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Well, despite today's significant sell-off, our next guest expects a rally at the end of the year and advises buying on dips. Let's talk more about this with Tom Lee from Fundstrat. This is the decline that is worth buying. Yes. Well, you know, it's a recession during which the VIX index rose sharply.
We have had a virtually precipitous collapse, and we know that we are entering a period where 74% of active managers are lagging behind their benchmarks. So I think the markets have an urgent need to deploy capital to pull the indicators up , and that means a rally. Do you think the drop we saw in the markets today is really as dire as it looks on paper, given the role of ETFs in these markets and what you're selling when you sell the three ETFs you probably own?
You sell the same stocks over and over and over again. Yes. I mean, there's been a significant increase in correlation in the markets today, and part of that is due to deleveraging, where rates are high, volatility is high, and we know that risk- parity funds have been overweight bonds. So I think it's largely a matter of closing positions, but when that's behind us, people are going to have to think about where to look for opportunities, especially in an inflationary environment, and stocks are the place to be.
Tom, I know you do a lot of quantitative analysis, and this year it was just fantastic. What do your quantitative models say about this? Let's put emotions aside. What do the machines say? You know, quant funds almost unanimously favor growth, and even our quant analyst Sam Doctor is overweight growth stocks.
So , one of the things that's rife today is people holding long duration, whether it's in credit through bonds or through growth stocks, which are long duration assets. So the move to higher rates is a move to assets that require significant investments. You want to own assets, not duration, which means you should consider owning value stocks.
Now, what about assets? Uh, I mean, all stocks are assets, right? So I don't quite understand what you mean . It used to be said that it is harder to get high returns to offset the P/E ratio. That is, in conditions of rising inflation, a business that requires significant assets, such as finance, can generate huge profits, as assets grow, they reduce debts and can earn margins.
If you are an asset-based company, such as a research and development company, it is difficult to keep up with inflation because you have labor costs, and the only thing you have is the growth in units of output. So, asset-based businesses are value stocks. I'm going back to the idea of buying on a dip.
So I'll play devil's advocate. The S&P is down 5% from its all-time high, although three percentage points of that have come today. What needs to change so that the “buy on the dip” strategy doesn’t turn into the start of something bigger? Well, the one metric we watch very closely is the yield curve, because you can't go against an inverted yield curve.
This suggests that confidence in the future has fallen so much that markets are moving into contraction. During this sell-off, the curve was actually getting steeper. So I find it quite optimistic that expectations for the future are improving. Let me continue this thought. You mentioned risk parity.
The last time we had an event like this with risk parity, we were down in the 11 to 12% range. So, Guy said we're down 6%, of which 3% is today. Is this a technical bounce or a numerical percentage that we base our risk parity on, since risk parity is inherently supposed to be linear to some extent?
So, we have seen the market grow. Of course, we haven't grown that much. Is it a percentage basis or a technical aspect? It's probably a bit of both, because risk parity will tend to increase the share of low-volatility assets and decrease the share of high-volatility ones, and stocks at 20 are a spike, but they're actually relatively low .
So I think stocks get some share in the portfolio, but don't forget about seasonality, which is very favorable right now. I mean, a correction, say, in May or summer, is scary because the seasonality is bad then. We have good seasonality right now at a time when everyone is trying to catch up on results.
So I think now is the right opportunity. Last question. I want to emphasize the message you are sending to the audience right now: buy on dips, but buy value stocks towards the end of the year. Is that where the growth will be, or will it be a broad rally with the same old players: FANG stocks, tech stocks, etc.?
Yes. I have two views. I think that towards the end of the year, people will return to their favorite tools that they already have in their portfolio. So all these FANG stocks that have fallen look very cheap because they probably wanted to buy them at these levels, or, say, PayPal at 70. But next year, I think the markets will become broader.
This year the market is very narrow and more asset-based, meaning it's inflationary or pro-inflationary deals, and there will likely be a move to value. This, I believe, is one of the most important moments of this year. Tom, good to see you. Thank you. Yes, nice to see you. Tom Lee of Fundstrat. Do you buy into Tom's market strategy?
Listen, I always look at everything pessimistically. I would really like to be an optimist. But by nature I am not. So I believe this is the beginning of something new. I'm not talking about 20%. But somewhere between 12% and 15% , given the S&P double-tops that Steve talked about, I think there's more pain ahead.
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