Stocks Could Pull Back in September — Here’s What Joe Tigay is Buying

Joining us now to kick off the week is Joe Tigay portfolio manager, Rational Equity Armor Fund. Joe welcome back. Thanks for being here. Thank you for having me. So we're wrapping up the month of August with some red arrows across the board. But overall it's been an upbeat month, especially for the Nasdaq. We're heading into September. Historically the worst month of the year for stocks. So get us ready for it. Should investors be bracing for a pullback here? I should always be aware of the potential. We should also also be wary. September is a tricky month. Seasonally. It's a tricky month in a midterm year, and there's other things going on as well. I think the key focus has been on inflation and interest rates lately. So that's going to be critical to a lot of important stuff happening this week. We have oil back over 90. Of course that's very inflationary. And obviously at the end of the week we have the jobs report that's going to tell us a lot about the economy and how the inflation is, adding up, altogether, in the jobs market and economic growth. Okay. We'll dig into both the jobs report and on Friday and oil in just a second. But if we do get a September pullback, what would tell you that it's a buying opportunity rather than the start of something worse? Yeah, that's a great great point. Great question. Just think thinking about the big picture. Something would have to fundamentally change for it to, be the end of this AI rally. So for me, just the short term pullback will be a buying opportunity. Would be an opportunity to look at which sectors are lower, which sectors are, being valued a little more harshly than others? Given the current climate, and I would probably look at it as a buying opportunity, something that would fundamentally change for me would be, you know, announcements from anthropic or OpenAI talking about their future potential profitability, that their future growth. I think that's really the story right now. There's a lot of pressure on these hyperscalers, a lot of pressure on the largest companies in the world because they're expanding. They're thinking about the next few years. They're taking on debt. They're building a lot of projects. And, the base case right now is that, the compute is not going to be needed. We're going to be overbuilding. These companies like anthropic and OpenAI are not going to be profitable. So all of these projects are going to go to dust. I think that's the case. And I haven't really seen that in the reality so far. I've just only seen companies saying that we need more compute. We need more and more of this. So yeah. So for me, if something changes with anthropic or OpenAI, something changes where, the profitability won't be for them. I think that's an area where I think I think twice about buying on a debt. But other than that, I'd be happy to load up. Well, we're technically getting a dip today if you count the S&P 500 down about a half percent, an actual dip. So if I have cash on the sidelines today, am I putting it to work now, or am I waiting for a better entry point in September? Yeah. Just today, I would maybe pick my spots, carefully. Just in general, I would pick my spots carefully, thinking about investing for the long term. It's not great to just throw it all in on day one. So, yes, if I had cash, I would consider putting it to work, but not necessarily all of it. And I would be targeting a few stocks. I would be watching them closely. I'd be watching, where good entry spots would be to get into and kind of just waiting patiently for that. I think, over time, it definitely pays to stay invested and in the market. But also if you look over time also, it also pays to pick your spots, be patient and be tactical, when, deploying that capital. So, Joe, last time you were here, it was March and the VIX was actually above 30. Now I'm taking a look and it's trading around 15. Are you concerned at all that investors are getting too comfortable. That's a really important point to make out. We have very similar concerns today as we did back in March. The market has done quite well since then. And yet, yeah, you're seeing volatility very low. The contrarian in me, yes, I am definitely a contrarian. It's just in my blood. Says when everything whenever VIX is too low, it's usually a time to be looking to add some protection and add some, add some downside, you know, insurance, so to speak. So yes, I do I do think that could be, a sign right here that, we are too complacent or too confident in the short term future. Given all the risks out there, very similar risks were there in, in March, and we decided that, you know, the risk premiums were double, what they are right now. So, yeah, for me, this is this is a sign that, you know, we're maybe a little bit overconfident in the short term. You talk about the risks. What's the risk investors aren't properly prepared for right now, but. Oh goodness. Well, yeah, if we, coil being back above 100 would be a very big, inflationary, inflationary shock. We have the jobs report coming out, of course, at the end of the week. Just an economic cooldown with high, inflation is kind of, a hard spot right here for the fed. So we definitely don't want to see that inflationary environment. So that's certainly the risk. But and then of course, the bear case on these big stocks is that the compute is not going to be needed or anthropic or OpenAI are going to flop. So, I, I'm maybe more concerned about the inflationary, and, inflationary shock in the short term right now. So oil's currently trading around $85 a barrel. How inflationary is that. How is that the danger zone or is really just 100 or higher. The danger zone. I would well it it depends on the time frame. So we had a little below 60. We had around 70. That was obviously of course very good. It's definitely higher than that now. So that is adding to the cost of everything, that we do. But it could be higher. It could be worse, obviously. So, the lower the better. I mean, needless to say, but, it was much more of a risk to me to, to cause a lot more economic damage above 100. We saw at 120, very briefly, there were fears that would be even higher. So that was certainly a big risk. And then having on the flip side of that, though, was that, when we saw cooldowns in the lower cooldowns, and geopolitically we saw oil drop very rapidly. So, it's still can go both ways here. We need to remember that while we're being very cognizant that, things could go south or north, you're in oil, and that could that could lead to some economic pain. Could could very easily go back down, below 70. So just be very, very, very aware of that as we're just really treading this, razor's edge here. It's very well might have a lot of things going on in the market where there's a lot of these risks out there, but we still continue to, just, ride the volatility higher and continue higher, even though, the risks continue to be there on the side. So as you mentioned, we have the jobs report coming on Friday. What does the market actually want a strong number or weak one. Yeah, that's a great question. You know, I always like to see strong economic data. I always like to see growth here. But, I think the risk right now is these interest rates. So I think the market's going to be a little bit happier. Maybe not with, terrible disastrous number or we're losing a lot of jobs, this month, but something cool, maybe in line with expectations or slightly cooler. I think the market would be happy to see that, just to maybe kind of put a lid on the number of rate hikes the fed will do or maybe limit maybe, maybe not even any rate hikes the fed will do. Just but just to limit the short term hiking that the federal do because that will slow down, economic activity. Now, there's a lot of money being spent, by, some of the biggest companies in the world out there, some of the biggest company, those overall, they're spending upwards of trillions of dollars in these investments, really eye spending, that is going to boost economic growth. That is going to make, things more expensive. They have a lot of people competing for fewer resources. That's just naturally what happens with inflation. So it does make sense. The economy is running hot. It does make sense that we will need to have higher interest rates. So this jobs report is going to tell us exactly how hot, how how how high these interest rates need to go. So that's what's really important to me. And I think if we can put a lid on these interest rates, I think that, stock markets specifically like that a lot. Yeah. If someone was listening to me saying, why would the market once a week jobs number, it's just because that would mean maybe the fed won't actually hike rate hike interest rates in September or later on this year if the jobs report does come in hot though, and yields jump, stocks fall, would you buy that weakness? And what would be the first thing that you would buy? I would be yeah be watching policy. I don't I don't like making major preemptions on and there's not been watching over the course of a couple of weeks and looking to put that money into work. I have a couple of big, big infrastructure plays that I do really like, though, my, some of my favorites, which of course, I own in my fund, the rest of our fund, our, Alphabet and Amazon, they are two of the biggest, infrastructure plays that are building out this infrastructure. They're also two of the biggest, cloud plays. I, I, I'm a strong believer that there is this question whether we're going to need all this, which is being laid out in the marketplace. People are betting against these companies that they're not going to need this. But I'm a strong believer that we are going to use it. I think some of the smartest people in the world are spending their own money, putting their own capital at risk to build this out. We're seeing, valuations for space in the trillions of dollars because they think that data centers will be needed in space. Well, I, I'm maybe I'm not quite there on space, but if people think that data centers will be needed in space and they think that space is worth that lofty with elevation, that I surely think that data centers will be needed on Earth. And I surely think those data centers will be profitable that are being built on Earth. So I'm, firmly in, a believer, that regardless even of what happens without anthropic, an open eye, that Amazon and Google are going to be their, winners in this, in this, eye game. So, yeah, I'm, I'm looking at them on pullbacks. I'm looking at them on strength. I'm just watching them closely because I think they're going to be, companies are going to be around 50 years from now. And companies there that are going to thrive in the short term too. So last time you were here in March, alphabet was still one of your top picks then. But also Palantir was on there. Are you still a buyer of Palantir here? A lot bigger buyer, before trading around one 2100 wherever. I don't remember exactly where it was. I think there was a narrative that for some reason, it got looped into the software as a service. For some reason, software names were being hammered because people were saying, hey, I can do all of these applications on my own without the need, for paying for an expensive subscription. A lot of people can do that, but some people might find it just easier to use, use their software provider. A big deal that happened last week, maybe underreported. I think CRM teaming up with and for to do I think it's called Claude force is a kind of a new model. They're burning out, which is kind of like an easy way to get into it, an easy way to use this compute and use their software. Yeah. For Palantir. I thought it was kind of a no brainer. I don't know why it was so low then. The valuations, were just much better than when it was, where it is right now. And I, I want to lessen some of right now than it was. And then I was a few months ago for sure. What's a popular stock or part of the market that you wouldn't touch at these levels aside from space? It doesn't sound like you're interested in space theory either. I think I could be I could be sold on space six. I just need more time to kind of understand the technology and, and the future. But yeah, I think right now I'm, I love a lot of the, I love the inflation play, but I'm a little cautious on energy right now. Just because oil is so volatile, it can go up and down. But I am, I am, short term and medium term believer that inflation is going to run a little bit higher than expected. Maybe while economic growth is also higher than expected, I think that's going to be a trade off. The fed is going to allow us to have. So yeah, I am, but I am said that there's just a lot of volatility in the energy, space. I would think I would just avoid that and look for maybe some other metals, to to play the inflation game. What would you buy today that has nothing to do with I. It's interesting you say that. I think that everything is just and is is touch with everything. Everything is included. You think about banks. Maybe that has nothing to do with AI, but it does. Are you there? Of course. Using it and becoming more productive, I think about, I, you know, traditional, transports. You would think that has nothing to do with that, but of, you know. All right. And maybe let me rephrase it. Okay. What would you buy today that isn't a tech stock? Isn't a tech, so. Yeah, so I do I do like, a lot of value stocks. I do have, you know, I, I'm allocating a lot, in my portfolio, for them, I, I have a large, a large allocation to very traditional, techs, like the famous one with the very famous investor, which will be passing on, in very shortly, a very big, Berkshire position and I. Yeah, I, I'm a big fan of his stock selection, big fan of, his process. And yeah, I think, there's a very, very valid place, in portfolios for that in that. Yes. That has a lot less to do with technology than, some of the other spots in my portfolio. But I do think it's, a core component which should be held by, by retail. And you also talked about adding downside protection to portfolios to prepare for what could be, seasonally weak September. How can the everyday retail investor do that? Yeah. So I think, very simply the way that I invest is, I have a long term view, that I think the stock market is going to be higher over long term, maybe a ten year horizon. I'm very confident stocks will be higher. But I also know that within that horizon there's going to be some volatility. We're going to have ups and downs. And that's kind of measured with volatility index. And the VIX. People may get confused. They think of the VIX and say hey this is something that I can just buy and all that. I can own plots or I can buy mixed futures. And that's just another staple investment. I I think that's the wrong approach to it. The way that I do volatility is that as opposed to stocks that have a long term expected value, the expected value for volatility for me is that it will return to the average. And that simply means when it's too high, it probably should sell it, get out of it, but it's too low. It's probably time to buy some of it. So it'll go back to the average. Right now I think it's on the low end. I think it's time to be, putting on some protection, and anticipating, returning to the average. So some near-term weakness. But by your end, do you think this is a market the higher. Yeah absolutely. Do I mean, someone's going to happen, you know, even on a timeframe of four months now, you know, I can't really predict it, but I do think base case, I do think, the the push will be higher, and it's just coming from the enormous amount of capital being spent by, the largest companies in the world. And this this is in government spending. This isn't, you know, this isn't just a stimulus bill. This is like real capital being put to work by the largest companies in the world that have, a handle on what's profitable out there. So, yeah, this money is going back into the economy, and I think that will push everything higher. Would a rate hike in September change your bullishness at all time? It would dampen my bullishness. I think it would make things harder. It would make valuations a little bit tougher. But it would I would still be bullish. I think it would just mean and it would just slow down the rate of growth instead of eliminating the growth. Okay. All right. I think this is a great time to pivot to our rapid fire round of this or that. Quick questions, quick answers. No hedging. You've played before. Are you ready, Joe I'm ready. Here we go September buying opportunity or trouble ahead. Buying opportunity VIX at 15. Calm or complacent. Complacent. Hold cash or deploy it. Deploy by strength or by weakness. By weakness tech or the rest of the market. Really depends I'm going to lean tech, but it's it's 5050. Big tech or small caps. Big tech. Alphabet or Amazon. Alphabet. The biggest risk to the market. Inflation or slowing growth. Slowing growth. But inflation can do it. That's just the push pull. But yeah. Six six months from now higher or lower market. Higher. Finish this sentence quickly. The next buying opportunity will come when? And the next time any any dip any, any overreaction to, off. See, Chinese news about a new model, overreaction to, valuations being too high or. Yeah, an overreaction to tech stocks. And is is the simple answer. The first thing I should do when volatility surges is. Look for stocks that are oversold. Look for stocks that are, unfairly beaten down, that are sold just because the rest of the market went down. But their financials and fundamentals remain strong and had no business being a part of the selloff. The most crowded trade in the market is It was it was the memory stocks. That was that was the crowded. Too crowded I mean maybe chips are still very crowded. I will also say. The most underrated part of the market is. Still software. Software got ahead of itself. I think the recovery here, I think software names, look very good to me. One software, a name that look good. One software name that looks good to you is Palantir. That's that's one of my best. The biggest weak spot in the market is. The. Yeah. The there's a push pull on debt. Whether or not this, this we're overspending on the on the short term, I think, I think the weak spot will be, the need for anthropic and OpenAI have successful IPOs. The I stock investors are overlooking is. Yeah. Are we overbuilding? Are there too much debt? Is there too much compute? Are we going too fast? Too soon? You can look back. Sorry, this is going to be a long answer. Can I give it? Yeah. No. You know, the I stock investors are overlooking is. Yeah. Is it, Or are are these companies overbuilding? Are we investing more than we need? Is there one name, though, that you think that Wall Street isn't paying enough attention to? Yeah, I don't have. I don't have a good name. I, I, I know that Wall Street's paying a lot of attention to it, but I'm very curious about Oracle. I'm watching it closely. I know it's it's very closely analyzed. I know that they maybe they're paying too much attention to it, but I, I'm, I'm just scratching my head with right now with why it doesn't react the same way as some of the other companies. So curious on Oracle means that you're interested in it or you aren't. I'm interested in it, but I yeah, I, I'm not currently in it. I'm just just watching it, like, software names had a big bounce. They didn't really respond. They, I'm curious. There's there's something going on there where there's a bigger there's a bigger emphasis on their balance sheet. Bigger, bigger concern for them than some of the other companies. Okay. We'll leave it there. Joe Tigay, portfolio manager. Rationale, equity armor fund. Always a pleasure. Thanks so much for joining us. Thank you for having me. If you enjoyed this street talk check out our full interview with Ben Emons. He says a rate hike is likely in September and explains how to position for it.