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The question is what does the vaccine do for the economy and the markets: Brigg Macadam Founding Partner

Greg Swenson, Brigg Macadam Founding Partner join the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: I want to shift our focus over to the market action what we've seen play out. Of course, November was the best month that we saw since 1987, largely, in part, due to the fact that we got so much of a positive vaccine news in that month. So as we are continuing this discussion about the rollout of the vaccine that should come in mid-December, I want to bring on our next guest to chat what markets should be bracing for. Greg Swenson is Brigg Macadam founding partner. He joins us now on the show.

And Greg, I mean, we've been talking about how strong November was. But when you shape up expectations for December, it's a big question of which sectors, which stocks, which-- you know, which growth part we should be expecting here in year-end. So how are you seeing in all shape up when we discuss this rotation from growth over into cyclicals? What are your expectations?

GREG SWENSON: Yeah, Zack, I think we'll see more of the same, frankly. The rally that we saw in November where there was a much greater breadth, a much wider range of stocks that were participating or contributing to the gains, I expect that to continue because they're still relatively undervalued. If you look at the financials, for example, you know, they're only trading at 16 times, versus the five-year average of 14 times, whereas tech is at 29 times versus 19.

So look, I think they're still relatively cheap, compared to the rally in tech, and I think I'd expect that what we saw in November to continue. And I think you'll also see a shift-- not only, you know, a rotation, perhaps, out of tech into the more cyclicals, but also in the small caps. I mean, you mentioned, Zack, the Dow had the best month in 33 years. But if you look at the-- you know, the Russell, you know, you had a massive rally-- 18%, that's a record-- so, you know, as well as the S&P.

So you know, look, I expect that trend to continue. And then the real question is, you know, what is-- what does the vaccine do for the economy, and what does it do for the markets? Obviously, it's great news for the real economy. The question for the markets, is it already priced in? Is there just too much good news priced in?

AKIKO FUJITA: So let's pick up on that point you made about Russell 2000 because it's certainly an incredible rally in November-- as you point out, the best month on record. How are you playing that space, specifically? How do you think investors should be looking at some of the small-cap names? Where are you seeing the opportunities?

GREG SWENSON: Yeah, I-- you know, look, I think, you know, small caps, obviously, you just want to spread out your risk. You don't want to go-- I wouldn't recommend any particular small-cap stocks, but I'd try to run on a couple of themes. One is financials. The other is energy, for sure. And then, of course, food security, anything around food security and critical infrastructure and I think there's some opportunities in mining. Not necessarily in gold right now-- you've seen a pullback in gold. But I think if anything that's around solar and wind energy storage, as well as electric vehicle storage or batteries-- so anything that you-- where you can leverage the inputs going into these critical infrastructures, as well as electric vehicles.

So you know, I think there's some opportunities. There are some small caps in that space. And I think I would try to stay away from the big-tech names but try to leverage the opportunity in mining and energy.

ZACK GUZMAN: Yeah, and we've also been-- we've been hearing about-- you raise the idea that some of this good news might be priced into stocks. We got the warning from Citi in their kind of reading on the S&P 500, saying they could have overshot here. Their metric there, the last time that they saw it flagged as well was right before that 9.4% slump we saw back in August. We're seeing shares of Zoom trade lower today, even despite beating expectations there, still concerns that the rally is over now, when we think about returning back to the office.

So talk to me about that and where we sit here now, how you square it with also some calls to see the S&P 500 well above 4,000 into next year. So how do you square these things? Is it just kind of some short-term chop here before we return back to pre-pandemic levels of the economy chugging on all cylinders?

GREG SWENSON: Yeah, again, I think I'd stick to the names or the sectors that have lagged. You know, look, the stay-at-home trade I think is essentially over. It doesn't mean sell all your big-tech stocks. You know, there are still really good stories, in terms of growth. But I think you have to be careful.

You know, as I said, a lot of this news is priced in. You still have some runoff elections in Georgia in January. You've got, you know, potential tax increases that could be a headwind to the economy. You've had massive debt issuance this year, $9.7 trillion from corporates and sovereigns, and a pretty dramatic tightening in credit spreads.

You know, I always try to keep my eye on credit spreads and the credit markets. You know, in some ways, that's a good sign that risk is back on and high-yield spreads have come down from 10% back in the beginning of the pandemic to around 5% now. So they're back at, you know, summer of '19 kind of spreads.

But you know, too much optimism can be-- you know, makes me a bit nervous. Again, I don't necessarily think you should, you know, sell or-- you know, or short, for sure. But you know, you've got-- you know, October, the sentiment was 43% bearish and 26% bullish, and that's flipped. Right now, it's 47% bullish, 27% bearish. That makes me a little nervous.

You've got the newsletters, 2/3 of the newsletters are bullish. That's the highest since January of 2018. And you saw a pretty dramatic sell-off in equities at that time, or after Jan of '18.

The other metric I look at is the VIX. You know, the VIX is back down to the-- you know, to 20, roughly. You know, that's not too much higher than the lows before the pandemic hit when it was in-- you know, trading anywhere from 11 to 18.

So you know, I look at some of these metrics, you know, there's a lot of reasons to be bullish. I especially am bullish on the real economy with these vaccines. You know, it's a testament to the great private sector, the mobilization of the private sector as well as the federal resources.

I know there's more work to do there, as Dr. Hilton was saying earlier. But I think if the rollout is effective, you know, you could see a real uplift to the real economy. But again, with the markets-- the markets have priced that in. Since the first announcement from Pfizer, you know, which was only a few weeks ago, you know, so much of the rally, I think, has occurred. So I would just be a little cautious and be careful going into this.

ZACK GUZMAN: All right, yeah, and all good points there. We've been talking about-- a few of our market guests have raised the VIX, to keep our eyes on that to see if we are going to continue this rally that we've seen here. Of course, we'll see if we can in the month of December-- today off to a nice start. But Greg Swenson, Brigg Macadam founding partner, appreciate you coming on to chat.

GREG SWENSON: Thanks. Thanks, Zack. Thanks, Akiko.