Where Main Street Meets Wall Street

Why the stock market might see ‘further choppiness’ in October


Dave Mazza, Managing Director and Head of Product at Direxion, joins Yahoo Finance to discuss what to expect from the stock market in headed into October.

Video Transcript

And I want to stick on the markets here and also on that econ data. And for that, we’re going to bring in Dave Mazza. He’s a Managing Director, Head of Product at Direxion. And Dave, thanks for joining us today.

I just want– you heard what Emily was saying about the numbers that we got this morning. There’s a huge debate raging about inflation. Powell says it’s transitory I don’t believe him. But what’s your take on all these numbers?

DAVE MAZZA: I think your stance about not believing him it’s becoming a bit more of consensus here, is it’s getting harder and harder to show at least from a data perspective that inflation is indeed transitory or exactly what is that particular mean. I think what’s notable though, is that we’re seeing markets really try to digest this. And in many ways, all it’s doing is adding fuel to the fire for the inflationary trade, which has come back into place since the last FOMC meeting.

So what we did is, well, we have rate rises being pushed out to 2023 but at the same time the economy sort of getting– getting hot again. And it’s difficult to see the Fed necessarily moving quicker than what they’re telling the market. But at the same time, investors cannot ignore the inflation data right now.

Well, and then I just want to get your take on the current market environment. We are down about 5% in the S&P 500. I was talking with a guest earlier today– we haven’t had one of those 5% corrections all year long. How far down could we go in here? Or do you think the worst might be over?

DAVE MAZZA: Well, to your point, investors have been asking and calling for a correction particularly this 5% number because it hasn’t happened through most of the year. And really the previous year investors bought any dip that they could, whether it’s 1%, 2%, 3%. And September kind of finally gave us– gave us that.

This last week’s trading environment has been extremely choppy. I expect to see some further choppiness into October simply from a seasonal perspective. And we’re heading into an earnings season that’s going to have really, really high expectations just as we’ve seen in the past. So I expect markets– until we kind of get some clarity from some of the early reporters, the banks again are coming up in a few weeks, it’s going to be difficult to really see markets settle. So I expect markets could fall another few– a few percent here. But I do think right around earnings season we’re going to see that kind of find some stability.

Well, and this kind of ties into discussion around the bond market. If we could pull up the Wi-Fi interactive, I have a chart of the 10-year T-note yield. And it broke up to relatively recent highs only a few days ago. We’re off those highs right now.

But when we see rates moving higher like this on the long end typically we see value outperform. And that’s what’s been happening. I’m just wondering what your picture on rates are going into the– the heart of earnings season, let’s say over the next month or two? And how this plays into your overall investment thesis?

DAVE MAZZA: I think we have actually a lead on rates sub 2%. That may be a bit crazy to some to think about the fact that 2% is high, but I do see that’s generally where we’ve seen foreign buyers step in, pension plans step in pretty markedly. But I do think rates, particularly can move a bit higher here in the short term, can probably test 1, 6, 1, 7, maybe 1 and 3/4 from a 10 year.

What this has done though, is that we see some real steepening of the yield curve. The yield curve is much deeper than it was looking at the [INAUDIBLE], a month ago, particularly a year ago this has really been supportive to your point for value stocks, and in particular financials. You know, Look? At some of the names today whether it’s American Express, Bank of America really over the last week as well.

So we’re seeing some really robust performance out of financials along with the energy sector, which is helping value. I actually like financials more than energy for a bit of an intermediate play. But what I am looking for is in looking at growth again, because I do think we’ll see another resurgence but really it’s going to be very differentiated. I wouldn’t necessarily just focus on the headline numbers of a growth index or a value index. We’re going to need to pick our spots a bit more think about particular industries.

So within financials really your money center banks that are really most supported by a steepening yield curve and a rising 10-year yield. And then kind of on the tech side is looking at some of these disruptors that have seen their multiples come down pretty sharply because I do expect them to continue to post some strong earnings in the next reporting season. But much of their multiples for the better part of this year really got ahead of themselves from where earnings might be. So, definitely be a bit more selective here I think going forward into the fourth quarter.

Well, before we go, I want to get your take on the Chinese market here. They’re in holiday for the next week. So maybe we’re not going to get a lot of news. But we’ve heard so much with regard to Evergrande recently, their property market under pressure, plus all the antitrust actions by the US government there. What do you see in store for Chinese stocks in the near term and maybe a little bit medium term?

DAVE MAZZA: I think Chinese stocks in emerging markets at large at least if remain an underweight until we get some greater clarity coming out of China. I do expect them to, at the margins, continue to support the property sector. So for distressed investors it may be a great opportunity there.

But looking to step in to some of the mega-cap names, particularly those listed in the US, still don’t necessarily see the support for them. Even some of the China-related stocks have taken a hit. I’d rather actually focus on areas like a Starbucks that benefit from China but still kind of still have US businesses as opposed to stepping into some of the mega-cap China names for the time being. Eventually this gets washed out. But really China-emerging markets remain made an underweight relative to the US and Europe from my perspective.

Yeah, we’re just looking at Starbucks. They’re down 7.7% over the last two months. All right, Dave Mazza, Managing Director, Head of Direxion, thanks for your insights here.

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