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Another 779K Americans filed new jobless claims last week

Sean O’Hara, President of Pacer ETF Distributors, joins Yahoo Finance's Kristin Myers to break down the latest economic recovery data.

Video Transcript

KRISTIN MYERS: Turn now to Sean O'Hara for more on those jobless claims. Sean is president of Pacer ETF Distributors. So Sean, wondering what your reaction is to those jobless claims figures. It is a nice trend that we're seeing here that they're dropping by more than expected because we had just a couple of weeks ago really been hit by some huge headline figures, where we saw a leap by greater than expected.

SEAN O'HARA: Yeah, Kristin, thanks for having me on. You know, the trend is certainly moving in the right direction. I wonder or worry that it's not moving fast enough. I think as you start to see more leniency and opening things up here in Philadelphia, where I am, they're starting to talk about increasing restaurant capacity. I know New York is doing the same thing. And so that should continue to help that trend.

But if you go back and look at those charts, we're a long ways from where we were. And, you know, that's a troubling circumstance. To me, the expectation is that the economy will be back to where it was pre-COVID by maybe the third or the fourth quarter of this year. And earnings for the overall market might get back there.

However, the stock market itself is up pretty substantially above where it was in 2020. And so, we're going to probably continue to remain in these elevated levels on PE until something breaks, one way or the other, until we have an acceleration of good news and earnings, or until reality sort of takes hold and the market needs to come back down to sort of a normal valuation level.

KRISTIN MYERS: So you mentioned earnings, and it looks like the earnings recession is coming to an end. Do you imagine that the growth that we've seen is going to be continuing in the first half of the year?

SEAN O'HARA: I do, but growth on earnings is a tricky thing because it's relative to what, right? So I'm looking at pure numbers. For 2020, we were expected to have $165 worth of earnings for the S&P, and it opened up the year at around 3,300. You know, that's 20 times. That's not a terribly overinflated number. We're expecting that we're going to get back to $165 in earnings on the S&P 500 by the latter part of this year. But the S&P is at, what, 3,800 and change. And so, 25 or 26 times that number.

And so that concerns me. There's a lot of complacency in this market around valuations based on low interest rates. And there is no place else to go. But history has been a pretty good guide on this stuff. Eventually, we're going to have to revert back to the mean. The, quote unquote, "normal for today" isn't going to be that different from the normal over time.

And so, from an investor's perspective, it's great to have these returns. It's great to have the market up three days in a row, like we've seen. But I think we need to be wary of paying attention to the risk in the market if we don't have a perfect reopening and a perfect recovery, or the numbers come in below where everybody expects for longer.

KRISTIN MYERS: OK, I'm really glad that you mentioned this point because we've heard a lot of folks talking about the investor enthusiasm expectations really running out ahead, valuations being higher than they should be. So are you anticipating some sort of pullback a little bit later in the year, especially, as you mentioned, some of those downside risks around reopening stimulus, for example. What are you anticipating this year?

SEAN O'HARA: Well, I think the news will continue to get gradually better, and that's good for the optimism. The market never goes straight up forever. Corrections are a very, very healthy part. It sort of shakes out the wannabes, if you will. So I wouldn't be-- it wouldn't be unexpected, from my perspective, to see a correction along the way. It's been a while since we've had one. And it's just a natural part of the overall cycle.

Longer term, I just don't think we can stay at 25 times on the S&P and 38 times on the NASDAQ. And so, either one or two things has to give. Either the earnings need to really accelerate up to that valuation level, or the overall level of the market needs to sort of settle down for a while. You know, it could go flat for a while, so that thing's caught up.

But I just think there's-- with what happened with GameStop and all of that craziness, and, you know, the Tesla-fication of overall valuations, it just concerns me a little bit. I don't want to leave the party yet, but I'd be thinking about ways to diversify my portfolio away from some of the high valuation stuff. Not selling out entirely, but owning some stuff that trades at a lower price that has more cash flow, for example.

KRISTIN MYERS: Is that what investors should really start thinking about right now-- reallocations in their portfolio? I'm curious to know how some investors really should be approaching this market, given some of those Reddit-fueled trades.

As you mentioned, we had GameStop. We had silver the other day. You know, we had Elon Musk talking about Dogecoin on Clubhouse. And we saw run-ups in Dogecoin and other cryptos. So I mean, as an investor, how do you manage, right, some of your portfolios knowing that there are these Reddit-based traders out there, making sometimes seemingly random picks on some of these stocks?

SEAN O'HARA: Well, look, I mean, let's just start by saying that what's going on today is not new. There's an old book called "The Money Game," written by a guy under an alias. His name was Adam Smith, the alias. And it talked about how the rumor mill used to drive stocks up so that people could then sell their positions. We just do it faster today and in a more ubiquitous way because of technology.

And so, I look at what happened with that as not necessarily investing, but sort of playing a short-term trading game. Long-term, to answer your question, I think we need to constantly ask ourselves, what are our goals, what am I hoping to accomplish, how much risk am I comfortable taking, what would I do if the market went down 10% or 20% or 30%, and then where am I overextended on my overall asset allocation, and where should I be trying to redeploy capital to things that might have better growth in the future than the things that are really expensive today?

KRISTIN MYERS: So then looking out at 2021 specifically, what sectors are you liking, especially as you say that you anticipate the market at least settling down, maybe even trading sideways for a little bit? If you're chasing some of those returns, those high returns that you saw in 2020, what sectors should we be looking at?

SEAN O'HARA: Well, I just-- one quick example from our fund family, you know, we have an ETF, the ticker C-O-W-Z, COWZ. It's a large cap fund. It's overweight tech, healthcare, and consumer discretionary, which, by the way, the NASDAQ is overweight tech and healthcare. So but you can own that portfolio. It's 100 names that have a high free cash flow yield and pay 13 times earnings and get about a 9% free cash flow yield, compared to paying 38 times earnings for the same basic sectors in the NASDAQ 100 and having a free cash flow yield at, like, 2 and 1/2% to 3%.

And so, I'm not saying completely sell out of the NASDAQ and the tech names. I'm saying maybe we should redeploy some of our capital into those same sectors, but reallocate to lower prices, where we're getting a higher return on our cash.

KRISTIN MYERS: Sean, you mentioned some of the downside risks coming this year. Wondering what some of the catalysts are to the upside, as you see it. We talk a lot about stimulus. Are there any others out there that you think investors are really paying attention to right now?

SEAN O'HARA: I think the two catalysts to the upside is, things get better faster, or the vaccine rollout goes faster. And everybody goes back to work, and the earnings sort of catapult into back up to that level quicker than people expect. And the exact opposite of that is true on the other side. The headwind to the market is that we don't have that quick of a recovery. We don't have a very successful or efficient rollout of the vaccine. And things stay slower. And that trend continues to improve, but not improve rapidly enough.

KRISTIN MYERS: All right, Sean O'Hara, president of Pacer ETF Distributors, thank you so much for joining us today and giving us some of those insights.

SEAN O'HARA: Sure thing. Thanks.