Stocks: ‘This is a rally in a bear market mode,’ strategist says

Julian Bridgen, co-founder and president of Macro Intelligence 2 Partners, joins Yahoo Finance Live to discuss this week's market action and whether or not it will carry over into next week, the Fed, and inflation.

Video transcript

SEANA SMITH: But let's dig in to what we're seeing today, what Jared was just saying, whether or not this rally is going to continue. For that, we have Julian Brigden. He's MI2 Partners co-founder and president. Julian, it's good to see you. Jared was just talking about whether or not the gains that we saw this week, if there's enough momentum to continue over the coming weeks. What do you think?

JULIAN BRIGDEN: I'm a bit skeptical, I've got to be honest. I think it was interesting you pointed out crypto. I've been watching crypto very carefully. The correlation to the equity market has been very close in the last few weeks. That is actually trading very, very poorly with some very big levels. So if you look at Ethereum, you would not want us to break through sort of $17,000 on the downside. That's held us for many, many months. And it looks to be probing that level on the close. Bitcoin around the $28,700 level. It's the same sort of level.

And that makes me think a little bit that what we're seeing in the equity market is really month end rebalancing after a very, very poor equity market, which I think has resulted from people are having to rebalance their portfolios and buy some equities. If it continues past mid-week, let's wait and see. And I'll give it some credence then, but I got a sell signal for my S&P model. I think I said, when I was last on the show, I was about to get one, and that we'd have to go quite a long way to start negating that. So I'm still in this-- this is a rally in a bear market mode.

DAVE BRIGGS: Are you seeing at least the inflation number beginning to peak, especially given the earlier print today?

JULIAN BRIGDEN: Well, if you believe the professionals, it's been peaking since last January. The professionals have got it consistently wrong. The economists have got it consistently wrong. I think there's a good chance-- look, as they say, a broken clock is right once a day. I think there's a good chance that we're starting to see some signs of flatlining, but I think there's an awful lot of pressure still in the system. And I think if we start to see inflation pressures start to abate, there's two concerns I've got.

The first one is, because there's so much price pressures still in the system, in producer prices in particular, if they don't pass it on, that would imply to me margin compression. And that isn't good for the equity market. And I think the second thing that the equity market needs to understand is, the Fed has made it very, very clear. In fact, if you go and listen to the interview that Powell did-- was it last weekend or the weekend before-- on NPR. And he talked explicitly about the need to rightsize the labor market and to reduce the demand for labor.

That can only be done-- and this is one thing I talked about quite extensively on the last interview that we did-- by tightening broad financial conditions. And the problem is, is that's extraordinarily hard, not impossible to do, unless you get the equity market down, and the equity market stays down. So, ironically, the more that the equity market tries to fight this, the more that the Fed will probably have to fight them.

RACHELLE AKUFFO: And I wanted to shift gears here and talk about earnings. Obviously, we've seen margins being pressured a lot. Do you expect that to continue? Are we anywhere near perhaps seeing some relief on that side?

JULIAN BRIGDEN: No, I really don't. I think-- and I think it varies from industry to industry. I think if you go back and you look at the late 1960s, for example, which was the first time that we had a big pickup in inflation. It's a structural pickup that I think we're in now. You really started to differentiate the winners and the losers on the pricing power side. And I think we've started to see that. I mean, retail, which we saw, obviously, with people like Target and Walmart, are classic areas where they have very, very little pricing power because it's an incredibly competitive marketplace.

So I think, when I look at our margin models, they're appalling. They're down at levels that we haven't seen since the global financial crisis or the dot com bubble bust. The only thing that is stopping that happening is that companies are passing the price increases through. But that means inflation. And conversely, those that can't pass it through, could see enormous compression in margins. So I am-- I think this becomes increasingly a split race between the haves and the have-nots in terms of pricing power.

SEANA SMITH: So, Julian, what are-- I guess, people who are trying to figure out how to adjust their portfolios right now, there's so much uncertainty. A lot of it relies on the Fed. We take a look at that inflation number. It seems to at least be heading slightly in the right direction, but still, obviously, historically, extremely high. What should people be doing right now?

JULIAN BRIGDEN: So since November, I've been building cash. I've been bearish. It's been very difficult. I haven't built enough cash, and I'm a bear. So that just tells you how hard it is. I think the thing that I'm really thinking about longer term is that I think that the US has had a decade of a fantastic run, where we've seen these tech stocks dominate the trends for the last decade, enormous outperformance of the US versus its peers overseas.

And I actually think those days are gone. I think we are moving back into the sort of period we saw from 2002 to 2008, when we saw a steady dollar decline, where we saw US equities underperform the rest of the world and underperform hard assets.

So on any weakness I'm trying to allocate into the rest of the world and into those tangible overseas-- those tangible assets, so some commodities, some precious metals. And also those countries that tend to benefit in those sorts of environments, so the likes of Brazil, Canada, New Zealand, Australia, South Africa.

So that's really how I'm managing my portfolio. And I think-- I've said to clients, I think we're on the cusp of a rotation of biblical proportions, where the first become last, and the first is the US, and the last, which is emerging markets, commodities, become first. And I think over the next decade, that's how-- where the real money is to be made. And I'm afraid it's outside the US, which is what a lot of people own.

DAVE BRIGGS: All right, Julian, it's a Friday of a holiday weekend. The Dow snapped an eight-week losing streak. The NASDAQ, seven. I'm going to force you out of your comfort zone. Give me an economic indicator or a sector you do feel positive about.

JULIAN BRIGDEN: So-- so I think if I-- I do think that this market maybe has a little bit more, but not much. We'll see next week. As I said, price action beyond Tuesday, which is month-end close, I think, is going to be critical. I still really like the mining and metals sector. I think that's a great sector longer term.

It is still actually one of the few sectors, if you look from when the dollar started to rally in 2011, which is when these real US equity markets started to outperform. It's still negative in absolute terms. That, to me, is where the longer term opportunities rise. It's a little choppy at the moment. Whenever you get nervous, I would sell some S&P or NASDAQ against that. I really think that is one that could be a seven or an eight-bagger over the next few years.

DAVE BRIGGS: That is a glimmer of sunshine. Julian Brigden, MI2 Partners co-founder and president, thank you, sir. Enjoy the holiday weekend.