John Petrides, Portfolio Manager at Tocqueville Asset Management, joins Yahoo Finance’s Alexis Christoforous to discuss the accelerated decline in stocks.

Video Transcript

ALEXIS CHRISTOFOROUS: For more on the markets now, I want to bring in John Petrides. He is portfolio manager at Tocqueville Asset Management. John, good to see you. Look, if there is nothing new coming from the Fed chairman today, I mean, he's basically reiterating what he's been saying. They're going to do all they can to keep the economic recovery going. Don't expect them to hike interest rates any time soon. What's happening here? Is the market just not believing him? Because we've got an aggressive sell-off today.

JOHN PETRIDES: [AUDIO OUT] of financial news headlines, starting with the Fed. And the fact that Powell has been very dovish-- didn't say anything here to even caution that the economy is recovering and the need to taper from QE is possibly on the horizon, is really interesting. And the fact that he even used that inflation could be considered transitory is unbelievable. That's usually a term, in my opinion, that the Fed uses around when oil prices and commodity prices rise to discuss inflation.

But here, the market is having a crisis of confidence with Powell and the Fed, in my opinion, saying that the Fed's got its head stuck in the sand, and the economy is moving out faster than expected. And inflation is going to be a bigger issue. And the Fed may have to jam its foot on the brakes sooner rather than later in terms of QE.

And then, obviously, on the other side, you touched on it with OPEC, the fact that OPEC has-- did not increase production and kept things status quo. You're seeing the spike in oil. And look what it's doing to consumer stocks. You know, consumers just trying to rebound and get its head above water coming out of COVID. And then if it has to deal with higher prices at the pump, that will act as a further tax on consumer spending. So you're seeing some concern there.

And then, obviously, tomorrow, we have the big jobs data. And this morning's jobless claims was better than expected. So if tomorrow's jobless claims is better than 175,000 analysts' expectations for new jobs, you're going to have more potential inflationary pressure and the market really concerned about if the Fed is missing this train, go right by them.

ALEXIS CHRISTOFOROUS: I want to get back to this idea of a crisis of confidence in the Fed right now, John. Because what would investors want to hear from Jay Powell that would calm their fears about these rising rates we're seeing in the bond market and the fact that inflation is starting to heat up? What do we want to hear from the Fed?

JOHN PETRIDES: Well, you know, this is very different-- this recession is very different than 2008 and 2009 because we shut the economy off by flipping the light switch with COVID. And now we've turned it back-- we're turning it back on. With 2008, 2009, we had to delever out of the economy. We had to regulate the banks. We had to get out of a heightened crisis.

So the Fed had more visibility and time. Here, this is a very different story because when the vaccine rolls out, the economy is running significantly faster than what would happen in the past recession. So the longer that the Fed waits with its tapering program and getting out of QE, the harder it's going to have to do when inflation comes.

So I think that's what the market is concerned. I think the market would like to hear the Fed start acknowledging that the economy is beginning to turn a little bit, acknowledging that there are more vaccines in distribution and more of the country has been vaccinated. And that will lead to economic growth.

And listen, the Fed's buying $7 trillion in assets to its balance sheet, double what we did in 2008 and 2009. So it's got to really come off a high measure. Oh, and by the way, we haven't even gotten the new $1.9 trillion stimulus package from the government yet, which is on deck to come through. So I think the market would like to see the Fed acknowledge that inflation forces are going to be-- could be more than what they're currently anticipating.

ALEXIS CHRISTOFOROUS: Right, so you're saying that that stimulus that has yet to come to market is even more inflationary. So if that's going to be the backdrop and interest rates are going to start creeping higher there in the bond market, what do you do with investors' portfolios? Where do you start rejiggering things, John?

JOHN PETRIDES: Yeah, it's a good question. We still think that in our enhanced income strategy, having more yield in the portfolio from non-traditional sources of income is still the way to go. So, high dividend paying stocks, REITs, Real Estate Investment Trusts, master limited partnerships, which are getting a bump today from the price in oil, fixed to floating rate preferred stocks, fixed to floating rate bonds, entities that can get you more yield, but have protection against the rising interest rate environment, is where we think investors should be positioned in today's environment.

I mean, you're seeing what's happening. Look at the major indices between the NASDAQ, the S&P 500, and the Dow. There's a reason why the NASDAQ is underperforming the most, the S&P second and the Dow. And it's mainly because those-- NASDAQ and S&P have more growth and more tech-oriented stocks. And when interest rates go up, that's bad for stocks from a discounted cash flow standpoint. And we know the growth-- we know the outperformance that growth did to value in 2020.

So, growth stocks are up 38% in 2020, with value stocks up 2%. So you had a massive outperformance. But that was in an environment where there was no expectation for the end of QE. Now perception has changed, and now the market is focusing on valuation on those stocks. This is not a fundamental story. This is all about valuation.

ALEXIS CHRISTOFOROUS: I want to ask your thoughts on tomorrow's jobs report. If it comes in stronger than expected, do we get a sell-off because good news is going to be bad news for the market in that they're going to-- investors are going to expect the Fed to have to get aggressive sooner rather than later?

JOHN PETRIDES: I think in the short term, that will be the case. If we're in line or weaker than expected, I think stocks will rally again. If it is better than expected and significantly better than expected, you could have, in my opinion, possibly a repeat of today. And now, this tees the Fed up for their March 16th, March 17th meeting, where many are anticipating that they'll execute Operation Twist, which the Fed will buy longer dated bonds, bring down yields, which have risen on longer dated, and sell short-dated bonds to sort of flatten out the curve.

So that's where I think, in my opinion, things could be headed over the next couple of weeks. But bottom line, fundamentally, the economy's improving, and fundamentals of businesses are great. I mean, Wall Street companies, publicly-traded companies, had a great earnings season relative to expectation, and that's still going in the right direction. This is a function of where interest rates are relative to valuation.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. John Petrides of Tocqueville Asset Management, thanks so much for stopping by today.