Transcript:
Caroline Woods
The stock.
Caroline Woods
Market is hovering near record highs.
Caroline Woods
But some of the most.
Caroline Woods
Important warning signs are coming from places investors aren’t watching.
Caroline Woods
Closely enough. Joining me now is Kristina.
Caroline Woods
Hooper, chief market strategist at man Group. Kristina, great to have you back.
Kristina Hooper
Great to be back. Thank you so much for having me.
Caroline Woods
So, Kristina.
Caroline Woods
Everybody watches the S&P 500. But you say.
Caroline Woods
Investors should really be paying closer attention to the bond market right now.
Caroline Woods
What is it signaling that investors may be missing.
Kristina Hooper
So I think what we’re seeing is treasury yields climbing higher in the long end and the shorter end. And we’re also seeing a higher level of volatility. Now why does this matter. Well yields going up typically exerts downward pressure on stocks particularly those higher valuation stocks or what we would think of as longer duration asset. So it’s important to recognize that we could see stocks come under pressure.
Kristina Hooper
If you don’t go much higher. And then when it comes to bond volatility typically when we see a big spike in bond volatility in the move index that can predict or pre sage some kind of stock market selloff. The most latest example was back in global financial crisis where we saw the move index go up dramatically on volatility went up a lot.
Kristina Hooper
And we saw stocks of course come under enormous pressure. Something similar happened in with the move index in 2021 going into 2022. And of course we know what happened to stocks then. So it’s not a perfect indicator by any stretch of the imagination. But it can be a good indicator of what’s going to happen in the stock market.
Kristina Hooper
And so I think we need to be paying attention to it, especially as stocks continue to move higher.
Caroline Woods
So what is the level on the ten.
Caroline Woods
Year yield, for example, that you’re paying.
Caroline Woods
Close attention to? And at what level does it become a.
Caroline Woods
Much bigger problem for stocks?
Kristina Hooper
I think when the ten year yield is at 5% or higher, that can be problematic. But we also have to keep in mind that a lot of it is about the level of the move higher. How many basis points does it move in, how short a timeframe? And that of course can also exert downward pressure on stocks.
Caroline Woods
Usually we also have inflation that isn’t exactly cooperating. Pieces did come in line with expectations today, but inflation isn’t moving.
Caroline Woods
In the right direction.
Caroline Woods
So at what point.
Caroline Woods
Does higher inflation become a real problem for stocks.
Caroline Woods
Again? Because at this point it seems like.
Caroline Woods
The market is.
Caroline Woods
Is.
Caroline Woods
Sort of ignoring it.
Kristina Hooper
Yeah. So higher inflation can be very problematic because it alters the Fed’s trajectory. When we came in to 2026, there was an expectation that the fed would lean dovish, that we would see rate cuts. Now we’re at the point where expectations are around rate hikes. That is a very very big difference. And of course if inflation runs hotter appears more persistent.
Kristina Hooper
What we can see is expectations change again to more tightening. And we know what happened again in 2021 2022. That was an extreme case. But when, expectations are more diverse than what we get from the fed, that can be problematic for stocks.
Caroline Woods
So we have inflation that sticky.
Caroline Woods
Rates that are.
Caroline Woods
Still elevated and could be moving.
Caroline Woods
Higher. We have.
Caroline Woods
CEO confidence that’s weakening.
Caroline Woods
According to the conference boards latest.
Caroline Woods
Data. Do you think that investors.
Caroline Woods
Are underestimating how fragile the.
Caroline Woods
Economy actually is beneath the surface?
Kristina Hooper
I think so. Certainly what we’ve seen is a fairly good economy, but it’s really, been driven by two key factors. One, of course, is AI CapEx spending. And the other is consumer spending, but largely high income consumer spending that the top 10% of consumers in terms of income spend about 50%, or responsible for about 50% of the spending.
Kristina Hooper
So that there’s a vulnerability there, because if you have high income consumers, who experience stock market losses or who experienced job losses, that can change things. We’ve already seen them pull back a little on spending. And then, of course, with the I Catholic spending juggernaut that shows no signs of ending, but we could see some kind of a slowdown, from a variety of factors, including a semiconductor shortage to inability to access, adequate rare earth elements, to support the big data center build out to not in my backyard movements that are pushing back on AI data centers being built.
Kristina Hooper
So there are a number of reasons, or in fact, inability to raise enough money to fund additional, I CapEx. So there are a number of factors that could slow AI cabin spending. So, either either driver, either key driver of economic growth could slow, and that could be very problematic as well.
Caroline Woods
And you talked.
Caroline Woods
About higher rates actually.
Caroline Woods
Hitting the higher valuation stocks. So what does that mean.
Caroline Woods
For.
Caroline Woods
You know, some of the high flying stocks that we’ve been seeing really push this.
Caroline Woods
Market higher. Do you think that there’s still more room to run for those. Or would you.
Caroline Woods
Be getting cautious here.
Kristina Hooper
Well I certainly think there’s more potential room to run. But I’m also cautious at the same time recognizing that earnings have been very strong. And they could continue to be strong. But we have to recognize that as prices continue to move higher, as we see some multiple expansion, that means that there are more risks. There are more vulnerabilities.
Kristina Hooper
If we were to look for example, and add, the buffet indicator, which is the Wilshire 5000 market capitalization relative to U.S. GDP, what we see is that it is now over two times, the Wilshire 5000 market cap is more than two times that of U.S. GDP. Warren Buffett a long time ago warned that when you get over two times, that is a danger zone.
Kristina Hooper
There’s more vulnerability there. So yes, we could see earnings, for a lot of the tech names, the high valuation names, continue to be positive in the next quarter, maybe a few more quarters. We have to recognize that there’s vulnerability there. And if we see some kind of, problem, if, for example, Treasury yields go up a lot and exert downward pressure or earnings don’t need such high expectations, you can see problems for tech names, when you’re priced for perfection, if you don’t have perfection, if you don’t meet, that standard can be problematic.
Caroline Woods
So if someone watching this says, okay, I.
Caroline Woods
Hear the risks, but the market is still near highs and.
Caroline Woods
I don’t want to miss out. How should they think about positioning in this environment?
Kristina Hooper
I think it’s all about being well diversified. So for example, investors can continue to have exposure to the US stock market, continue to have exposure to the I cap X juggernaut, but perhaps diversify a little, take some profit and put them in attack for example, or allocate to other parts of the stock market that they may be under allocated to, some of the more value or higher quality names that are lower valuation and also move abroad.
Kristina Hooper
There are a number of opportunities with lower valuations outside the U.S. and in particular, EMEA. Asia is a bright spot right now. Emerging markets in general is is a rather bright spot. You had those, commodity exporting countries that are benefiting from higher oil prices. And then of course you have Asia that is benefiting from the AI CapEx buildup, not just in the U.S. but in China.
Caroline Woods
Okay. So making the.
Caroline Woods
Case for investing internationally.
Caroline Woods
How should investors be thinking about playing defense if they think.
Caroline Woods
Okay, the markets run.
Caroline Woods
A bit too far, too fast for my liking? I want to play defense a bit more.
Caroline Woods
What are some.
Caroline Woods
Ways that they can do that? To not miss out on the gains, but also to protect themselves.
Caroline Woods
If there.
Caroline Woods
Is downside?
Kristina Hooper
I think it’s all about being well-diversified and also having some exposure to alternatives. There are a number of different alternative strategies, like market neutral, strategies that can enable investors to participate to protect. And so I think, again, that being that well-diversified and not just within equity and fixed income, but also having exposure to alternatives, lower correlating assets within the alternative space, can help complement a portfolio and and has historically smoothed out some volatility.
Caroline Woods
You talked about the the consumer weakness that we’ve been seeing, especially at.
Caroline Woods
The lower.
Caroline Woods
End.
Caroline Woods
What sectors are trades are.
Caroline Woods
Most exposed if the consumer.
Caroline Woods
Finally cracks?
Kristina Hooper
Well I think that it’s consumer discretionary and particular consumer discretionary that is lower and middle income primarily driven. So so what we’ve seen in fact, is as I said, higher income consumer is doing the vast majority of the spending. And that can continue. And is exacerbated in the near term. So there are a number of consumer discretionary names that are already under pressure.
Kristina Hooper
But if we were to see a bigger collapse in consumer spending, consumer discretionary in general, would be hit hard in this environment. And of course, we do have some valuations that are more extended in the consumer discretionary space. But I think if we look more broadly, we have to recognize that it’s not just about consumers that could be under pressure.
Kristina Hooper
We could see companies under pressure. We’re seeing oil prices that are much higher. Then at the start of this year, and we’re also seeing the impact on other, important commodities. Their prices have gone up. It’s not just oil that passes through the Strait of Hormuz. A significant portion of the the global supply of commodities such as urea, ammonia, and helium, which goes into semiconductor manufacturing, all those, all those commodities are going to see their prices go up quite significantly.
Kristina Hooper
That’s any impact. The bottom line for a number of companies in a variety of different industries.
Caroline Woods
Okay.
Caroline Woods
So another risk that you’re laying out there. So is it easier to make the.
Caroline Woods
Case that this.
Caroline Woods
Is a market that moves higher or lower from here?
Kristina Hooper
Well, it could certainly move higher in the shorter term. But I do think and valuations are not protected in the short term. So so I will say though that they can be very predictive in the longer term. And what we see, our very extended valuations and the potential for, disappointment. So, so I think it could easily move higher in the shorter term.
Kristina Hooper
We have catalysts that could move higher, like, an Iran U.S. steel. But I do think at some point this year we will see disappointment.
Caroline Woods
What would that disappointment look like? How big of a pullback could we see? And would that ultimately be a buying opportunity.
Kristina Hooper
So I think we could see a 10 to 20% pullback. And in this kind of market environment keep in mind we have seen just enormous gains made in a relatively short period of time. And so it really depends on what we see taking shape. In terms of the longer long term earnings picture, when we see that pullback.
Kristina Hooper
But it could very well represent a buying opportunity, for investors with a long enough time horizon.
Caroline Woods
And anything that’s selling off you would.
Caroline Woods
Buy in terms of sectors or what.
Caroline Woods
Would you definitely buy, what would you definitely avoid if we do see a 10 to 20% pullback.
Kristina Hooper
So I certainly think being selective around technology makes sense. There are a number of names, that are doing quite well, that, that, that if we were to see some kind of, pullback that creates more attractive valuations. And in particular, I would point to the cybersecurity space as one that is a perennial, cybersecurity is a perennial concern for CEOs and corporate leaders.
Kristina Hooper
We tend to see, healthy, robust budgets, being, being, afforded to cyber security. So I think that’s one area with with very significant potential if we see a pullback, others, would include some financials, could really benefit in an environment of rising rates, especially some, some of the insurance names. So it’s, it’s really a mixed bag.
Kristina Hooper
But I do think that there are those that have really attractive, balance sheets and, and have, you know, very, very solid, cash flow, looking attractive, except for valuations. So if we see some kind of, a repricing that could, that could spell opportunity.
Caroline Woods
Okay. All right. I think this is a great time to transition to our rapid fire game of this or.
Caroline Woods
That you’ve played before. Quick questions. Quick answers.
Caroline Woods
Are you ready, Christina?
Kristina Hooper
I’m ready for you.
Caroline Woods
All right. Here we go. Stocks by year end. Higher or lower from here. Lower by any dip or raise cash.
Kristina Hooper
Buy on the dip. Raise cash when stocks are high.
Caroline Woods
U.S. or international.
Caroline Woods
Stocks.
Kristina Hooper
International.
Caroline Woods
Large caps or small caps or.
Kristina Hooper
Large caps.
Caroline Woods
Defense or offense right now.
Kristina Hooper
A mixture. I can’t say enough good things about diversification.
Caroline Woods
Best sector to play defense with.
Kristina Hooper
I think technology because of valuations. I think you want to be very selective in that space. We’re going to see there are going to be winners and losers as a result of, the evolving AI CapEx picture. So I think it’s in selectivity and intact.
Meg seven or the rest of tech.
Kristina Hooper
Meg 2 or 3 and the rest of tech.
Caroline Woods
One area of the market you.
Caroline Woods
Still like at these levels, but it’s not tech.
Kristina Hooper
Well, in Asia, really benefiting from from the CapEx build out. And you know, for some like the for Korean stocks, the MSCI Korea forward PE of seven times.
Caroline Woods
One trade investors may be getting wrong right now.
Kristina Hooper
I think just the assumption that this will continue indefinitely US.
Caroline Woods
Bonds or cash here.
Kristina Hooper
Cash and some floating rate fixing them.
Caroline Woods
Biggest risk geopolitics or weaker consumer.
Kristina Hooper
Geopolitics.
Caroline Woods
Consumer holding up or cracking.
Kristina Hooper
Unfortunately consumers are already cracking to a certain extent. I think that continues for the fed.
Caroline Woods
More likely to cut or hike rates hike.
Caroline Woods
The biggest mistake investors make in this environment is.
Kristina Hooper
Assuming that what’s happened in the recent past is going to continue to happen, not being well diversified, not not taking profits and reallocating to ensure diversification.
Caroline Woods
One word to describe how your feeling about the market.
Kristina Hooper
Cautious
Caroline Woods
and to bring it back to stocks by year end, you said they’ll be lower.
Caroline Woods
How much lower?
Kristina Hooper
I think they could easily be 10% lower than where we are here.
Caroline Woods
All right. We’ll leave it there. Kristina Hooper, chief market strategist at man Group.
Caroline Woods
Thank you so much.
Caroline Woods
Always appreciate your.
Caroline Woods
Insights, Kristina.
Kristina Hooper
Thank you. I really appreciate being on.
Caroline Woods
If you enjoyed.
Caroline Woods
This street talk, check out our full interview with Robert Schein, where he reveals the four stocks.
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An S&P 8000.
Caroline Woods
Price target by your end.
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