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The biggest risks going into 2021 are the black swan events: CIO

David Bahnsen, The Bahnsen Group Chief Investment Officer joins the Yahoo Finance Live panel to discuss the latest with the markets.

Video Transcript

- The deal on stimulus, of course, is something that investors have been waiting now for months. Taking a look at the market, though, today, we can see the COVID headlines are dominating, with all three of the major averages still in the red. For more on this, we want to bring in David Bahnsen. He is the Bahnsen Group chief investment officer. David, great to have you on the show. Let's just start with where things stand at this point. What's your take on the losses that we're seeing today, and the fact that COVID seems to be dominating the progress on the stimulus?

DAVID BAHNSEN: Yeah, and it's very difficult for me to comment on a 100-point drop after six weeks of a 4000-point increase because it leaves you without a real clear explanation as to causation. I think that this morning's jitters are very likely around some of the COVID headlines overnight in the UK, but of course, those headlines were there all day yesterday, as well, and the futures were up a couple hundred points last evening.

So I think that it is sort of a regular market, just sort of gyrating a bit. It's a bit overbought, and there's some degree of recalibration. But to the extent that people might be wondering if there's some really, really bad news coming on COVID, it doesn't seem to me like 120 points would be the response to it. Energy has been rallying dramatically, and it's checking back a little today. The financials are actually doing quite well in response to the Fed ruling on Friday afternoon. So there's just normal market activity taking place. And it'll be interesting to see how we close out the year.

BRIAN CHEUNG: David, Brian Cheung here. I want to ask you about what's going on in fixed income markets. You kind of rightly point out that, when people are talking about, oh, there might be a breakout in the 10-year yield to 100 basis points, it's still an extremely low-yield environment, but we are still seeing some of those, at least with the maybe selloff muted bit this morning, that people were going back into US treasuries. What does that tell you about the strategy broadly in the market or trying to buy capital appreciation in this type of market?

DAVID BAHNSEN: Well, anyone who's trying to buy capital appreciation won't be buying treasuries. And so to the extent that you get an inevitable movement into safety at different points, sideline money that finds its way into treasuries, there's so many different things that, particularly on the sovereign wealth side, that will move the longer end of the curve. But primarily, where people are going into capital appreciation is US equities, and only US equities.

I mean, even with the incredible return in emerging markets this year and the weakness in the US dollar, you're not seeing the flows into emerging markets equity you would expect. So whether it be fixed income or some of the other alternatives, that, quote unquote, "TINA" trade or perspective on US equities, there is no alternative, especially when the objective might be capital appreciation. That's really the only place people can go.

The issue will be where they go to get it within US equities. And that sector rotation has played out rather meaningfully over the fourth quarter, but would still only be in very, very early innings in our mind. We would be very much in the camp going into '21 that that rotation that's been long-awaited by so many into value and out of really very frothy growth is about to play out.

- Well, David, speaking of that rotation, then, where are you finding some opportunity? Is it on a sector basis, or are you drilling down and really identifying specific names within those sectors?

DAVID BAHNSEN: Yeah, we are very bottom up at my firm. We are dividend growth investors, and so a little bit over half of the 2 and 1/2 billion that we manage are in dividend growth equities. And so that, by definition, that's a very bottom-up formulation. But the truth is, when you're done with your securities selection, you end up with a sector allocation. And the sector allocation right now, I think, is resulting in heavy weights in energy, financials, consumer staples, some of the sectors that you talked about being most vulnerable or weak on a day like today. And we like it that way.

Where we're not finding a lot of value, just in terms of the valuation metrics we use, let alone dividend aspirations, is obviously in the FANG-type names and what we call cool tech, the kind of newer, bigger, shinier objects in the technology sector. Old tech is where you can find really good dividend growth and really good value. Intel is very, very cheap right now. Broadcom has had an incredible run. We made over 100% on Broadcom this year. But even then, it's still yielding well under the 3s, and had been an over 4% yielder. That's hard to find in technology right now.

BRIAN CHEUNG: And David, it sounds like, if that is an endorsement of maybe a value play right now, what's the time horizon for that? Obviously, a lot of people can't even imagine the world in 2021, 2022. If you are making those types of plays, how long are you designed to be holding those if you're making that play?

DAVID BAHNSEN: Yeah, I'm probably the wrong guy to ask that just because we're not-- it's not a play for us. It's a very secular perspective. We have a permanent bias towards good valuation, and we just recognize that there are certain periods in which valuation becomes incredibly unimportant to investors. And obviously, we've got a chance to see some really great returns in large-cap technology growth because of that.

But no, for our perspective, we want to permanently be invested in companies we think are at good valuation. And we measure that through their cash flow generation and their cash flow growth, and then, of course, the portion of that cash flow that they're going to share with us as investors in the form of dividends. So we are in that trade, so to speak. We will be in that trade well beyond 2021.

- David, taking a longer-term look here at the markets, absent COVID and the stimulus talks, what do you see as the potential headwind here or biggest challenge for investors going forward into next year?

DAVID BAHNSEN: Yeah, it's a great question because I think there's two categories we talk to our clients about all the time. One is the stuff you're really supposed to be scared about, which is, by definition, stuff that you don't know, the stuff I could never answer. There's no way one year ago at this time I could have been forecasting what the COVID pandemic would end up looking like. So I think the biggest risks are always those, quote unquote, "black swans" that therefore are, by definition, unhedgeable, and that you're reasonably indefensible against. And that reality as an investor is why we do asset allocation.

Now, in terms of things we do know about that are just out there, and people have to be aware of and hopefully incorporate into their active portfolio management, I think the risks with China are never really fully appreciated. I think a lot of people just assume, with a new Biden administration, it'll be a rosier relationship with China. I think that presupposes that China is up to good, and I don't think they're up to any good.

So I would always be cognizant of weakness there. I never know if the banking system in Europe is going to stay alive for another week. And so those type of risks are out there. But as you point out, the things with COVID, stimulus, if every single man, woman, and child in America is talking about it, it's probably not the biggest risk in markets.

- All right, David Bahnsen, the Bahnsen Group chief investment officer, great to have you on the show. Thanks for joining us today.

DAVID BAHNSEN: Thanks for having me. Merry Christmas.