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‘Fundamental drivers are in place for the economy to continue to move stronger’: Strategist

Rebecca Felton, RiverFront Investment Group Senior Market Strategist, joins Yahoo Finance’s Kristin Myers to discuss the moves in bond yields and the rise in consumer sentiment.

Video Transcript

KRISTIN MYERS: I want to dive into more of that market action right now. Again, we have a bit of a mixed bag, with the Dow the only major index in the green and the 10-year yield popping right now. We're joined by Rebecca Felton, RiverFront Investment Group senior market strategist.

So Rebecca, looking at the rates, as I was mentioning just in the opening to the show, the 10-year bond yield up over 6.5%. So absolutely soaring right now. Now, we've repeatedly heard that, at least when it comes to interest rates, when we're looking at those yields, that these moves are temporary. So I have a two-part question for you here. A, I'm wondering if you also perceive this as a transitory movement, and B, are investor fears about rates right now overblown, then?

REBECCA FELTON: Well, thank you for having me. And yes, we do agree that some of the things that we're going to be seeing over the next few months will be transitory. We still expect that the yields will settle down as we move through this period, and expect that equities will resume their upward trend. You know, we are overweight equities, and think that the resumption of growth that we're looking at over the next several months is really compelling.

KRISTIN MYERS: Now, I hear what you're saying that you are overweight on equities, but how bullish are you in this year, especially considering that we've heard from a lot of folks that we can expect quite a bit of volatility this year?

REBECCA FELTON: Yes, we certainly could expect volatility because people are worried about valuations. And when you have valuations at these levels and unknowns pop up, then you do tend to have these choppy days. But when you look at the fundamentals-- the fact that housing has recovered, the fact that the consumer is back in play-- I mean, the numbers this morning from the consumer were very positive-- we know retail sales have rebounded, and to the point of getting those $1,400 checks on top of already high levels of savings, so the fundamental drivers are in place for this economy to continue to move stronger.

And we know that corporate earnings are heading higher. The expectations for a forward 12-month of 175 is where we are now. That has continued to move higher. And since we didn't know how far to cut estimates in 2020 and we saw the beats throughout the year, we would venture to say that we probably don't have the number right on the upside too, which leaves more room for movement higher.

The other thing that we're finding is-- encouraging is, you know, so folks are getting hung up on the whole growth to value thing, but what's important is we're seeing a broadening of participation in sectors that we had not seen. So if you look at what's happened over the last several weeks in terms of energy and financials and some of those more cyclical name-- sectors taking hold, this is really positive for market fundamentals. And so we still are encouraged.

KRISTIN MYERS: So a lot to dive in here that you're mentioning. I want to start a bit on that corporate earnings. And it's something that we've talked about a lot, that we see expectations more downbeat than upbeat. And as a result, we saw a lot of corporate earnings coming in above expectations, at least for the fourth quarter. I'm wondering if you think that that might weigh a little bit on sentiment if we see that expectations are not being met throughout 2021.

REBECCA FELTON: Well, that would absolutely be a wild card if numbers didn't materialize in terms of that 175 over the next 12 months, and that we had overheated in terms of taking expectations for 2021 back up. But that's just really hard to visualize in terms of the fact that it's not just the earnings that have gone up. The sales forecast have gone up, as well. Profitability is higher. And-- so because you saw a lot of companies cutting costs last year. So there's a lot to be positive about. And it's not just one or two sectors. It's broadening out across a number of sectors in the S&P 500.

KRISTIN MYERS: How would you advise investors really to trade around some of these periods of volatility that a lot of folks are anticipating, especially in the short term? Is it all about continuing to keep an eye on the ball, at least in terms of the long term, or are there some reallocations that folks really need to be making in their portfolios?

REBECCA FELTON: Well, that's a great question. And you know, we have started making some moves over the last several months because we were in that overweight tech group through much of 2021, and we still are neutral to slightly overweight technology, particularly in the software and services area. But over the last several months, we have added back cyclicality to our portfolios in the form of bumping up our financial weightings to adding back to industrials, particularly infrastructure areas.

And we also have a healthy allocation to things that are consumer-oriented, when you think about big box retailers and some restaurants and things like that. So we have tried to be balanced in how we're approaching this, and we're staying focused on our process. And as a core manager, we are not going to get too far ahead of our skis in terms of any of these sectors.

KRISTIN MYERS: I want to ask you about stimulus. You had mentioned it just a moment ago. Right now, not boosting the markets too much, as much as we had seen previously when we saw stimulus packages getting signed. And I know that you mentioned that it's in the rearview mirror right now. Do you think that there might be a slight change, at least after this weekend when we start to see those checks, you know, hit some consumer bank accounts next week, and even beyond?

REBECCA FELTON: Well, the consumer is a powerful force in these markets, at 60% or more of GDP. So that is absolutely important. We also need to see small businesses coming back. And those last NFIB numbers were still disappointing, and there's a lot in this bill that just was passed. I think it was something on the order of $700 billion for small businesses. So that's going to be a critical component of this recovery, as well. So we-- you know, it's still a lot going on, though, because that infrastructure bill, as we move later into the year, you could see some rhetoric back and forth on that because that's not going to be something that goes smoothly because of the prospects of tax hikes being added into that bill.

KRISTIN MYERS: Absolutely. It's a very good reminder that, even though we've gotten over the hurdle of stimulus, there are still politics and policies out ahead in front of us down the road that could have an impact on the economy, and also the markets. Rebecca Felton, RiverFront Investment Group senior market strategist, thanks so much for joining us today.