Stocks Could Fall 20% If This Happens — Here’s How to Prepare

Joining me now, Kenny Polcari, senior market strategist at Slatestone wealth. Kenny, great to have you back. Thanks. So it's always a pleasure to be here with you. I wish I was in New York with you, but I'm in Florida next time. Next time. Kenny. All right. Let's talk about stocks. They're on pace for a mixed September. But want to get your view on this market. Have we gotten a little too used to stocks only going up. You know what. It's very interesting because I came into September worried about all the issues right. Whether it was the fed, whether it was interest rates, whether it was the ongoing conflict. But the S&P is actually flat. Right? Right. Where it was at on August 31st is about where it is today. Nasdaq is is a couple of points actually higher than where it was in August. Right. So the nervousness and anxiety that I thought was going to happen in in August hasn't hit the indexes, but it has hit individual name. Right. If you look at I look if I look at my own portfolio, I'm down 6% from September 1st till today. Not my not not our, our corporate portfolio, my own personal portfolio. So, you know, I kind of expected to see somewhere between like an eight and 10% pullback in the market in September. My outperform essentially reflects that. Yet the broader market, kind of tells you if you look at it says, well, it hasn't been so bad. Right. And I think what we've seen is on any weakness, we have seen plenty of support. Right? We haven't seen the bottom fall out, in the broader market, although individual names once again have gotten beaten up, some of them have got beaten up more than others. But that's just part of the cycle. But one way, the other, we got, you know, the one, fed rate hike in the middle of the month, from from get reward. The market is now pricing in, a hike in October and a hike in December. And I would say that if oil stays in the mid 90s to the high 90s and diesel stays up where it is up and doesn't get offer any relief and bond yields continue to take higher. You know, the ten year hit you know, 5.21 5.22%. That is going to provide a headwind for the broader market. At least all does. It's going to put a cap on it. Right? So we're not going to explode higher. And there is a possibility that as we move into October and start getting closer, closer to mid-term, that that anxiety will, rear its ugly head, and then we'll see maybe a broader pullback in, in the indexes. So that 8 to 10% pullback is now your October forecast. Well listen it's happened to me in September I'm down like I said 6%. And the month isn't over yet. Wait till Wednesday. That'll be over I'll take it. But yes I'm still looking for a drawdown. Right. And like I said, if you look at individual names and you'll see it, you'll see some things are down eight, ten, 12%. So if you look at individual names, you'll see it. The broader market though hasn't hasn't pulled back. But I still suspect and I'm still in the camp that the broader market, both the Nasdaq and the S&P will see, volatility in the month ahead. So yes, I still suspect wouldn't be surprised if we saw a broader pullback. You know, somewhere in that in that range. Well was still in the Dow. The Russell in the Dow have been the underperformers in September. What does that tell us is that that does that mean the tracking out of rotation was short lived. Yeah. Yeah. But and also you look at the Dow transports because they have also been in underperform. The Dow transports have broken down and through their long term trendline support. Right. And that's something to actually be concerned about because now if you look at the Dow industrials it hasn't yet. But the Dow industrials are now below its intermediate term. And so now where it's in between the 200 day and it's intermediate term. So that's going to be a key metric to watch to see if the Dow industrials then mimic what the Dow transports are telling you. Because remember the Dow theory talks about you know the Dow industrials make all these products and the transports transport them all around the country right. If not around the world. And so when you start to see when you start to see both of them in a negative pattern that suggest to you that the market in the economy is going to run into some is going to it's telling you that the market and the economy is going to run into some problem. And if you look just at the transports, it's already it's already raising that warning flag. Right? The industrials haven't done it yet. But but we'll see what happens over the next couple of weeks if it breaks in fact better today. And if it does then that would confirm Dow theory saying that, you know, the industrials and the transports are sending up the warning line okay. So given that is now the time to get cautious or should we still be aggressive now. So you I would never and I look at that as my own portfolio and as a wealth advisor. I'm not getting aggressive at all I always remain I always have kind of one foot in that cautious stance. And I look for opportunities on pullbacks in names that I like right there, a good solid opportunity there. We'll talk about them in a minute because you'll see what I mean when we talk about not necessarily being aggressive. If you're a day trader, if you're somebody trying to do it on your own and you want to be aggressive, you know, go for it. But me personally, over the 42 years I've been doing this, I tend I tend not to, you know, I don't ever get so aggressive in the broader market as I do. Kind of I'm much more methodical about it. And as a wealth manager, that's kind of the position you have to today. You can't really get so excited that you all. And God, I gotta go all in. You know, as a trader. Yes. Or as an individual investor, you could do that. But certainly somebody who has a as a responsibility to find assets. You know, I don't ever find myself in that position where I've got. Oh, God, I gotta jump in. I gotta put everything to work today. It's not what I do at all. Okay, so what does the portfolio of someone who has one foot in the cautious camp and that not the all in mentality actually look like? Where are you positioned? Where do you want to be? Where you want to be. Right. So it's not so much where I don't want to be because I think there's opportunities everywhere. It's kind of where are those, where are those sectors in the cycle? Right. So again, right now I own tech, but I'm not necessarily buying any tech at the moment because again, I think it stretches a little bit. I think that if the market if rates keep going up, high growth things and the tech names are the ones that have outperformed are going to be the first ones to get hit. We've seen that so many times. So I own it. So I'm not chasing it. But you talk about basic materials. You talk about health care. You talk about financials that are all been under pressure. That's where I think there's opportunities. So for me personally as well as, you know, for the firm, we're going to be looking at those sectors where they're not running away. There's still high quality names that are just going through part of a cycle. The thesis to own them hasn't changed. They're just under pressure because the cycle is causing them to be in a pressure. So those right financials like health care, basic materials, even parts of the industrial sector. Look, we'll talk again. We'll talk about it today. But granola is a perfect is a perfect example. Right. It's in the industrial space. The stock is the stock had gotten, sold. Right. It was down over 22%. It is now finding its base starting to rally back. But that's the opportunity where I'm saying, right, I love the name. I love the space. The stock is pulled back. So that's where I'm buying. I'm not buying at its highs. I'm buying it on a pole. Yeah 20% off the highs for GE Ivanova. So what else would you buy today aside from GE for. No. Well listen there's another one that's actually on fire. Is ASML right. ASML is you know, we can talk all day long about the chips that ASML is, is the company that manufactures those very very high end machines that, that make this very specific chip. That's another thing that is pullback. It is a favorite right. The firm owns it. It is a favorite. But that is also pulled back. And today it's up on a 1.5% I think on, on some you know, on some good news on some those that came out is as bad as its problems as well as just kind of like there's a market reaction because of that backed off. And then when good news comes out, you get the trade advice, the algo that jump right in and take it higher. But ASML is a name that we all know that we like. And again on weakness we started adding to our cover position. Right. So and then let it ride. But on a day like today when it's up you know 1.5% or 2%, I'm not chasing it. We bought it on the way down. Right. Buy it on weakness because the thesis you own it as a change. The stock is just going through, through part of the cycle. More from Kenny in just a minute. But first, a quick break. Can you give us some names that aren't tech names that you would buy today, or you wouldn't. Wait? So back for. So that I wouldn't buy today? That's your thing? No. That you would buy today, that you don't need a big push that I would. Yeah. That I would buy thing. Right. I wouldn't this like wait for a pullback. So I'll tell you. JP Morgan Bank of America I would buy because they're in the financial space. The whole sector has gotten has come under some pressure. So those are names that I would buy their names that I own, but their names that I would buy, outside of that, I would buy Merck in the healthcare space. I'd buy Merck, I'd buy Lilly. Now, listen, you and I had this conversation. I'm. I'm biased to Merck just because of, some of the medications in the cancer space that they that they developed that, you know, actually saved my life. And so therefore, I, you know, I've looked at it on the chart, if you look at Mark, Merck had pulled back, it was kind of underperforming for a long time. It's built the base. But right in here, you know, I'd continue to buy Merck you know at its lows now it's rallied on. So it's started. You better but I would continue to buy Merck. I'd also buy, you know, if you look at the, the emerging market space. Well, not any specific name, the ETF, the ECM ETF, which represents kind of the emerging market has done very well. In fact, this year I think it's up. Let me just look real quick. Emerging markets are up 23% so far this year. But you know, they'll pull back a little bit and I buy I buy some of that as an ETF. Okay. So give us what's on your shopping list for if and when we do see that 8 to 10% pullback. So then I would go into the tech right I'm looking for tech to go on sale right. So I'm looking for some of the bigger names. I'm looking from Microsoft once again to go on sale because we've already seen that once we saw Microsoft go from 520 or 530 down to 350 and rally back. But on any pullback, if we see a pullback in the broader market and tech gets it, Microsoft is going to be one of the names that get hit on any pullback. I'd be buying Microsoft I'd be back. Apple I'd be buying Amazon. I'd be buying meta. But meta is not. That is actually on a run right. We bought some meta. And meta is now actually on the run. So I, I'm not going to be chasing better. But if meta does pullback, if that is part of those names that gets drawn into the draw down. Certainly meta would be a name that that I would buy, but I'd also buy, you know, other names in the space. I'd buy some of the cybersecurity names because I think cybersecurity, you know, for it, but for, for Fortinet, CrowdStrike are going to be names that, that I'd like to buy, continue to buy because cybersecurity, the more the more advanced I and this technology becomes, then the more demands is going to be on cybersecurity as a, as a whole in the sector, but on some of those individual names. So CrowdStrike and Fortinet, I do think. Kenny, what are your three highest conviction AI names right now. On the field? Would you possibly. Micron because of memory? Right. In the event I'm assuming that that fits in the AI space because it's all about making sure I, of course micron be one Microsoft is going to be another. I think that's just a core name. I love Microsoft, I've owned it for a while. I'll continue on it. I think they're doing great things in the space. And so therefore I'm assuming you're okay with that name as well. As the third one. Let me think about that for a second. I would say probably something. I'm going to go something in the quantum space. So one of the names there I like is I queue that's struggled for a while. It's kind of doing nothing but iron to like IBM. IBM is also got big, big quantum presence. Right. So, IBM could be another name, but if you want specific quantum, I'd pick, iron. Q okay, so I on cuz almost 50% off the highs. Microsoft's down about 70% of the highs, and microns off what, more than 10% off the highs. Right. And for any of those you you would wait still for a pullback. You wouldn't put money to work today. Well Mike look at down right. What do you just say that down 10%. What do you say. Micron is down 10%. Right 13% from the highs. 30%. So micron that falls into the position where if you want to buy something today that does understanding that if we get a broader pullback micron like a lot of the names are going to get hit again. So I wouldn't put it. You know if you allocate a certain amount of dollars to it I'd buy a little bit and then keep someone, you know keep some dry powder on the side. Take advantage. If we get that pullback, which I do think we're going to get. Look the markets and the pressure get treasuries at trading at 5.21% today. There are a couple of basis points. And so I think that's what you have to be concerned about. Yeah. In your note, your latest note, you said this 5.2% ten year treasury is going to cause some investors, especially the ones who are more risk averse to say, why am I taking equity risk when I can get paid more than 5% to own a risk free treasury and sleep at night? So why should we take equity risk? Well, because here you go. Depends on where you are in the life cycle. If you're somebody in their 60s or 70s, then that's going to be that's going to that's going to feed right into the way you think, because you can't afford to think that matters. If you're somebody who's in their 40s or 50s and you've still got 25 or 30 years to go, then you shouldn't be so concerned about, you know, the ten year Treasury. I mean, unless you're completely risk averse. But if you're if you're somebody in your 40s or 50s, you should still be, you know, at least market weight risk, if not a little bit more. Right. But certainly someone in their 60s or 70s at 5.2% that you can guarantee riskless sleep at night sure doesn't mean you take it 100% of your money putting it there, but you may take a sizable chunk of it and say, you know what? I'm going to take this risk off the table. I'm still going to have some risk to the market, but I'm going to take this risk, and I'm going to put it this in this treasury and look at maybe someone who says, I'm I'm going to take three years worth of my living expenses and put it in this 5.2% treasury, and I have to worry about it. And then the rest of it, I you know, I don't I don't need it because I've taken my three years worth of living expenses and I've guaranteed it. Now the other one kid can run with it. What level on the ten year would make you change your overall market outlook? Or what sort of pullback could happen that would make you realize it's not a buying opportunity? It's something more concerning. Well, so if we see look, I thought 4.75% was the danger zone for ten year Treasury. In fact that's run right. We're already at 5.2%. And the margin is still essentially closer to my eyes than not. So what I'm what I'm assessing based on how strong the economy is that you look at somebody economic data. You saw that consumer sentiment was wall or Friday's bit of a sentiment was was, a better than expected. I'm guessing that the ten year Treasury could probably push a tiny bit higher before it gets really anxious. So where's that? Is that 5.3, 5.5% in there? I think that's really now the danger zone because we're at 5.21 and the market is not panicking at all. And so you have to assume, you know, bonds take a little bit more of a hit and treasuries could go a little bit higher. But if I think we get the 5.3, 5.4, that's I think when the market's going to start, people are going to start and eventually they're going to start to, you know, question themselves and say, okay, what about am I willing really to pay. What are these companies have to earn with the ten year Treasury risk free rate at 5.3 of 5.4%, that's going to change that. That's going to change the math. And so now while I thought it was maybe 4.7 or 5, that's been proved wrong. So now I got to move my target up. So it's got to be somewhere above 5.2 because we're already there and the market's holding in. So it's got to be somewhere you know 5.35.45.5 somewhere in there. But does that mean if we see that level you you wouldn't take part in a pullback. You would say now is the time to be very cautious and maybe. I will. Take money out. If we get there, I would be more cautious. I would be I would said I wouldn't panic and sell everything I own because the names I own are all high quality in the sectors they're in. But I would take back, I'd sit back for a minute and I'd let the I'd let the market turn to see where it's going to go. I wouldn't necessarily jump in on the first down date, because I think that I think there'd be a bigger story there, right? If that if treasuries tick up there, then I think there's, you know, we're in for we're in for so much volatility. So I'd be happy owning what I own. But the cash that I have to invest, I'd leave sitting in a government money market fund earning 5.4% while I wait. So if you kind of expect an 8 to 2, I know you don't have a crystal ball, but if you kind of expect an 8 to 10% pullback correction, that would be healthy. If we do see the ten year at 5.5%, what sort of pull size. Pullback is then I think the. Big bear. Market I think the both yeah I think the pullback yet or really like the I think the pullback is at more than 8 to 10%. If we see the ten year Treasury tick higher then I think you know you're you're into you could be into a 15 or 20% pullback. And so that would make me more cautious in terms of okay what am I going to do with this cash I have to invest? I'm going to do nothing with it. I'm going to let it sit and earn 5.4%, because doing nothing and leaving your money in a government bucket fund is an investment decision. You are making a decision, right? It's all against you sitting here earning nothing. It's earning 5.5%. When the market could actually suffer a 10 or 15% drawdown. That's going to offer stability for the balance of the portfolio. So that's what I would do if it got to there. Then I'd be more cautious, say, okay, I'm willing to sit this one back, sit this one out. I'm going to keep what I have. Unless, of course, the thesis has changed on why I, Apple or Amazon or JPMorgan. And I don't think the thesis is going to change that much. That would cause me to say, okay, I gotta get out because the things I own are not like that. Right? I think I think the only name I own that would be like that would be Iron Cube because it's so bald, but I'm not even sure that that would be true. But it would cause me to suggest, sit back and say, okay, I'm going to wait. Okay, so we have a lot of retail investors who tune in as they think about the Q4 playbook, knowing that we could have this pullback in store. A lot of them probably are sitting in S&P 500 funds. What's their strategy? Which they do. So listen you. Guys are kind of. Careful to your point. Yeah okay. So here's the point. You're sitting in S&P 500 fund. You realize how much of that is exposed to tech. It's close to almost 40% right. Though the tech weighting in the S&P is I think close to 40%. So all these people that say oh look I'm in an S&P fund, I'm okay. Be careful because you've got a lot you're out weighted in technology. So so what do they do okay. So what you have to do is you have to diversify the way you might want to think about going into an S&P equal way fund. He has to be equal way fund. You realize he has to be equal. Weight is up almost 10.5% this year. And when the S&P is up 12% right now okay. Yes because it's got a big tech weighting. But if tech gets whacked then the S&P the market weighted S&P is going to get whacked. But the S&P equal weight won't react as much. So you may want if you want the exposure because you want broad market exposure. Then they put more money into the equal weight S&P versus the the regular way S&P because because you're you'll be overweight in technology. And then if you own the S&P and then you say oh I'm going to own the X okay. Or I'm going to own, you know the the IVs the, you know the Ivy tech ETF, you're going to be even more overweight in technology. So you have to understand if you're going to play the game in ETFs, you have to understand what those ETFs own, what the exposures and then ultimately what your exposure. If you're going to play with individual names, then you have to spread it out. Make sure that you've got you've got, representation across the sectors, right, to make sure that you're balanced. So, Kenny, if I gave you all my extra cash today, not my retirement, but just my extra cash, and I said, start a portfolio from scratch for me today at these levels, what would you do? So I would. Start. Yeah. Yeah. No, it's great advice. No, it's great that, so first of all I'd have to do is have to sit down and talk to you, just assess kind of what your own risk profile is, right? Because because I don't know what your risk profile is. So you can give me all the cash you want. But if you say to me, look, I'm, I'm, I'm, I'm more risk. I want to be risky. It's my extra cash. I want to be risky. I'm a long way off. Okay? So you want to be risky, right? You're young. You've got 25 years to go. You want to be risky. So I would start. I wouldn't take it all today and just plop it in. But I would start to feed it in, and I would start to build a portfolio of the broad, equal weight S&P 500, not the market weight, the equal weight. I'd put you in, health care. I'd put you in, industrials. Right separately. Either we can play. Yes, if you want to eat that type portfolio. But if you if you want an individual name portfolio, I'd pick names like JP Morgan, IBM and Bank of America, Johnson and Johnson, Amazon, Apple, Microsoft. Those are all the names that I would I would, you know, I put you in the SPV which is he has a B value trade right. Which are value names. Right. So they're not as sexy as the growth names, but they'll offer stability especially, you know, on a drawdown. Okay. And what do you need to see for me to get even more risky and just go into, you know, bigger tech again? Well, listen, you should everyone should have tech exposure again. It's going to depend where you are, right? You're younger than I am. I have tech exposure, but I'm 65. My tech exposure is going to be a whole lot less than somebody who's 40 or 45. Or at least it should be right just because of my age and where I'm at in the life cycle. So again, that's all part of this conversation of which I'm happy to have with you if you want to have a conversation. But, you know, that's all very that's all very individual. You can't just it's not like a one size fits all question. Just because I don't know anything about you. I don't know about your family. I don't know what what what what you're trying to provide for. All that stuff plays a role in how I might help design a portfolio. That's when your fee starts kicking in. All right, I guess with him. All right. Kenny, but I. Listen, I'm kind of nice to you. All right? Kenny, I think this is a great time to pivot to a rapid fire round of this or that. You know how to play. Quick questions. Quick answer is no. Hedging is you can help it. Yeah. Are you ready? Yeah. Right. There we go. Yep. Bull market intact or cracks forming. Cracks forming Q4 take some risk off or stay fully invested. Stay fully invested. Stocks by year end higher or lower from here. I think they're going to end right here. So I don't think they're going to be higher or lower. I think this is where we are. But a bumpy road to get there. Bumpy road out the. Dow or Nasdaq from here. A bottleneck. So that's that. S&P or Russell. Staying the low I have to say S&P because the grades go up Russell the skids are going to get whacked. Mag seven or everything else. Everything else. Buy the dip or raise cash. You're tying my hands on that one. You got to buy the dip. Unless, of course, you see those other things, right? I'm not trying to hedge, but if suddenly we see treasuries go to 5.4%, then I'd say, you know, not necessarily raise cash, but don't put any more to work. Don't buy the dip. Right. Better my next pullback. No I get it. We appreciate the context. It's okay that buy on the next pullback tech or something outside of tech. Yeah. I say tech is. The number one stock. You're definitely buying on a pullback. IBM. You're seeing the pullback for IBM right. You buy it. Buy it here. Yeah one sector you want to own in Q4. One sector healthcare. One sector you don't want to own in Q4. Consumer discretionary micron ahead of earnings buy now or wait. Buy it. Nvidia or AMD. Us. I can say Nvidia because I own it. I don't own AMD because that's the way I played it. So I'd have to I have to be loyal. Okay. Switching gears, is Nike ahead of earnings bargain or steer clear. Steer clear I. Nike or Carnival which is also reporting. You're killing me. And neither I don't like either one of them. They're not names that I own. So you know, I'd be I'd be okay to be. I'd be poking, carnival consumer stocks. Pick selectively or just avoid here. Consumer staples. No. Consumer discretionary. No. I would stay away from I don't like consumer discretionary okay. The one stock in your portfolio you'd never sell even in a crash is. Microsoft. And finish this sentence. I wouldn't sell the market. I wouldn't have Amazon and I wouldn't sell my data. People it either. Okay, we'll take all of us. Finish this sentence. If the market pulls back 10%, the first thing I'm doing is it's, No wonder right now, first thing I'm doing, I would, I would, I would, I would rebalance the portfolio. Kenny Polcari senior market strategist of Slatestone wealth. I always appreciate you joining us. Thanks for playing along. Thanks for all your picks and your insights. Thank you for letting me play along. I always enjoy that. Next time I'll be with you at the New York Stock Action. Can't wait. Kenny, if you enjoyed this street talk, check out our full interview with Brent Schutte. He's also in the S&P 500 is to concentrated camp and says where to move your money now.