Keith Lerner, Chief Market Strategist at Truist / SunTrust Advisory Services, joins The Final Round to discuss characteristics of the market, why he thinks we are in a bull market, and possible election outcome impacts to the market.
SEANA SMITH: Welcome back to "The Final Round." I'm Seana Smith.
As stocks closing higher today, with the S&P just shy of its record highs-- and for more on the stocks' latest news, I want to bring you Keith Lerner. He's the chief market strategist at SunTrust. And, Keith, let's just talk about where we are today at current levels. S&P making a run today for a record high. But I know in a recent note that you said that your base case outlook is that we're-- that we're in a bull market. So with so much uncertainty, what do you think is going to keep this momentum that we've been seeing over the last several months intact?
KEITH LERNER: Yeah, well, we do think we're in a bull market. That's been our call for several months now. I think, back in March, if you would've said we would've been back to the new highs by now, that would have been, you know, unimaginable.
But our view is that so far this market is acting like it does coming out of a major low as far as the pessimism we saw back in March, and then also the momentum of the lows is very consistent. And it seems to-- more specific to your question, what's going to keep it is that if you think about bull markets, they typically happen at the onset of an expansion. And we're just coming out of the worst of the recession.
Our view, the average expansion lasts about five years, and stocks rise about 85% during that period of time. So I think it's just, you know, incrementally better. Economic data will continue to support the bull market.
We're not gonna say that there's not gonna be any bumps in the road. As we get through August and closer to September, we will expect some volatility with the election, China-US tensions. But all in all, the weight of the evidence in our work does suggest we are in a bull market.
MYLES UDLAND: And you know, Keith, it's always kind of an interesting mix-- it's always hard to pin it down. Is this technically driven, fundamentally driven? But I think about the rotation we've seen in the market the last couple of weeks and just the broader character of the market.
In your view, is this a move that's being more driven by folks who are fundamentally bullish or folks that are looking at flows, positioning, the technical setup for the market, and saying, hey, this thing is still in really good shape? Because it seems like every time we go to touch, you know, a resistance point-- boom. We shoot higher, and the bulls continue to have technical control of the trading here.
KEITH LERNER: Yeah, I think the first part about bull markets tend to be driven by liquidity. And, as we all know, Fed chairman recently said, we're not even thinking about thinking about raising rates, so-- and then you have money supply growing at over 20% on a year over year basis. So it's liquidity. That's how bull markets start.
You're seeing a lot of folks over the last few months fight this trend in general, but I also think you're still looking at the relative value trades. You can say stocks are higher on an absolute basis, and it's hard to deny that. But when we look at the work and, say, the equity risk premium or the earnings yield relative to the 10-year treasury, we're still in a bucket, whereas on a 12-month basis, stock returns are pretty positive. So, like I said, it's a combination of factors. But so far, the actual trajectory is the strongest we've seen out of any bull market since 1950.
RICK NEWMAN: Hey, Keith, Rick Newman here, sir, to ask a little more about the Fed. There's a lot of evidence that we would not be in a bull market if not for all that Fed liquidity and the other extraordinary stimulus measures the Fed has put in place. Does it matter-- I mean, can you call it a bull market when it's like a fake bull market and it's not the fundamentals driving it, it's monetary policy?
KEITH LERNER: Yeah, if you look at your account, and the value's going higher, that's real money. So I would call it a bull market. And again, we can talk about this as the most extreme liquidity we've ever seen, but bull markets tend to occur based on liquidity.
And I will say, you know, maybe the Fed's done too good of a job. Remember Warren Buffett said, during his annual meeting, the reason why he didn't purchase more equities is because the Fed moved so aggressively in right away. So-- and I don't think it's just the Fed. I mean, it's obviously global central banks, but the other side-- let's not lose sight of this-- is that earning trends are improving. We just had the best quarterly earnings season over-- in the midst of the best quarterly earnings season-- in over 15 years.
And yes, of course, that's off of very depressed expectations. But analysts overshot to the downside.
And when we look at the market's character, as you mentioned, we have improvement in transports. We're seeing a little bit of activity out of small caps. We're seeing the equal weighted retail stocks-- a new cycle high. So these are things that are sniffing out better economic data in the future in our view.
- Keith, you mentioned that better economic data will continue to support what you say is the beginning of this bull market. And yet it seems like even when we get data that disappoints, the market doesn't necessarily respond to it as strongly as you would expect. It doesn't necessarily lead to a big sell-off.
So I'm trying to understand where you think that the threshold is. I mean, what is the downside risk? What is the headline, do you think, that could derail the recovery we're seeing right now?
KEITH LERNER: Well, I think partly why the market hasn't moved down as much is because we have-- you know, right now there's so much money going to a vaccine. And every week, we're getting headlines, and that's helping support the downside from the market going too far down. So I think if there was significant disappointment on the vaccine or therapeutic side, that's a risk. I think if the earning trends, which I'm telling you is improving, starts to stall out or roll over, I think that is a risk as well. There's always risk.
I mean, you always have to look at the weight of the evidence. And again, when I say it's early stage of a bull market, we're still up 50% off the lows. So it would be perfectly normal.
Maybe we take out these highs and start to consolidate some of the gains. But if you think-- forget about the next 5% or 10%. Where's the next 30%, 50%? And if we are, you know, several months-- or early stage of a bull market, that one that can last multiple years, there's still more upside in our view.
RICK NEWMAN: Hey, Keith, you said earlier you might expect some volatility around the election. Let me just challenge you with a contrary view, which might be that the markets have considered a Joe Biden presidency, and it's fine with markets, even if Democrats win the Senate, because if there are tax hikes, they probably would not come right away in the aftermath of this recession, and that Biden would actually be-- offer more stability with regard to China and things like that. Would you go along with that, or not so much?
KEITH LERNER: No, I want to disagree with you. We've made a point with some [INAUDIBLE] the business [INAUDIBLE] [? signed ?] valuations. What the Fed is doing matters more than who's in the White House. And I would say, this year in particular, whether we make progress on a therapeutic or a vaccine will be more important over the next 6 to 12 months than who's in the White House.
That said, if there's a clean sweep by the Democrats, initially then the market may have a knee-jerk reaction. But after that, I think the business cycle will be more important than that. And I'll just give you an example that I think is helpful is-- in 2013, taxes were raised, and a lot of people were concerned that the market was gonna move down. But instead, we were up 30%.
And then in 2018, we had that big corporate tax cut, and a lot of people were getting bulled up, because earnings were going up a lot. But the market went down about 5% or 6%, and that's because the Fed started to raise rates and pushed back against the economy that they thought was maybe starting to overheat a bit.
SEANA SMITH: All right, Keith Lerner of SunTrust, great to have you back on the program. Thanks so much for taking the time to join us today.
KEITH LERNER: Thank you.