The correction has been too easy and too rational so far
Interview: Brown Brothers Harriman---Blood, Charles---Equity Strategist
>> rite aid’s former president, timothy noon an, wasness sentenced to two years of probation after prosecutors said he played a central role in helping them uncover an accounting fraud at the company and helped them secretly videotape rite aid’s executives discussing a cover-up of the four-year fraud. newnan pleaded guilty to lying to investigators and faces as much as six months in prison. our next guest says he’s cautious on stocks right now but is bullish on energy, industrials and materials and plans to use a correction in stocks as an opportunity to add to these positions. he’s charles blood, equity strategist with brown brothers harriman and joining us from the american stock exchange, interesting location. appreciate your coming on today, charles. talk to me about this. i read your notes here and some interesting quotes in the preinterview, saying that the correction has been too easy and too rational so far. more fear and pain are likely before a lasting low can be established. goodness.
>> yeah, well, i don’t want to make it sounds like there’s a disaster here, but, at the same time, what i think you see happening in bonds and stocks is both markets are trying to price in the effect of the fed raising interest rates. part of that pricing-in has occurred but when you look at history, there are many examples of the stock market falling 10% to 15% over three to six months in the middle of a bull market triggered by fed rate hikes.
>> interesting, you’re saying that the negative market assess assessment rests in the belief that investor sentiment and market intensity have not yet reached the extremes normally associated with significant bottoms in the market .
>> that’s true. usually when you have a correction of that order of magnitude, you get a certain amount of fear in the market and you get―the market tends to get, as technicians would say, very oversold. i’m not talking about the way it looks a year and a half ago at the big bear market low, but at the same time, when the market made its most recent low two or three weeks ago, in my view, it was a little bearish sentiment but not enough and by historical standards not as much as you typically see. that’s what i meant by the correction being too rational so far, everybody knowing the fed will raise rates so stocks went down a little bit but i didn’t see the fear i would like to see at a solid bottom.
>> i put together a chart here while you were talking, a year-to-date chart of the s&p 500, a good barometer for the markets but there’s a lot of lines and arrows in there, folks. a couple of things i want you to notice. you can see the recent high in the market coming in the beginning of april. the market , the s&p sold off% about 6% during that time and the beauty of percentages, going back up, it’s about the same percentage, although lower, this recovery that we’ve seen. 5% down and back up again, hardly a correction makes, no, charles?
>> that’s the point, really. from the maximum high to the maximum low, we got down to maybe 7%, which is more than what we’ve seen in the last year, but you’re right, not much of a correction.
>> market expectations are likely to overshoot the policy reality. that’s, again, your belief, that% markets that tend to overreact% and catch up.
>> that’s the other aspect. we’re well into pricing in what the fed is going to do. but i believe that as much as we anticipate the fed raising rates, by the time it’s all over, the anticipation will be even greater than it is now.
>> one of my favorite charts is the s&p 500, the fed funds rate and the 10-year yield and this goes back to june of last year, obviously, the white line on the bottom of the screen, the flat line, the fed funds rate at 1%. but the s&p 500, the yellow line, you can see rising all the way and then in particular, the yields on the 10-year bond shooting up to 4.75%, a two-year high. they have both clearly, clearly moved ahead of the fed doing anything.
>> yeah, exactly right. the market is much more anticipatory now than it used to be. what’s helped the stock market , of course, has been spectacular earnings. and earnings still are spectacular. excuse me. i’m fighting off a cold here. earnings are clearly spectacular spectacular, but it’s hard for earnings to overpower rapidly rising interest rates.
>> you’re saying in a real sense the fed is―their expected rate increase could be the last policy indicator to move?
>> i would say that’s true. right now i would guess that the fed will probably make five or six rate hikes over the course of the next six or nine months and perhaps by the time we get the second one, it might be time to think about buying stocks. but we have a ways to go and that second one probably doesn’t happen until august so i’m looking for a rocky summer.
>> charles blood, thank you very much.% appreciate it. a glass of water on me, i’ll always do that for our guests. the president in georgia hosting the g-8 summit and high on the agenda, global terrorism. joining us from the summit will be the top counterterrorism aide to the president.
