Merrill's Hyzy: Trade War Fears Overblown as 'Buffalo Market' Lumbers On

What about the retail sector?

It's going through a metamorphosis and becoming very nichey and low cost — a value-buying spree on the part of most consumers. At the same time, retail needs to create an experience for the consumer when they buy goods or services — that something is being done especially for them. For example, buying sneakers or athletic leisure[wear] or even cell phone cases. All those can be customized to the individual's liking. So it becomes an experience versus just owning something.

Why did you call the February pullback a "torque correction"?

It was a fast, aggressive, powerful repricing of risk — and that equals torque. We had gotten to valuation levels that were a little too high.

Most people didn't see that correction coming.

Most people don't see 10% corrections coming. There needs to be a real fundamental catalyst that makes a correction last. We just don't see that fundamental catalyst negative enough to have that happen — the correction lasting and then ultimately turning into a bear market.

How long should a healthy correction be?

Usually a correction lasts two to three months. It gives investors an opportunity to reposition portfolios and add to positions that are attractive. That's why we think corrections are normal.

What's your forecast for bonds?

We expect bond yields to start to splinter up. We expect them to be anywhere between 3% and 3-1/4% on the 10-year and another 50 basis points on the federal funds rate. So, for those who have had gains in fixed income recently, we'll be rebalancing into equities. We'll be putting the cash to work in our preferred equity areas, such as large cap U.S. and emerging markets.

But what about pre-retired or retired investors, who are income-oriented?

They're having a little bit longer duration and a higher quality exposure in bonds.

But, generally, bonds are seen as risky right now.

Bond yields grinding higher, which is what we expect, is still a fine environment for fixed income because it represents a hedge on equity exposure. It also produces the cash flow you need. So we think that bond yields going up doesn't necessarily mean that bonds will be in the red for the year.

What areas are you underweight?

One that hurts is bond proxies in the equity market — REITs, telecom, utilities. Also, long-duration assets in fixed income typically underperform in this type of environment. So we're underweight bond proxies in equity-land as well as the more defensive sectors, like consumer staples.

Is now a good time, then, to reposition a portfolio?

Yes. We're doing that now. Areas that have underperformed versus the broader markets, like technology and financials, are attractive to add to.

Do you see continued volatility ahead?

Yes. The volatility we're experiencing right now feels sharper and more painful and abnormal because last year was a record low year [for volatility].

You told me about a year ago that "we need to be realistic at all cost." How are you being realistic now?

Some people think that all that's happened recently around trade, tariff tantrums and the potential for policy change is going to stop economic expansion — [meaning] when's the next recession? But the real economy is humming along and actually gathering momentum. The tax reform package will add about $800 billion to the broad economy. The profit cycle is alive and well. The Federal Reserve is removing the ultra-accommodation and is normalizing policy.

But that last one increases volatility.

Yes, when you have a change in interest rate policy, you always have an initial spike of higher volatility before it settles down to normal volatility, which is exactly what we're experiencing right now.

Is there anything to be concerned about investing-wise by President Trump's attacks on big companies, like Amazon or Verizon?

The most important thing about a company is their current earnings and whether or not future earnings are going to be affected by their normal course of business. What matters most is that the tax-cut stimulus is coming into play, the ability to bring back repatriated capital and the fact that unemployment is down to 4%. We still have an emerging middle class that loves to buy American goods. So what' going on in the real economy — what's happening in the restaurants, airports, stores — everywhere commerce is flowing optimistically.

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