What a Biden presidency means for the economy
RiverFront Investment Group Head of Global Strategy Doug Sandler joins Yahoo Finance Live to discuss how a Biden admin will influence markets and economic recovery.
MYLES UDLAND: But let's talk a bit more about what's going on in the markets and specifically, how policy could be shaping the economic outlook in the year ahead. For more on that, we're joined by Doug Sandler. He is the head of global strategy over at RiverFront Investment Group.
Doug, it's good to talk with you once again. So let's begin with the policy right now. As we enter 2021, we have an economy that is continuing to recover, but I think some uncertainties, not only with respect to the outbreak in the virus, what happens on the fiscal side, and what a Biden administration is really able to get done as they get their policy agenda under way?
DOUG SANDLER: Yeah, while there's still uncertainties on the horizon, I would say that the uncertainties have certainly gotten lower. And market like certainty. The market will trade with a higher multiple when you get less uncertainty. So, you know, the two big issues are the election, and the second is COVID.
On COVID, it's pretty simple. The market has looking beyond the current wave and knowing that there is a light at the end of the tunnel. Right now, that's three vaccines. There are multiple vaccines that remain in trial, so we expect more good news there. And then on the election, it's sort of a best case scenario in our view, which is, you know, you have a divided government, which means checks and balances will be in place. And you're likely to get more of the same, with probably a little more friendliness on foreign policy.
JULIE HYMAN: Doug, what do you think-- if those were the two big risks that are now sort of winding down, what's the next big one? What's the next big unanswered question or area of uncertainty that you think investors are going to be focusing on?
DOUG SANDLER: I think the big question is whether or not the government has built an effective bridge between where the economy was pre-COVID and where it needs to be after. And I think the easy answer there is it looks like they've done it. And I think the nomination of Janet Yellen is a great example of how we're going to see more of the same in both fiscal and monetary policy-- is in for a penny, in for a pound.
So, you know, they've said they're going to build the bridge. Now they're just going to continue to do it, kind of no matter what the economy brings. So I think that's the risk, but I don't see it as a big risk, because I think you we've seen the actions of both the Fed and in Congress. And they're going to continue to build that bridge.
BRIAN SOZZI: Doug, staying on Janet Yellen as potential Treasury Secretary, is she the type of pick that warrants a higher valuation multiple in the markets? This is something Myles wrote about in his Morning Brief newsletter this week-- really, that valuations are at record highs, but is that the type of pick that takes the S&P 500 over 4,000 and keeps it there?
DOUG SANDLER: Which is a safe pick. So I think we know-- we know exactly what and going to deliver, which is, you know, more of the same. I think Mike-- Myles and your last guest really said it well. He said, look, now you have a double barreled shotgun of liquidity, right? One from the Fed and one from the Treasury.
So if you're worried at all that we're not going to-- the government isn't going to provide that sort of priming the pump, the bridge, or whatever you want to call it, then I think you can put those worries to the side right now.
MYLES UDLAND: And Doug, when we talk about concerns over valuations or sort of where they go from here, obviously rates are a big part of that. And we've seen some steepening in the Treasury yield curve of late. If you own bank stocks, maybe that's good news. But the Fed's been quite clear that know the effective funds rate is going to be at 0 for several years. How do you see yields evolving? Do you see further steepening in the yield curve? And what could that do to equity prices as that discount changes?
DOUG SANDLER: Well, I think yields will stay low. I don't see inflation on the aggregate level, which is ultimately what dictates yields. So I think yields will stay low for long. I think we're talking about 2023 as sort of the Fed guidance, which means, you know, if you're looking for your money to grow, there are very few alternatives. And it's one of the reasons why I think the market just keeps moving higher.
But even if-- you know, even if we look at markets right now-- I'm looking at S&P at 3,600-- you know, the view is that we're going to do 164 or so in earnings next year. That equates to a 22 earnings multiple. If I reverse the math and come up with what they call an earnings yield, which is just simply dividing 100 by the earnings multiples of 22, I get a 4.5 earnings yield. An I try to compare that to where else can I find that in the market, and there's very few places.
And that's the US-- the most expensive market around. I can look internationally and find a lot cheaper alternatives. So I think for the time being, we're going to see the equity markets grind higher, bond markets sort of stay and sit there. And if you need your money to grow, there are not a lot of places you can go.
JULIE HYMAN: So Doug, does that make your job easier or tougher? In other words, do you just buy stocks and forget about it? Or are there places that you actually think we're going to continue the outperformance? I mean, you know, obviously, this year has continued to be dominated by the FANG stocks. Is that going to be the case going into 2021-- and obviously there, we have the opening bell ringing there. Doug, what do you think?
DOUG SANDLER: Yeah, Julie, think that's a great crash question because I don't think it's whether you should be in or out of the market. I think the real question is what leadership looks like. So you identified it right-- it was the growth stocks that led for the last 12 years. And now the question is, are we going to see those big cyclical companies, the ones that benefit from an economic tailwind? Are they going to be the next source of leadership?
And I think that question is sort of still hanging out there. I think they're getting the tailwind of economic recovery from pent up demand, from the economy likely to reopen after COVID. But whether that's going to be sustained is still an open question. My view is you want to own growth in rent, cyclical, and value. And now's the time to [? rent ?] a few more of those companies. We've been doing that in our portfolio, adding a little bit more of those cyclicals, value, maybe even some small cap and international. But those may be temporary. I think you still want to own those growth companies.
MYLES UDLAND: All right, Doug Sandler, RiverFront Investment Group. Doug, great to get your thoughts this morning. Thanks so much for joining the show.
DOUG SANDLER: Thanks, Myles.