Watch the premiere episode of Opening Bid with Yahoo Finance Executive Editor Brian Sozzi joined by Freedom Capital Markets Chief Global Strategist Jay Woods and FS Investments Chief Market Strategist Troy Gayeski to discuss the performance of the "Magnificent Seven," the chip sector, take a deep dive into Tesla (TSLA), and give insight into the current state of the overall market.

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This post was written by Nicholas Jacobino

Video Transcript

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- Hi there, investing curious friends welcome to "Opening Bid." I'm Yahoo Finance's executive editor Brian Sozzi. Let's make some money. Joining us now is FS Investments chief market strategist, Troy Gayeski. Troy, good to see you again. It's been a while.

- Great to see you, Brian.

- And then we have Freedom Capital Markets chief global strategist Jay Woods. I hope I got all that stuff right.

- Yeah, you got it right. Good to see you.

- I clearly missed the memo on the no tie thing. It's the first time I've ever hosted anything without a tie on, so it's freaking me out.

- You look far more fashion forward than we do.

- I appreciate.

- Yeah, and I went with this celebratory tie for you being your first show. So I wanted to strike the mood.

- Well, we're bringing the good vibes at a time, guys, where the markets are under pressure. It's getting a little rocky out there. And, you know, I've been thinking about really the past few days. And I'll start with you, Troy.

- Yeah.

- Is this the moment where we get that 10% pullback in markets? How do you see things?

- Yeah, so I think the best framework for analyzing the current market is a mini repeat of what we went through August, October of last year. At that point, obviously you had stronger economic growth. Bond markets were grappling with, hey, the fed's--

- Things are great.

- Yeah, the Fed's not cutting anytime soon. And you had this big surge in yields, which caused multiple compression. And so you really see the same price action, where stronger economy, hotter inflation, those in the bond market that were delusionally expecting like the Fed to cut six times. Whoops, they're not cutting six times.

- Wai, they're not cutting six times.

- Where did that number come from?

- Somebod is trading days.

- Not logical one.

- What's so amazing there is the disconnect, we think, between rational analysis and what bond markets have been pricing in really the last 2 and 1/2 years. It took the Fed months to price out cuts in '22, let alone '23. And so here we are again, where equity markets ignored higher yields for a while. But you can't ignore them forever once you get a 4.6 handle on the 10 year.

- Jay, you think investors still, I'll use the word, delusional? Because I was reading a note, maybe it was JP Morgan, this morning. People are still looking for two rate cuts with the first one in September. Why? Inflation is still running hot.

Average consumer still getting hit over the head with $3, $4 products at Dollar Tree or Dollar General. Inflation is a real thing. How are they going to cut rates?

- Yeah, I don't know why they're going to cut rates. I think the PCE will be the last bastion of hope when we get that on Friday. It's the only inflationary number, the Fed's favorite inflationary number that has consistently gone down. So it's on that path. And then there's this whisper number that 3% is actually OK.

So that last rate hike, people don't remember, did we really need that? Well, it looks like we did. But for me, I think they want to get it down to 5%, probably before the summer season. If they don't do it this June, then I think it's off the table because then it could get political, and that's a whole nother, thing. They don't want to open a can of worms.

- What are the charts say? You're an-- you're a hard core chart watcher. We've seen some breakdown in the S&P 500. But anything to suggest that a 10%, 15% pullback is in the cards?

- Well, 10% pullbacks happen on average once a year. We had a 14% pullback last year. When did we get the big pullback, it was when rates spiked to 5%. What's going on now? Rates are spiking. Are they going to go to 5%?

They're on that trajectory. Let's take it slowly. And that's what's happening. It's going slower this time. And we are digesting this new normal, which is higher for longer. We're back to the way things used to be. We're talking before great financial crisis.

And the market's OK because it's slow and steady. You throw in spike in rates, geopolitical concerns, and back to back quarters of 10% gains in the S&P 500, yeah, you're going to get a pullback. You get 3%, 5% pullbacks a year on average. We just had one. We're down 5 and 1/2 percent. We pull back a little bit more. I think that's healthy, and I think it's a great buying opportunity.

- You got thinking. And Troy, I'll go over to you in a second. The great financial crisis, I remember covering that. But I'm thinking like there's a whole generation of people that never even lived through that. And like, suddenly, we're like the old guys in the room.

- I know. I'll tell you this, time goes too fast. But yeah, it is rather remarkable sometimes when you interact with folks that hadn't gone through that period and don't remember all the trauma and markets. And fortunately, I mean, this environment, one of our biggest theses when things started to get ugly in '22 is that look, this is a rate-driven, multiple compression period, where financial assets have to adjust to higher for longer to the Fed doing quantitative tightening instead of quantitative easing.

Even though we've had some fragile bank failures, the banking system is still very robust. And it does look like the Fed is wise enough to start curtailing quantitative tightening or tapering it before there could be a liquidity issue. But to your point, when we look forward, one of the biggest obvious risks to markets is if the Fed continues to drain their balance sheet, money supply is stagnating at a time where there's just limitless Treasury issuance, limitless Treasury issuance. So if we're going to get a liquidity event or another market shock, it's more than likely going to come from the back end of the yield curve on another big rate spike.

- I've been talking to a lot of folks about a potential market shock. And right now, they're zeroing in on the country's high level of debt. Is this the moment where investors need to give a damn about that? Because it might push up the 10-year to 5% or even beyond. And maybe that is the thing that triggers stocks lower.

- Yeah, I mean, look, from our perspective, we've been ignoring deficits forever. Because every time people hyper focus on it--

- Just kick it down, kick it down the road.

- Kick it down the road, right. But now, we're in a situation where the leaders of both political parties have no plan at all to address it. We're now spending more on interest service costs than we are on our defense budget. And last we check, we spent a lot of--

- It was the $NotNormal, right?

- Yeah.

- Let's just be honest.

- And so when you think of those shock events, you saw this last year, where suddenly there is like, oh, five or six billion of extra issuance coming, markets gapped higher. And then it was one to two billion of less issuance. And it was like, this is great.

Those are rounding errors. When you run in 5%, 6%, 7% budget deficits at a time where the economy is still expanding. So unfortunately, investors are going to have to spend more and more time on that as we go forward and really not treat it like they did through most of our very long career since we're old guys here.

- [LAUGHS]

- What's the biggest-- when you're on the floor, Jay, New York Stock Exchange trading floor. You've been down there for a long time. What's the biggest concern you're hearing from folks right now?

- The concern, it varies from day to day. Usually, it's where's my lunch? But the biggest concerns right now are geopolitical. Because those are the things that-- they don't have a deep impact most times, but that's what everyone's looking for because it can cause the most intraday volatility.

We've seen it the last week, where we've opened higher and then closed lower. I think five consecutive days as we tape this, it looks like another higher opening. And we'll see if it can hold. We're focused right now on earnings season.

I think earnings are what we're looking forward to. Because earnings growth has been steady. It's been solid. We saw it in some of the financials. But this time, something's a little different.

We're in more of a sell the rip than a buy the dip mentality. And we saw some financials, have some great earnings. You saw Goldman Sachs. We saw it at American Express. American Express, so close to new highs. Goldman Sachs, getting there.

- You mentioned Amex. Real quick, I talked to Amex CEO, Stephen Squeri, right after. And he's like, basically, wealthy people are spending. Our stock is doing good. And maybe that's the thing to keep in mind here. Despite everything going on in the world, maybe we don't get that 10% pullback. Wealthy people are out there buying stuff. So that's a good thing maybe.

- Well, look, I think when you look at how wealth has been dispersed in this country for a long, long time, obviously the upper 1%, 5%, 10% have done great, continue to spend. The consumer overall is in good shape. And ultimately, it comes down to the labor market.

There's really no key reason for the labor market to crack right now. We had the period of time where it would have. We had some fiscal drag. We had business fixed investment go down. We had the housing market rollover.

But the consumer kept spending because of the excess savings and because the labor market was hyper tight. So now, we're in, let's call it, somewhere between a warm and red hot labor market. And as long as that continues, there's no reason consumption can't continue to drive the economy forward.

- You think people will buy this dip, Jay?

- Yeah, I do. I really think this is actually a dip buying opportunity. You talk about technicals. I look at presidential cycles. This bull market, I think, is in year two. And this dip is the garden variety dip.

When you live through it, though, you're like, is this the garden variety dip? I don't know.

- You've seen this stuff before, Jay.

- Yeah, it's never fun to live through it. But these are normal pullbacks. They seem healthy. It gets accelerated. When you see semiconductor stocks take the hit that they took last week, that gives you a little panic.

But I think this is a great buying opportunity in a stock like NVIDIA that their earnings continue to grow. Yes, ASML, Taiwan. A little warning. But the way people sold, that was a little panic. And as the other side of that trade, a market maker all those years, this is kind of what we like.

- If you're actually wondering what I'm drinking here, I know it's brown. It's actually just a fat burning energy drink. Like it's just how I'm living my life. I have to get a lot of energy.

- Trying to scope to that--

- You guys are like high energy folks. I need to, like, reach another level. So that's what this stuff is.

- Try to sculpt that jawline, Brian?

- Yeah, yeah, yeah. Yeah. Wait, what do they say about this? No comment. But Jay mentioned-- Jay mentioned earnings. And Troy, we're-- a lot of focus right now in markets on the Magnificent Seven.

- Um-hmm.

- They're expected to grow earnings in the first quarter by like 61%. Excluding these seven stocks, S&P 500 earnings are going to fall like 7%. I mean, how important is the Mag Seven to markets?

- Oh, I mean, just completely dominant. And what's happened-- and I think sometimes people get caught in the weeds of micro detail, but if you look over 10, 20 years, you've seen a winner take all economy in the globe develop.

And at one point, it was our champions versus China's champions. Chairman Xi took care of that. So now, it's just our champions. And you have all the wealth flow up to the top five, 10 companies. So trying to fight that mega trend is really a losers battle.

So from our perspective, if you're going to get growth, you're already going to own market cap weighted indices. One of the areas to look at is middle market private equity because there's been this mega trend of companies staying private and not going public. And that's where you can get growth at a reasonable price as opposed to trying to play a catch up trade.

- Well, how do you-- how do you do that, the average human at home? How do you invest in middle market private equity?

- Well, unfortunately, even though the asset class has become even more democratized, you still have to be an accredited investor or qualified client. But we're able to reach more and more folks with access to that, which is 1/5 of the-- or would it be the fifth largest economy in the world, 1/3 of the US economy, where you can get growth at a much more reasonable price and not have the kooky volatility that you tend to have, particularly in smaller cap indices.

- Speaking of volatility, NVIDIA, down 25% for the March 25 high. How concerning is that?

- It was down over 20% at one point last year, if you recall. After one of its--

- Terrible.

- --best summer. Well, it did. It went sideways. 400 to 500 for about five months before it finally broke out. These things happen. And people get emotional with this stock. And this, like I said earlier, I think this is a great opportunity for those that have been waiting for that dip in a stock that continues to crush it on the earnings cycle in the hottest space is the best name is a good time to dip your toe in the water.

And if you think it's going to get accelerated, what we do as traders is you put those lowball bids in. All right. It's 740. I'll put in a bid at 700. I'll leg into the trade. If it gets to 660, I'll buy a little bit more. If it gets back to 600, I want to put a lot of money to work in this stock.

So you never know what the volatility, how excessive the sell off can be. We saw it in supermicro, MCI as well. That was down 25% in one day. So yeah. If you think and believe like I do in NVIDIA over the long term that this pocket is absolutely a great opportunity to add to this stock or get in for the first time.

- Hang with me there for a sec, guys. If you're watching on our streaming platforms, we're heading for a quick break. Everyone else, stay with us. We're still rocking our 24 minutes today as usual.

- Jay, how do you go about picking a Magnificent Seven stock? Obviously, there's seven of these things. How do you know which one is the right one for you to trade?

- Well, you got to do your research.

- No pressure.

- No, no. Yes. It's just I pick out of a hat. No.

- Throw a dart.

- Well, first, price action sensitive first. I always look at the technicals. I look for strong uptrends. Then you look at earnings. You look at earnings growth. And then you look at the relationships that these companies have with other companies.

- Like Google to me just had great news. Technically, it's actually the strongest of them right now. And that news that they may be partnering with Apple and generative AI to all iPhones. Wait, that's a pretty big story.

And then you look at Apple. You look at it over the long term. It's still a great growth stock. But it's become more of a utility than the next big thing. In fact, Apple never created the next big thing. They just perfected the next big thing. If you think about it, they didn't create the cell phone, but they perfected it with the iPhone.

- There's no car.

- There's no car. And we don't need a car. We don't. And then you talk about cars.

- It would look like a mouse anyway.

- Yeah. And then you look at Tesla. And it's extremely volatile. It's in a long term 2 and 1/2 year downtrend when you back it out. So I look for stocks that are strength, stocks that I believe in, I use every day. I mean, Amazon, to me, is a stock that is in the portfolio. You just don't sell it. Even you just ignore it. And that's how I look at these things overall.

- Troy, isn't it-- as someone looking for opportunities in alternative investments, it's a complicated space. Your gig is not exactly easy. Is it worrisome that investors continue to bet on these seven stocks. Given all the other opportunities out there investing land, they remain absolutely obsessed with seven stocks?

- Well, I don't think it's a negative unto itself and that-- the arguments against if people try to talk down markets, part of it is like oh, you have all this concentration in six, seven stocks.

- Which I'm not trying to do. I'm not trying to talk--

- No, no, no, no, no, no, no, no, no. No, Brian. But we hear that refrain a lot. Typically, it's from long only active managers that have underperformed market cap weighted indices forever. Because, again, it's a winner take all economy and all the wealth flows up.

So our perspective is not that you shouldn't own great companies. Now, obviously, you have to differentiate between an NVIDIA and a Tesla. That's like apples and oranges, right. But how do you complement that? And what are you trying to get?

Are you trying to get income? And there's a lot of opportunities in private credit. Are you trying to get growth? And the go to solution is middle market private equity. Or are you trying to get diversification?

And then you have things like liquid multi strategies, which you can invest through mutual fund structures, which are trying to basically mimic what some of the great platform hedge funds have done, but do it so the average person could access it. So we think it's all about complementing the growth you're getting in, not the Magnificent Seven, can we just say the Magnificent Six.

- Sure.

- Plus maybe Eli Lilly.

- I can't think of a new--

- Eli. I think Eli Lilly was that seven stock now. I really do.

- Why aren't they? Why aren't they a tech company? I mean, drugs. But obviously.

- I found it so bizarre, right, that the market's held on to this magnificent seven, including Tesla, when it's been clear to everyone for a while that Tesla is a great brand and revolutionary in terms of market positioning. But it's a challenge business, right. Let's just face it.

And Eli Lilly, on the other hand, is just crushing it in terms of, obviously, the weight loss drugs, the revenue growth, the earnings growth. So from our perspective, they should make that switch officially at some point.

- I'm on board. I like that.

- Well, let's stay on Tesla. A lot of focus on what that company may or may not do over the next decade. I think I was reading a good Deutsche Bank note saying, this is the moment, where investors want to truly understand the future. What do robotaxis mean to a company like Tesla? Will we ever see driverless robotaxis on the road? And how do they monetize these things? Uber failed this. Lyft has failed at it. And look, I look at GM too. I mean, they're temporarily on hold with their robotaxis.

- Yeah, you look at GM, Ford, they're kind of pulling back from EV and robotaxi. I don't know how they're going to do it. It sounds fantastic. I thought in 2024, growing up on the jetsons, we'd have flying cars now.

- They can't-- they can't even fill the potholes right. The potholes are in the street. And we robotaxis.

- But getting back to Tesla, we've been promised some great-- we've seen. great-- I can't even speak.

- I mean, just EVs.

- What he's done is revolutionary. But we're waiting for that next big thing. And now, the Model 2 may be delayed. We're still waiting here. So the conference call is going to be very interesting when that occurs. And then on 8/8, he promised the robotaxis.

I know we use in India recently. I don't know if you've ever been to India. I do not think it's possible to have a car without a driver in India, given the scooters and the congestion. So good luck on that.

- Sounds like San Francisco, though. Look, all the scooters driving around San Francisco. How are you going to drive a Tesla robotaxi?

- Well, I mean, I think at a more basic level. It's just have a saturation of the electric vehicle market, right. And so I think those that have been bullish on Tesla for years have always said that that is how they get started. And then you're going to have the battery storage side.

And even though you've had growth, we don't know if that growth is strong enough to offset the stagnation in EVs. And then, look, auto manufacturing is incredibly competitive, right. I mean, you have the big boys that have come and said, all right, we're going to stake our claim. We're going to grow our market share.

And then you have the China threat on top of it. So there's a lot of ways to lose money. But one of the old fashioned ways is to invest in a growth company when earnings are declining and multiples are compressing as well.

- That's a hot investing tip.

- Yeah.

- That's really good.

- No, no. I mean, look, you don't want to buy any growth companies. When earnings have stagnated, it multiples and compressing.

- What is it like to-- as you guys are both-- I mean, covering the markets, watching the markets, what is it like to see all this Elon Musk news? I mean, you're investing in alternatives. But does he give you enough fodder from the outside looking in to look for new opportunities and alternatives?

- Well, yeah. So I think from a pure investment standpoint, you're always looking for expected return versus risk of loss, correlation, how a particular expression benefits something else. So we try to divorce ourselves from the political there.

But I think a more realistic example is if you think of factor trading, very simplistic and straightforward, it's sometimes gross overvalued versus value. Sometimes expensive tech is cheap versus cyclicals. So we'll try to identify mispricings. And sometimes, they stand out tremendously.

Like you had a non profitable tech back in early '21 versus value that was just a huge divergence. And what's interesting now is there's really nothing jumping out. There's been this urge to rotate into value. But value is not cheap, right.

There's been an urge to fight this trend of five or six companies driving market cap. We're pretty quiet on the factor side. But instead, we're focusing on the housing market, for instance, where you have a massive increase in mortgage rates, which has led to the second great slowdown in refi activity.

And so if you own agency RMBS, particular securities there, you can benefit from a slow refi environment. Because again, unless the Fed takes the front end to arguably two or lower and does QE again, refinance activity is going to be slow as far as the eye can see. And then on top of that, people aren't moving because they don't want to move from a 3 and 1/2 percent mortgage to a 7% mortgage.

- Guilty.

- Yeah. No.

- I don't even own a home. So, I mean, you guys are talking foreign language to me.

- Hey, soon enough, right. Soon enough.

- That's why I keep working.

- Yeah, that's why you work hard, right.

- Yeah, I know. But last word to you on Tesla, Jay.

- Yeah, sure.

- Stock down 41% year to date.

- Um-hmm. Why wouldn't it fall another 25%? This earnings report suggests nothing good is going to happen. And there might not be anything good coming out of Tesla. I would even argue the August 8 development or potential, where he comes out, Musk, and unveils robotaxis, maybe that's not a good development either.

- Well, let's hope it is. And I think this conference call is going to be the tell. The last three times they've had conference calls, as Dan Ives has said, the last two have been disasters, his words. And technically, the stock is at a very interesting support level, around 150, broke it slightly.

There's a pocket down to 100 here. And there's momentum behind it where people may just throw in the towel if they don't see deliveries continue to improve. Pricing pressures have also cost them. China announced they were lowering rates on some of their models today as well. So this conference call is going to be the tell, I think, for not just the next quarter, but for the next year.

- We got a couple of minutes left. And really, the last section for me of this podcast is I try to leave people with some tips on how to become a better investor. Clearly, you guys have both been doing this for a very long time. You both have.

- Let's not get carried away here.

- You both look fast. Troy, I will give you first here. The biggest investing mistake you continue to see people make and how can they avoid it.

- Well, I'll tell you. Over time, I think it's been a lack of an embrace of diversification. Extrapolating recent trends out too far into the future and adding capital into bull markets at inopportune times, or the converse is, you know, selling bottoms because of panic like in the GFC or in '22.

I think right now, there's a different challenge for investors. It's how to put these massive cash hoards to work and how to do it in a way where you're meaningfully boosting return without taking uncomfortable levels of risk, right. So that again is where alternatives come in. If you can meaningfully increase your return to, say, high, single digits or low teens without having the volatility, the potential to walk into a 7% sell off in duration or a 5% to 10% sell off in broader markets, that's a real value add. So the challenges have evolved. Think about putting cash to work without taking uncomfortable levels of risk. And again, that's where alternatives come in.

- I'll try I'm going to tweak it a little bit for you, Jay, in about a minute and a half that we have left. The biggest investing tip you wish you had when you were 21.

- I wish I had. I got some good ones when I was 21. Cut losses. Do not get married to a great idea when it's in a downtrend. The trend is your friend. It's all cliche. But when something breaks, like a PayPal was in an uptrend for years, it broke. Something changed. It has not come back.

Do not get married to an idea, a single person behind the stock, and a fad. Those things can crush you. And then obviously, diversify. You always want to get that one big stock the next thing and put a lot of money into it. Don't.

The young version of me was smart and diversified. Put my first five, $10,000 money into the index funds and didn't think about it. When you hyper focus on these things, when you think that there's fast, easy money to be made, if you hit it, congratulations. But it does not happen all the time.

- Don't be greedy. Right.

- Yeah.

- Don't be greedy.

- I just realized I'm off the camera, caught this. I try to fix my tie. Clearly, I'm not wearing a tie. It's just a force of habit. The next time we have back, Jay, I actually have to ask you how you won softball championships. I played a lot of softball on the weekend. I was checking out that LinkedIn profile. We'll leave it there.

- Hey, we just won two games this weekend.

- All right.

- Congrats.

- Congratulations.

- OK.

- All right. Jay Woods, always good to see you. Troy Gayeski, good to see you. As always, appreciate you guys coming on down and kicking off opening bid.

- Thanks for having us.

- All right.

- My pleasure. Yeah.

- That's Yahoo Finance's latest "Opening Bid." Do stick around for much more in the weeks and months ahead.

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