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The 3 core themes driving economic revival

Kevin Mahn, Hennion & Walsh CIO joins Yahoo Finance Live to discuss how the pandemic is impacting investors stock portfolios and the outlook for economic recovery in 2021.

Video Transcript

JULIE HYMAN: Earlier on we were talking about where we are in the economic cycle, that is presumably we're at the beginning of an economic cycle still, after we saw the markets bottom a year ago today and a lot of stimulus being thrown at the economy, economists have been ratcheting up their forecast for growth for the full year. What does that mean for you as an investor, let's bring in Kevin Mahn to talk about it. He is Hennion & Walsh CIO, and Kevin Mahn, you're looking at the idea of economic cycle investing. So in your estimation where are we first of all in that cycle?

KEVIN MAHN: Sure. And today does mark the one year anniversary of when the market did touch bottom during the initial phases of the COVID-19 pandemic and has since rallied over 75% from that bottom, leaving many investors to question where do they turn for growth oriented opportunities. And I think you need to look at the economic cycle not only that we're in right now but where we'll likely be for the next few years. And that's during an expansionary phase.

Certainly the initial recovery has taken place throughout the third and fourth quarter of 2020. Now we believe we're entering in a multi-year expansionary phase and historically certain sectors and certain asset classes have benefited from those expansionary periods when credit conditions are improving, there is more accommodative policies, whether that's from the Federal Reserve or from the federal government as we're seeing in both cases, unemployment's coming down, GDP is rising, that's where we are right now. So investors can take advantage of those opportunities if they are looking for growth.

BRIAN SOZZI: Kevin, what stocks are you buying on pullbacks?

KEVIN MAHN: Right now I think there's a lot of attractive areas to look at because of those pullbacks. We still believe that there are three core themes that will drive the new American economy coming out of COVID-19, Brian. They include technology, not necessarily the larger cap mainframe providers of technology, but those smaller cap disruptive technologies.

We still like biotech in this environment. Unfortunately, there's many more rare and chronic diseases that we still need innovative health care solutions for and typically they come from biotech. Then e-commerce is not just a fad, in fact, it's here to stay and many estimates say that one of every four purchases will be done online by the end of 2023.

So those are opportunities. But I think, Brian, you still go back to those areas that could benefit during an expansionary phase, global equities, US equities, specifically the sectors of communication services, consumer discretionary, industrials, financials, and even once again technology. And then on the fixed income side-- and this is for growth not necessarily for current income opportunities-- but asset classes such as convertible bonds, senior loans, and high yield bonds generally do well as credit conditions improve and as the economy grows.

MYLES UDLAND: You know, Kevin, you've been around the block, you've seen a couple of worries about inflation come and go, and inflation has pretty much been on a downward trajectory throughout your career. Does this feels different to you at all or do you kind of see it the way that Powell I think does, where we're going to have an inflationary impulse this year but we are likely to head back to that you know, let's call it broadly disinflationary environment we've been living in for a couple of decades now.

KEVIN MAHN: Right. Great question, Myles. And we have to remember that the Fed is trying to reflate the American economy. They're promoting inflation and they told us that in all likelihood they will allow their target inflation rate of 2% to be eclipsed and stay above that level for some period of time up until the point in time when the economy gets closer to that 3.5% unemployment rate where we were in March of 2020.

So investors need to be cognizant of the fact that we are trying to inflate the economy. And there are asset classes you could turn to to help take advantage and hedge that inflationary risk, such as equities. And of course on the income side, if you're looking to live off the income that your investments provide regardless of inflationary pressures, you could still rely upon the income from single issue bonds and if you hold those bonds to maturity, in most cases, you're getting your par value back. So you need to put it in the proper context of what your objectives are and what type of economic outlook we're in and that's for a reflationary period that's accompanied by an expanding economy.

JULIE HYMAN: Kevin, when we've talked over the past couple of years really, you've had sort of a long standing thesis about the next industrial revolution as I recall. So you were investing in things like 5G and AI. Where does that stand, I mean, you're telling us you're talking to us today about stuff to rotate into, are you rotating out of or at least lightening some of your positions in some of those long standing holdings that you would have?

KEVIN MAHN: We are not. In fact, I know there are three big rotation trades taking place thus far in 2021, those being from large cap to small cap, from growth to value, and slowly from US to international. But I still believe there are opportunities, long term growth opportunities in those disruptive technologies that you speak to.

And if and in all likelihood, it appears there will be a new infrastructure spending bill, 5G will be a component of that. So communications services is one sector that we like for both an expanding economy, in addition to a sector that benefits from infrastructure spending. So the need for disruptive technology certainly doesn't go away in the new American economy, you just have to find the right appropriately valued names.

BRIAN SOZZI: Yeah, then we're coming up against the opening bell here on Wall Street, Leatherback ETFs. That's a pretty interesting name. Leatherback ETFs ringing that opening bell to kick off trading this morning. Kevin, you sound to me like a guy not too worried about a potential third wave of COVID impacting markets, why is that?

KEVIN MAHN: I don't know if I'm necessarily not worried about it. But I am confident and optimistic that the global rollout of multiple vaccine candidates will help the economy to open perhaps much quicker than anyone earlier anticipated. And I certainly was encouraged to see the comments coming out of the FOMC last week, when they suggested that economic growth over the course of the next year will be at its highest rate in the last 40 years. Granted, that's off of a dismal first and second quarter of 2020, but that's very encouraging.

And the fact that they also indicated that they believe unemployment will fall from its current level of 6.2% to 4.5% by the end of this year, and ultimately back down to 3.5% by the end of '23, that's encouraging. So I'm trusting that the vaccine rollout will be effective and ultimately that the economies will open much quicker and that these accommodative policies that are in place will help the economy continue to grow and expand for multiple years.

JULIE HYMAN: All right, so that economic cycle investing. This cycle lasts for a while. Kevin Mahn, Hennion & Walsh CIO. Thanks so much. It's great to see you.