Financial advisor explains significance of ‘short duration’ in the markets right now

Eric Diton, The Wealth Alliance President and Managing Director, and Jay Hatfield, InfraCap Founder and CEO, join Yahoo Finance Live to talk about the stock sell-off, short-duration asset classes, and emerging markets.

Video Transcript

Here’s the closing bell for today, Friday May 6th, at the New York Stock Exchange.


There you have it, your closing bell for May the 6th. Cheering there, but very little to cheer about today, as we see all three major indices in the red. The Dow down about 0.3% there, down 96 points. The S&P 500 also down over 0.5% there, down 23 points. And of course, the biggest laggard of the day, the tech heavy NASDAQ down 1.4% there, losing 173 points.

Well, Seana and I are going to digest what’s been happening in the markets today with our guest Eric Diton. So Eric, I want to first start with you in terms of what you’re seeing here. The enthusiasm that we saw after the Fed’s announcement versus what we’re seeing now, which one is the overreaction?

ERIC DITON: That’s a great question. First of all, Thanks for having me back. I appreciate it.

What happened was there’s a saying on Wall Street, buy on the rumour, sell on news, or sell on rumour, buy on news. We knew the Fed was going to hike rates 50 basis points. It was the most telegraphed hike in the history of mankind. But the markets sold off into it. And then they finally did it and it’s like, OK, it’s done. And so you got a lot of short covering and you got a big rally.

That was not the real deal. The real deal was what followed yesterday and continued today, and that is that there’s a tremendous amount of uncertainty out there. Yes, we know the Fed’s going to hike. How many times they’re going to hike? There’s a huge disparity between where rates are and where the inflation rate is. Is the Fed going to have to get up to 6% or 7%, or is inflation going to come down, they’re going to meet in the middle? That uncertainty is one of the big factors that’s driving this market to continue to come down.

SEANA SMITH: Certainly has been. We’re seeing that weigh on the markets. We also want to bring in Jay Hatfield. He’s InfoCaps’ founder, CEO and portfolio manager.

Jay, it’s great to have you. Just your comments. As we look at the losses over the last two days, certainly a reversal, like Eric was just saying, about the initial reaction that we saw from the market on Wednesday afternoon. Is the selling done?

JAY HATFIELD: Thanks, Seana, for having me on. Well, there’s one key indicator that I would focus on, which is the 10-year bond yield. So we’ve had the view that it would bottom somewhere in the 3% range mostly because of $52 trillion of global pension assets that are under allocated to bonds. But also, the tendency for the yield curve to flatten when the Federal Reserve is tightening.

But we haven’t seen that. In fact, yesterday, it rallied from the lows. The 10-year really was in a bit of a crash. It was down like $3 or $4 at one point. And so we believe that’s what destabilized the market after the slightly dovish Fed comments. And then today, again, the market was trading, if you really watch it closely, very sympathetic with 10-year bonds. And so you saw that late weakness in the day. A little bit of rally as people cover their shorts into the close.

So I would urge investors to watch the 10-year because that really drives valuation. Our fair value at 3% on the S&P is $4,100, but at 4% it’s $3,600. So huge difference.

And Eric, I want to get your take on what you’re seeing in the bond market and how investors should really be digesting this information.

ERIC DITON: So the two words I want to leave you with are short duration. I don’t care whether we’re talking about stocks or we’re talking about bonds, you want short duration. That’s where you wanted to be for a long time. For us, that means short bonds, two years or less, you can get decent yield there. Floating rate, bank loans, private credit. Then in stocks, dividend stocks, MLPs, things that are going to pay you a good income that you can reinvest to get more return.

You want to stay away for a long time. That means long bonds. It also means stocks where they’re not earning money, and maybe in 3 to five years they will earn money, who knows? Those are the types of stocks that are owned in– you know, Cathie Wood owns those stocks. And they had a great run a while back, but they’re getting hammered. Short duration is where you want to be across the board.

SEANA SMITH: Jay, when we take a look at some of these stats here, the S&P 500 capping its five weeks of declines, the longest streak that we have seen since 2011. NASDAQ 100 sinking for the fifth week, the longest streak that we have seen since 2012. And some of the conversations that you’re having with clients, how are you reassuring some of those skeptical investors?

JAY HATFIELD: Well, what we do is focus on dividend yield. We think the key issue in the market when the Fed is tightening is you want lower risk stocks that can pay dividends. And then even if those stocks decline, which in this more aggressive sell-off the dividend stocks have started to decline, you can take your dividends and reinvest. We particularly like preferred stocks because they’re senior to common. And we really focus on the ones with higher dividends. They have lower durations and are quite defensive in defensive sectors.

So we think it’s an easy call to avoid the profitless tech stocks. They have super high betas. They’re the riskiest stocks. And we don’t think the key driver is really interested rates. We believe they were in a bubble last year because of Fed liquidity and now they’re probably the sector that’s going to continue to sell off, along with Bitcoin, when the Fed actually starts reducing liquidity. But dividend stocks should get benefit from rotation. And even if they don’t, like I said, you can reinvest the dividends dollar cost average down and you have great companies with low multiples and high cash flow.

So Eric, as people continue then to look for some of these safe havens then, perhaps looking at things like buying Bitcoin or perhaps even looking at emerging markets, what do you have your eye on in terms of those spaces?

ERIC DITON: Not Bitcoin. I can tell you that right now. The Bitcoin is trading down with those long duration assets. So not where we want to be.

Very intrigued by emerging markets. If you look long term at various times in the market cycles, 2000 and 2010 was a great time for emerging markets, and then 2010 to 2020 was not. But we’re sitting here after a huge US rally and the United States is a 62% market cap of the world but only 26% of the global economy, whereas emerging markets are 11% of the market cap and 35% of the global economy . That was actually noted by Sharma over at Rockefeller recently.

So there’s tremendous value in emerging markets, low PE, high dividends. Also exposure to commodity assets in a lot of those markets, like Brazil, for example. So I think that’s a very intriguing part of the world right now.

SEANA SMITH: Esta bien. Eric Diton and Jay Hatfield, thanks to you both for helping us wrap up what has been a very crazy week for the market.

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