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‘I don’t think anyone gives a darn’: strategist on Trump stalling the new stimulus proposal

Frances Newton Stacy, Optimal Capital Dir. of Strategy, joins Yahoo Finance’s Julia La Roche and Adam Shapiro to discuss her thoughts on the market and how it will continue to price in worries from political and social tensions.

Video Transcript

ADAM SHAPIRO: You know, the markets right now, it's Christmas Eve. There's really not a great deal of volume in what we're watching. Does anyone give a darn today about what we were just talking about, Frances, regarding the President and the stalemate with Congress?

FRANCES NEWTON STACY: I don't think so. I don't think anybody gives a darn. And I don't think that it's going to affect markets materially. I think markets are basically priced in about $2 trillion in stimulus. And obviously, we're not getting that with the $900 billion relief bill. But we know that Janet Yellen and Joe Biden are coming into office. And we know that there's even a possibility that the Democrats are going to take control of the Senate, which all points to more stimulus, which all points to the down-dollar, which all points to more ability for asset prices to increase. So the markets are quite literally shrugging this off.

JULIA LA ROCHE: Let's talk a bit more about that. You're talking about markets are likely to go up in 2021 with this confluence of factors. What about the Fed here and the kind of market dependency on the Fed part of the equation?

FRANCES NEWTON STACY: Well, that's definitely not going to go away. I don't see any meaningful adjustment in the asset purchases because we have to keep the system liquid. And any time you have a record amount of debt in the system, you have to continuously paper over that debt. And they're going to have asset purchases continue because we can't risk having those yields go too high in the face of this debt service.

So even if the yields tick up to an uncomfortable point, you're going to see yield curve control, which is basically more asset purchases targeted along some part of the curve. And that's just the way that we have to do it. The best case scenario is to paper over it. And that's the choice that we have.

And so the Fed is going to be accommodative of that for a very long time.

ADAM SHAPIRO: Let's continue that, because I'm looking at the 10 year today. I mean, the yield is roughly 94 basis points. For the average investor who doesn't look at these kinds of things and the impact that it has on markets in general, what should the average investor pay attention to? Does it matter if the yield on the 10 year goes over 100 basis point?

FRANCES NEWTON STACY: Well, I think we don't know when the Fed will step in. And it's going to be based on debt service. So I think the early indicators for me are what is the time frame of change? So if it just ticks over 1%, ticks up to 1.25% over a really long period of time, I don't think the Fed is going to be that concerned, because they'll be able to monitor the debt service going alone. But if it suddenly spikes, I think you'll see the Fed get very interested in what's happening because they won't have enough time to calculate in risk to the debt service.

And remember, the one thing that can undo all of this is problems in the credit markets. We still have a lot of mortgages and forbearance. And we still have a lot of credit issues where we don't have a lot of data coming in the next year. So that's the thing that they're going to be watching very, very carefully.

So I don't know if they've actually targeted a number to step in. But I think it's going to be about how quickly it rises and how much they can monitor.

ADAM SHAPIRO: If I'm an average investor looking at how quickly that yield rises, that spike you talk about-- that could be coming. This is all speculative discussion-- what's the number I'm looking at? Are we talking about 1.5% say within five months?

FRANCES NEWTON STACY: Well, I think that markets are so anticipatory, I would like to see what happens with treasuries and traders when we get over that 1% mark. If we're pushing up to the 1.1%, do we see an interest in treasuries? And that will be the early indicator that the Fed is probably likely to come in and step on those yields again.

So I think I'm going to look to the trading volume, actually. And I know that's not always as easy for the average investor, but I would definitely watch the long end of the curve. So that's the TLT ETF to see if there's any meaningful upward momentum. Because then that sort of means that we expect yield curve control from everybody who has access to the calculators of what's happening in the credit markets.

JULIA LA ROCHE: You know, it's interesting you just mentioned that as an indicator that you're looking at. And I do like to ask folks, what are the indicators they're looking for and any sort of changes. And I guess if you're talking about the economy, what are the things that you're paying attention to that could suggest that things are slowing down or we're not getting back to the growth levels here, or things that could worry you, data rolling over, that sort of thing. What will you be watching specifically?

FRANCES NEWTON STACY: Yeah, so mainly the US dollar. The US dollar is not completely inversely correlated as it was a bit earlier this year. But it is fairly negatively correlated to markets and the inflationary trade and commodities, and things like that. So right now we've only had a mild uptick in the US dollar. It does look like it's going to continue its trend lower.

That makes complete sense with the Fed now targeting an average on inflation rather than targeting 2%. And it makes sense with the fiscal stimulus coming in. Those are all going to devalue the dollar. It makes sense with making those dollars cheaper moving forward to pay over that debt. So all of that makes sense.

So if we suddenly get a flight to safety in the US dollar or we suddenly get a massive upsurge in the US dollar, I'm going to expect other asset classes to trade lower the ones that were successful as the US dollar was going down.

ADAM SHAPIRO: Would that include-- if we get a sudden surge in the dollar, would that include a devaluation of real estate? Because so many people are piling into that right now.

FRANCES NEWTON STACY: Yeah, it's hard to see the machinations. I think real estate ultimately is going to be more about the yield curve and more about credit markets going forward. But the thing about real estate that's kind of unique this year is, as we know, New York and San Francisco real estate is really down. And in some of the suburbs, we're seeing kind of a bubble. And I think that's going to be kind of how the virus plays out and the work from home plays out.

You know, do they lower people's salaries if they're not willing to come into the office? Are work from homers taxed differently. All of these things that have kind of floated around.

But suburb real estate is basically a bit in a bubble. We can expect that to normalize. And then city real estate is obviously on its lows. But again, I'm just watching those yields in those credit markets.

Right now, credit markets are pretty tight. Do they stay tight? Did they get loosen? How effectively are we reflating out of this is going to be such a precursor for real estate.