if we were somewhere around $160 for S&P 500 earnings at the beginning of 2020 before the pandemic, right now projections are that we'll get above $170.

And so all of that is good news for investors. It's just a question of valuations and how much is already priced in. And it seems like a lot of it already is built in, so it's important to stay balanced in that portfolio.

KRISTIN MYERS: All right. James Liu, Clearnomics Founder and CEO. Always love having you on for some of your insights.