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Is ‘euphoria’ is taking over markets?

David Nelson, Belpointe Chief Strategist joins Yahoo Finance to discuss current market highs and how investors should position themselves going forward.

Video Transcript

JULIE HYMAN: Let's turn back to the broader equity markets now because we've got more Wall Street bears throwing in the towel, Citigroup's Tobias Levkovich the latest to raise his target. So do investors need to start worrying about euphoria? Sean Darby of Jefferies thinks so. He's flagged that indicators, some of the indicators he watches, anyway, are reaching euphoria levels, and that managing the risk of a pullback has become more important.

Hm. Let's ask David Nelson about this. He's Belpointe Chief Strategist. It's always great to see you, David. So what do you think here because, you know, I just listed a bunch of records before that we're seeing. I know that Sean Darby's seeing some of those euphoria indicators. Do people need to be braced a little bit more now for a pullback?

DAVID NELSON: It does feel a little-- a little bit like musical chairs where, you know, we're all crowded into one side of the boat, the music's playing, and there's a lot less chairs out there. I think you have to ask yourself-- we can't look at valuations in a vacuum. Clearly, the Federal Reserve has made equity the only game in town. You have to ask yourself, what's the offsetting asset class?

Outside of gold this year, where are you gonna put your money? The US Treasury right now, 10-year Treasury's around 70 basis points. Even the S&P 500 yields 1.9% even at today's high levels. Beneath the surface, there are other attractive areas of the market that don't get enough attention, areas like home building, where you're trading a company like, uh, D.R. Horton, trading it 12 times. A lot of industrial stocks.

These are essential industries. Whether you're buying your goods at Amazon or Walmart, somebody's got to make it. Somebody's got to manufacture it. There are attractive areas right there. But we're all crowded at the tech because that's where the growth is. And right now, in this mindset, we seem to be willing to pay anything for that. And if there's a bubble, that's likely where it is.

- Hi, David. Speaking of the Fed, just thinking about tomorrow's Jackson Hole Virtual Summit, thinking about liquidity and Fed buying being a major driver of the stock market over the past couple of months and the assumption that rates will continue to be low for the foreseeable future, do you see a risk tomorrow of investors selling the news once we get some clarity from Fed Chair Jerome Powell around the Fed's monetary policy framework reveal?

DAVID NELSON: I suppose there's a risk because, you know, he's gonna speak and it's a very important policy statement. And we'll-- we'll have to wait and hear what he says, but they've already said that they're gonna average on inflation. To me, that's code for saying they're gonna let inflation run hotter than they normally would.

And that's really the one thing that could possibly unwind-- unwind what we're seeing in the market because everything is dependent on the risk-free rate right now being 0. Valuations can get pushed higher in that dynamic. You take that away. And the only thing that could take that away right now is the prospect for inflation.

But we're just not seeing it, despite the fact that energy prices are up a bit right now because of a storm. That will pass. And energy prices are likely not to go to the levels where they were, you know, several years ago, and not for, probably, in our lifetime because OPEC as a cartel-like structure no longer exists. We're probably gonna have cheap energy for a long time.

JULIA LA ROCHE: David, it's Julia La Roche. We're talking about the Fed dependency here, but I'd like to get your take on the fiscal side of things. How much of what we're seeing in the markets is really predicated on the fiscal side of things here?

DAVID NELSON: Apparently nothing because we don't have any fiscal policy right now. We can't get the Democrats and the Republicans to agree to anything. It's an election year, I get that. I suspect little to nothing to happen on the fiscal side between now and the election. And I think, regardless of which side of the aisle you reside on right now, we can all understand and coalesce around the fact that this is gonna be the most divisive election in a lifetime. And that has its own risk, as well.

JULIE HYMAN: Speaking of which, David, I wanted to play a little bit of what Larry Kudlow had to say last night at the Republican National Convention. Maybe there's not gonna be any stimulus because according to him, everything's going great. Listen to what he had to say.

LARRY KUDLOW: There's a housing boom. There's an auto boom, a manufacturing boom, a consumer spending boom. Stocks are in record territory. A v-shaped recovery is pointing to better than 20% growth in the second half of this year.

- Who needs stimulus, David? Right?

DAVID NELSON: Larry's a good friend and what he's saying is true, but we're coming from very, very low levels. So yeah, we possibly could have the second half of the year at 20%, but, you know, you look at the stock market. Is the stock market an indicator of the economy? And I would have to say it is not.

The top five stocks represent 23% of the S&P 500, 37% of the Russell 1000. I hardly think the prospects of Apple, Amazon, Facebook, and others really represent what's going on in your local community.

So I'm glad the stock market is high. I'm glad that things are pointing in the right direction. But I think the message is that we have to normalize at some point. We can argue about how to do that. Some of the data that we're seeing right now is pretty good. People are going back to work.

JULIE HYMAN: True. All right. We're gonna get you to stick around for just a minute, David, because we want to talk about IPOs and other ways of coming public for that matter.