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Dow, S&P 500 trade lower as stimulus negotiations drag on

Yahoo Finance’s Alexis Christoforous and Michele Schneider, Marketgauge.com Partner and Director of Trading Research & Education discuss the latest market moves.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to stay with the markets now and bring in Michele Schneider. She is partner and director of trading research and education at marketgauge.com. Michele, is this market basically hanging on the hope that we get a stimulus package here before Christmas? Because I guess my next question would be, if that's the case, what happens if we don't get one?

MICHELE SCHNEIDER: Well, that's a really good question. And by the way, nice to see you again, Alexis. Well, it does definitely seem like the market right now, considering we have bipartisan support for what the Dems are calling a stop gap type bill for $908 billion, will pass, but they have till Saturday when the government goes out. So we're having a bit of a time crunch.

It's really hard to believe, and it's been hard to believe even right up to the election, that we haven't gotten something passed, considering at the end of this month, people will be losing not only their rights to not have to pay their rent, but landlords will be able to evict, but also their unemployment benefits. So the stock market has been on the heels of that, but it's still like Disneyland compared to the reality of what's happening.

So if the stimulus doesn't happen, as you say, I think that would be a warning. So what we've been looking at really starting last week was the long bonds, which had been actually under pressure, even with the Fed saying that they're going to be at low rates, basically ad infinitum. They were under pressure with the yields rising, and now that started to flip last week. And we're seeing some running into the bond. So there's where your safety is coming in right now.

ALEXIS CHRISTOFOROUS: What about your outlook for growth in the new year? And also, I was reading your note. You were talking about inflation possibly rearing its ugly head. We have not been talking about inflation at all here. Are you actually starting to see signs that it could become a problem in 2021?

MICHELE SCHNEIDER: Absolutely. Because not of oil, which is usually the general barometer for inflation, but actually, we've seen it already in food prices. If you look at wheat, corn, soybeans, in the last three months, they have risen over 30%, and that's on the futures exchange. And that, to me, is a real tell for a couple of things, one being the supply chain disruption, low labor, also some climate issues. We have El Nino's evil sister, La Nina, happening this year, which is expected to create more drought, especially in Brazil, Argentina.

So yeah, the food inflation could actually spark inflation elsewhere. And all we would need is one little catalyst. The Dow is already falling, the rates, of course, being extremely low. Tips, which is the inflation protection bond, there's been buying coming into that. And there's projections that the CPI, which is excluding food and energy prices, is expected to potentially triple. So I think with gold, silver, miners finally catching up a little bit with Bitcoin, sort of that inflation play up until, really, the last week, that's where we're really keeping our eye on, and we're very well positioned for that.

ALEXIS CHRISTOFOROUS: I want to talk a little bit more about that because if we start to see inflation rising in the new year, how does that change the equation, if at all, do you think for the Federal Reserve?

MICHELE SCHNEIDER: Well, there's a point where inflation going up and the market going up hand in hand is actually healthy, because it signals growth. And clearly, with the economy potentially coming back with vaccine hopes, regardless of stimulus, we're seeing that hope in rising prices all over the place.

But we also have a point where that separates. So let's look at steel. Let's look at copper. Those things have been flying. So once you have raw materials really starting to rise above and beyond what equities can keep up, considering we're still very close to a 100-year low ratio between equities and commodities, we can be looking at the past, which is 1979.

That's why people don't think about it because it happened so long ago, where raw material prices started to accelerate, and equity prices really went stagnant for years and years and years. So it doesn't necessarily mean a crash for equities, but it certainly can put a stop, I should say, to the rise of equities, particularly if the Fed finds themselves in a situation where, with the dead in the money supply increasing, they're going to have to do something to reverse that to keep inflation from going out of control. Isn't happening yet, but it could happen.

ALEXIS CHRISTOFOROUS: So might one of the things we see in 2021 is interest rates start to creep higher? And Michele, I'm wondering where you're seeing opportunities. Sort of just that scenario that you just laid out for us, you said you're well positioned for that. How so? And what might investors want to do now to position themselves?

MICHELE SCHNEIDER: Well, we have been very heavily into some of the small cap growth stocks. And we're going to continue with that. And we have our NASDAQ all stars that we've been in, Moderna being one in I think some of the biotech space. So I'm not trying to say that I'm negative in equities right here. But we have been long wheat. We have been long corn. We've been long DEBA, which is the agricultural ETF.

We were long the metals. We actually were flat for a while. And now today, we started building a position back in the gold miners. And we're going to look at the bonds because there will be a point where the bonds will continue to go up if equities come off as a safety play, and then a point where that might actually reverse. And of course, Tips is another place. We're not in it, but we've been looking at that as well.

Corn-- besides corn-- I'm sorry-- sugar is another interesting play we've been in, and coffee. If there's going to be drought, that's also already moving up. So some of these commodities that I haven't traded in years, we're really getting into now this year, which is fun, actually.

ALEXIS CHRISTOFOROUS: And we also have not been talking a lot about that here on Yahoo Finance because it hasn't been moving much. But as you say, recently, it has when, of course, a lot of our conversations are dictated by tech. And I'm curious what your thoughts are for technology, a big growth area in Q1.

MICHELE SCHNEIDER: Well, I do believe that we'll always see some good emerging tech coming out of this whole COVID thing. One of those silver linings is innovation that comes out of something that has been negative. And we're seeing that innovation. Where I am negative, though, more so-- and not right now, but especially if the market comes off-- is in some of the big tech, the classic big tech. Nvidia, which has been the darling for years, I see that as a potential short. Same thing with Microsoft and same thing even with Amazon, considering how well Cyber Monday went. Amazon stock is in the red even before the Dow really started selling off today.

So to me, the great rotation is going to be in the next Apple, the next Amazon, the next Nvidia, some of these smaller companies like Gogo or Upwork. These are companies we talked about a long time ago, HubSpot, Zebra. These new technologies for dealing with the COVID world and making technology and working easier is where I see things going. And if the market turns down hard, of course, that would affect everything. But in particular, I think it's going to affect those big tech. They're saturated. They don't really have much more upside at these points.

ALEXIS CHRISTOFOROUS: All right, we're going to leave it there. Always good to get your picks to get your thoughts. Michele Schneider at marketgauge.com, thank you.

MICHELE SCHNEIDER: Thank you, Alexis.