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’In a blue wave scenario, high yield muni bonds could win twice’: chief economist

Michael Darda, MKM’s Chief Economist and Market Strategist, joins Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland to discuss his thoughts on the market and how it will continue to price the upcoming November election.

Video Transcript

JULIE HYMAN: Let's talk about what all of this means for the markets. Of course, we have been, and we continue to, and we will after the election happens as well. Michael Darda is here to help us do that. He is MKM's Chief Economist and Market Strategist. Mike it's good to see you. Thanks for being here. You're looking at some potential ways to play the election. Some specific ways to play the election. One of the things that you're looking at, high yield muni bonds. Talk to me about why this is an area that might benefit.

MICHAEL DARDA: Absolutely, well thanks for having me on. Let me just say at the outset, I think regardless of the outcome of the election, the business cycle recovery almost surely will continue. And the bull market inequities that's been under way since late March almost surely will continue.

So I'd just like to start with that. All of that said, the complexion of post-election stimulus will be somewhat different. Depending on whether Trump is reelected, or Biden gets elected. And in a blue wave scenario, which is what the consensus expectation is now if you follow the polls, you would probably have a situation where high yield muni bonds could win twice. First from a multi-trillion bailout, or aid package, to state and local governments. That's been a sticking point between the administration and Congress recently. And secondly, muni bonds will tend to get more attractive if tax rates move up. So high yield munis could actually win twice in that scenario.

BRIAN SOZZI: Michael hit us with three reasons why you think the bull market will continue. I would argue that's the contrarian point right now.

MICHAEL DARDA: Yeah well we've certainly had a bit of a pullback in risk assets focused on the stock market, in particular. Recently as new case counts have been surging, you guys were talking about Europe going back into lock downs. But I think that the tolerance for lockdowns in the US is just not there now. So that's probably unlikely unless things take a real dramatic turn for the worse, relative to where they already are. And we've had a bit of a setback.

And so the recovery could ebb and flow. But I think post election you're looking at another round of stimulus either way. The Fed is focused like a laser beam on supporting the recovery. And so I think that makes it more likely than not that the business cycle upswing continues, even if it's somewhat slower. And the bull market continues even if we're dealing with a bit more volatility along the way as we have recently.

JULIE HYMAN: And so Mike, if you're looking ahead then past the election, what's going to be the next determinant of whether that bull market can continue? In other words, if you're not looking at fiscal policy, is it going to be what happens with the Coronavirus pandemic, and the vaccine, et cetera? The Fed doesn't seem to be changing what it's doing. So what's the next sort of wild card, if you will?

MICHAEL DARDA: Yeah absolutely, so we basically have three major variables to control for here. One is obviously fiscal policy. We know that's in suspended animation now. And we had a lot of fear that as the partial expiry of fiscal support started to hit the economy in late July going into August, that we would potentially face plant the business cycle. But that didn't happen. Growth continued anyway, that's a very good sign.

Probably no surprises at the Fed this week, we know what they're doing. So that leaves the pandemic, and we've recently gotten some worse news on the pandemic. But we also had a spike in July. A bit less severe than what we're dealing with now, but the recovery continued even with that spike. So that's my working hypothesis going forward. But the case counts moving up, and the virus getting worse now as we move further into the fall, is the clear risk factor of those three variables.

MYLES UDLAND: Mike just thinking about this idea of the economy being in an early cycle of a new phase, and also perhaps the market itself being in the early parts of a new bull phase. And kind of bringing this back to how investors were thinking about '09 and 2010, and the denial I think a lot of folks had in that time. Around what was indeed happening in the economy. Are you seeing that play out in your conversations with clients today? Or are people maybe quicker to understand that, yes things are quite tough on the ground today, but the market is looking at certain dynamics. The Fed is playing a certain role, and all those features are certainly bullish I think for the market, and positive the economy.

MICHAEL DARDA: Yeah no doubt about it, I think that's a really important set of points. So I think the market recognizes what's going on, which is that we had a very quick brutal bear market. Followed by a V shaped recovery in the stock market. And then there was this perception that, oh it's a K shaped recovery because the business cycle is still headed south. But within a few months we started to see the business cycle turn, and at least so far, the upswing has been much stronger than anticipated.

But based on my conversations with institutional money managers, I'd say there's been a tremendous amount of skepticism and pessimism all the way through. From May when the data started to turn straight through into, now we're getting October data as we move into November, high high levels of skepticism on the part of professional money managers. And that's probably bullish if you're thinking that the equity market is likely to continue to upward here.

MICHAEL DARDA: Finally Mike, I want to ask you about Bitcoin. [INAUDIBLE] in your note as well. And you know I've become sort of cautious about asking people about Bitcoin. In part because it doesn't seem to correlate to anything really. It's done very well this year, but you think maybe it could also do well?

MICHAEL DARDA: Yes so aside from high yield munis, if we think about what asset classes might get a bump from a blue wave, Bitcoin might receive a bump. In the sense that if tax rates are expected to rise in the future, then the wealthy might be looking for vehicles to shelter and hide assets. And Bitcoin would be one of those vehicles. All of that said, as you referenced, Bitcoin is a super volatile, super risky, asset class.

And so invest at your own risk, number one. Number two, there are no guarantees. And who knows where Bitcoin actually goes. But because it's a vehicle that would serve to hide assets, I think in an environment where you do have a big political change in tax rates expected to move up, you could make the case for it. But I would just say, for retail investors in particular, be careful.

These super highly volatile vehicles should be only a very, very small part of your portfolio. Also be wary of anything that's on late night infomercials. Typically the folks pushing Bitcoin are talking about hyperinflation and the monetary system collapsing. If that's why you're buying it you're buying it for the wrong reason, in my view.

MICHAEL DARDA: Yeah and I know if we have the taxi indicator anymore, when your taxi driver is asking you about it. Because we're not in taxis so much anymore.

JULIE HYMAN: No doubt.

MICHAEL DARDA: Maybe there are other replacers for that. Thank you so much. The late night infomercial one, for example. Michael Darda, MKM's Chief Economist and Market Strategist. Thank you, appreciate it.