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Markets: ‘Cash is king’ right now, strategist says

Morgan Stanley Managing Director Kathy Entwistle and LPL Financial Chief Equity Strategist Quincy Krosby weigh market performances against the Fed's rate hikes and economic pressures.

Video transcript

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DAVE BRIGGS: All right, there's your closing bell on Wall Street. And let's see how the markets closed to start this week. Not so good. As you can see, all three major indices down about a percent and a half, led by the NASDAQ continuing to fall 1.58%, just about 177 points.

Let's talk about what happened today. Bring in Kathy Entwistle, Morgan Stanley managing director, and Quincy Krosby, LPL Financial chief equity strategist. It's great to see you both. This always feels like Monday after Thanksgiving, you know? You ate too much, you drank too much, you got to go back to work, but that's not driving the markets. What is, Quincy?

QUINCY KROSBY: Well, we had a strong run in the market. We were able to just cross over 4,000 on the S&P 500. And then you could argue that the market was overbought coming into today and that you would see some profit taking. We didn't expect this much. I think China and the events there served as a catalyst for even more profit taking and concern.

JARED BLIKRE: Hey, Kathy, let me throw this to you. The day's price action governed by China coming into the market, also some hawkish statements by a couple of Fed members. What are you seeing? And does this add to the narrative-- how does this add to the narrative that we're seeing evolve into the end of the month?

KATHY ENTWISTLE: Yes, thanks for having me. And at Morgan Stanley, we've had this fire and ice narrative that we've been following. And the fire piece has to do with the Fed raising interest rates and how that affects the markets. We think that that's baked into the markets at this point, and that's done. What we're seeing now or what we're going to see eventually is that the ice piece will come through.

And that is companies having to revise earnings, their forward earnings forecast. And that will bring-- you know, the PEs are too high still. The price of the stocks are too high, and they've got to come down a little bit more. And once they start showing their earnings are not going to be what we're expecting, that will bring it down.

DAVE BRIGGS: All right, Quincy, let's get your reaction to fire first, being Fed speak. Anything surprise you today? Is your expectation of 5,225, is it a pause? And if I can just double you up there on the ice side, do you expect further downgrades to Q4 earnings?

QUINCY KROSBY: Well, yeah, we do. And the question has been, has the market fully discounted a recession, albeit, at LPL, we see a milder recession with all of the information we have at this point. And the answer is probably not. And I think absolutely when the earnings start to come in, when we start to see pressures, pressure on margins, you're going to have a market that is seen as just being too expensive.

Right now, or early this morning, before the market pulled back even more, we were at 17.5 times forward earnings. That's pretty expensive for a market that is going to face a slowdown, most likely a recession and a Fed that probably has to add about another 100 basis points before they're finished.

JARED BLIKRE: Kathy, what do you like here in terms of investments? Because investors may be crossing their fingers for a Santa Claus rally. Hope is not a strategy, though. What are you recommending to clients?

KATHY ENTWISTLE: We're recommending to take advantage of these times when the market is having, like, a bull rally during this bear market to reallocate the portfolio, to clean up some of the holdings that you don't want in your portfolio anymore, and reposition them into things that we like.

Surprisingly, right now, cash is king. It's very powerful. You're getting paid for your cash. We also like bonds, municipal bonds, corporate grades, and also high grade corporates, I should say, and also treasuries. So the equity portion is a little tough right now. We're being very cautious and careful and just legging in when we have more downdrafts in the market versus up in the market.

DAVE BRIGGS: Quincy, do you have a similar strategy? And what sectors are you a believer in the quarter ahead?

QUINCY KROSBY: Well, yeah, I mean, we also advocate the Treasury's investment grade, short duration. Very attractive for investors, and cash. I mean, I'm looking at CD rates. They're very attractive.

But on the equity side, we still like healthcare. You've got the biotech component, which is more of a risk-on component of healthcare, but you're being offered dividends. And I think that once capital markets come back to life, you're going to see quite a number of deals in the healthcare space, biotech and larger pharma. So that's attractive.

I want to also say, I know all prices have come down. We actually like energy-- the energy complex, I should say. That includes natural gas. It includes the service companies. It includes exploration and production, and also integrated. Now, everyone thinks you need to make about $100 a barrel in order to breakeven. In the US, the big integrated names need about $45 to breakeven.

But we do think that this pullback has been exacerbated by the concerns over China. Do they reopen? They're the largest importer of oil. And also, we had a major exploration-- options exploration just around Thanksgiving time, which created more volatility in the market. There's less liquidity in the market. We think that is going to change.

One thing that has not changed is that the structural aspects of oil, there's a shortage. We have a shortage. And we need to get to the green side if that's where we're headed. But we need to be going. America needs to run on something, diesel and fuel, till we get to the other side.

JARED BLIKRE: And Kathy, we've got a minute left here. Your thoughts on the strong dollar? Because it's bouncing off the 200-day moving average for those in the technical camp. What does a strong dollar mean to you?

KATHY ENTWISTLE: The dollar has always been the safety, right, the place of safety. And I think there's so much disruption right now going on around the world between the war with Ukraine and Russia. Now we've got China with COVID and some issues there. We've had the supply chain going on. So it's just basically been where people go for a safe haven. And to just add to what was said earlier, from the equity standpoint, we do still think that investing in the US and investing in areas like healthcare, energy, defensive stocks, and also dividend paying stocks is the way to play the equity market.

JARED BLIKRE: All right, a little bit of safety there. Thank you to you both, Kathy Entwistle and Quincy Krosby.