A buffalo market is a horse of a different color: Neither the typical bull nor a bear, it’s big, heavy, roams about and sharply reverses course when it bumps into deterrents. That has characterized the stock market since 2016 — but this year the volatile buffalo is “hairier, heavier” and more prone to fatigue, Christopher Hyzy, chief investment officer for Merrill Lynch and U.S. Trust tells ThinkAdvisor in an interview.
However, once earnings season is over, stability should return, he forecasts. Then, get ready for another plunge triggered by midterm elections.
As for a potential trade war, Hyzy thinks actual policy may turn out to be far less harsh than the recent verbal threats traded by President Donald Trump and the Chinese Commerce Ministry.
Other issues financial advisors should be watching, says Hyzy: the potential for robust wage growth that could bring more frequent interest rate hikes and oil prices that ascend to $90 or above and hold.
In the interview, he reveals the sectors that Merrill Lynch pegs to be this year’s market leaders, and others for which the firm also holds high expectations.
ThinkAdvisor talked by phone with Hyzy on April 5. The focus was on economic reality, which the CIO views as a potent reason for optimism.
Here are highlights of our conversation:
THINKADVISOR: What’s your view of the current market?
CHRISTOPHER HYZY: The market overall is trying to find a bottom. We’ll continue to try to bounce off these lows until we get through earnings season — by mid-May — which becomes the catalyst that ultimately stabilizes the market and from which we can rise. Earnings should show that the economy isn’t falling down and is actually gathering a little bit more momentum than was believed.
What did the February correction accomplish?
We’ve corrected the excess that was built into the market. Now it’s time to get back to more normal gains through earnings season. The next pullback is likely to be due to worries over the midterm elections.
What are the main market headwinds right now?
A real concern is protectionism and a trade war/tariff tantrum — that what has been spoken about is going to become policy. That would be detractive from growth and could undo some of the benefits of tax reform. Our view, though, is that this is the negotiation phase of more equal trade policy, especially a more palatable trade policy with China. The market threw a tantrum when there was an announcement that tariffs were going to be applied to specific goods. We expect that once all the negotiations take place, the trade policy may not look as arduous as what the words [threats] suggest.
What other issues should financial advisors be watching?
They should look for signs that wage growth is getting to levels that worry the Federal Reserve — that is, 4% or higher. This would likely increase the number of interest rate hikes over the three we’re expecting for 2018 and what the market is technically ready for.
What else should FAs be on the alert for?
If oil prices rise about $80 a barrel, stay there and get closer to $90 or higher, that’s hurtful to consumers. In the past, when we’ve gone into recession, the Fed had a tightening policy at the same time that we had high oil prices.
Do you think the Fed is increasing interest rates too aggressively in a short time span?
No. It’s right in line with what the market expects. They’re going up, but slowly. The level of wage inflation in the broader economy shouldn’t rise sharply enough to induce a policy error in the short term by raising rates too fast, too much.
Two years ago you described the market as a “buffalo market.” Are we in one today?
We’re still in a buffalo market within the bull market. The buffalo is a different type of bull market. This year, the buffalo market is hairier, heavier and gets more tired than its cousin, the bull. When it sees something that it doesn’t recognize, it tends to run the other way [pulls back].
Where do you see investing opportunities?
They’re still in the equity markets — large cap U.S. The most attractive opportunity is in emerging markets, which are still early in their cycle and have both valuations and growth that are attractive.
What other sectors do you like?
We think the financials are the next market-leading sector. They had some levels of leadership last year and earlier this year, but they weren’t the leader. We think they become the leader and as a tag team with them, technology. The technology sector is now back to valuation levels on a par with the broader market but growing substantially more than the broader market.
What about the retail sector?