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Gold, silver have worst day since March

Invesco Global Market Strategist Brian Levitt joins Yahoo Finance's Kristin Myers to discuss his market outlook amid hopes for a vaccine and further stimulus.

Video Transcript

KRISTIN MYERS: Some positive news on the vaccine front, Russia has actually said that it has found-- it has announced the world's first coronavirus vaccine. It has not yet, however, completed its phase three test. So obviously, that's going to be raising a lot of concerns over safety and efficacy.

But as we've been seeing, the markets have been getting a boost. NASDAQ, however, in the red, the only major index in the red right now-- it was in the green a little bit earlier today after this vaccine news from Russia. And of course, we have some fresh optimism over stimulus negotiations and a potential capital gains cut that the president had announced yesterday.

So for more on today's market news, we are joined now by Brian Levitt, Invesco global market strategist. Brian, so you say that markets right now are being driven by expectations of further recovery, the Fed letting inflation run. Obviously, we've got those PPI numbers today. Do you think we're at a top right now, or do you see more room to run here?

BRIAN LEVITT: No, I don't think we're at a top for the market. I think that there's more room to run. We have followed a very similar pattern that you would expect from the depths of a recession. You recover at extreme pessimism. You kind of grow in skepticism, and then you see a widening of breadth in the market as the policy response comes in and as the economic recovery begins to gain traction.

So I think what we're seeing in the last few days is actually healthy. We had a concentrated market. We had really large-cap growth companies being the drivers of it. And the market participation is expanding to more cyclicals, more value-oriented parts of the market, and that's a good sign. It's healthy.

KRISTIN MYERS: So up ahead, obviously, more room to run but what are you seeing as the next catalyst? Is it going to be stimulus? Is it in vaccine news? Obviously, we've got the vaccine news today from Russia, a little bit of skepticism there from a lot of health officials and experts. But what do you think is going to be the next big thing that pushes this market higher?

BRIAN LEVITT: Well, the market now is just going to assess whether things are getting better. And so it's going to be a long time before things are good, but they're likely to continue to get better. We've seen cases in the states plateau and start to roll over again.

Mobility remained higher, even as cases were rising across many states than it was earlier in the year. The Federal Reserve is going to let inflation run. Large segments of the economy are recovering. You'll probably get another fiscal deal. And so all of that combined is-- the market's going to assess all of that as better.

You don't need a-- necessarily a vaccine for markets to continue. What you need is, you know, Americans, and really global consumers, to be able to participate in the economy in a reasonably safe way. And we've come a long way from where we were in March with lockdowns. You know, there's human behaviors that we can exhibit that enable us to re-engage in economic activity. And as a result, the economy is recovering.

KRISTIN MYERS: So to that point, are you seeing a lot of volatility up ahead? I mean, how bumpy is this recovery going to be over the next month or two?

BRIAN LEVITT: Heavy volatility comes with policy uncertainty. And so we don't have policy uncertainty from the Federal Reserve. We may end up with some policy uncertainty on the fiscal side. So far, the markets are kind of going past that. I think the markets are sort of trained to expect our politicians to ultimately do the right thing, but only after exhausting all other options. So you know, it's possible if you don't get a fiscal deal that volatility comes back. But I think you will see it come through.

So you might not get that type of volatility investors are expecting in the next few months, unless extreme policy uncertainty emerges. And you know, it's possible that that doesn't necessarily have to happen.

KRISTIN MYERS: So of course, with any good new that we're talking about with the economy, we got to talk rotation. You say it's to be expected. How much more do you think that's going to be continuing, though, as we hear about these spikes in coronavirus? It's only going to increase those case numbers and, in some states, force them to reconsider their reopening plans.

BRIAN LEVITT: Yes, so investors have to assess that as the question. If they think that things are going to continue to get better and this recovery continues to take hold-- even if there's some fits and starts or it's intermittent along the way-- if you think it's going to continue to take hold, then that'll start to unlock some of this value that exists in the market. And I believe that will-- I think that will continue. You know, I think there's enough momentum behind this recovery. And again, we're starting to see cases look like they're rolling over and mobility remained relatively high, even as cases have surged-- so good signs for the recovery.

I think the bigger question is, where do you want to be longer term? You know, in recoveries, cyclicals, small-caps, value-oriented parts of the market are going to do well. The question is, what does the next expansion look like? And I believe it's going to be a pretty weak one, probably even weaker than we saw in the aftermath of the '08 financial crisis. And so a weak global economic expansion will likely get you back to those true disruptive companies that are able to generate growth.

So they're taking a bit of reprieve right now. They did they had run significantly. They had become a huge part of the market. The breadth of the market widens. We correct a bit of that. And ultimately, I believe, you get back to favoring those companies that are on the structural-- that are on the cutting edge of the structural changes in society, and many of those will be the winners that we had seen over the prior months.

KRISTIN MYERS: So Brian, before I let you go, I have to ask you about the slide that we're seeing in gold. It's actually accelerating now. It's over 5%. I mean, we were talking about this last week when it had actually been spiking. And we were talking with Cynthia Murphy, and she said, hey, we can actually you can see $3,000 an ounce. And wow, what a big U-turn from that. I mean, do you see further sell-off happening going forward, especially as we keep getting this good news, at least on the economic data front?

BRIAN LEVITT: Yeah, if you believe the recovery story, as I do, then yes, you should expect gold-- that gold to fall under some pressure. It really comes down to opportunity costs. You know, what am I missing out on by owning gold? And you know, if the more economically sensitive parts of the market are performing well, I'm missing out on that. But also, it really comes down to real yields.

I mean, you had been in an environment where the 10-year rate was close to 50 basis points or at 50 basis points, and inflation expectations were running up-- call it-- 1.7%. So that's a very negative real yield. There's no opportunity cost for me to be in gold. If you get a recovery, as it seems we're getting, and nominal rate starts to creep up, well, then the negative real yield becomes less negative.

And at some point, you get to a place where maybe you will be able to generate a positive real yield in the bond market. And so the direction of that matters more than the level. And so as real yields become less negative, gold falls under pressure. Again, if the recovery takes hold, as I believe it does, then you should expect nominal rates to trend higher, to trend closer to where inflation expectations are, and that would put pressure on gold.

KRISTIN MYERS: All right, Brian Levitt, Invesco global market strategist, thanks so much.

BRIAN LEVITT: Thank you.