U.S. Markets closed
  • S&P 500

    3,841.94
    +73.47 (+1.95%)
     
  • Dow 30

    31,496.30
    +572.16 (+1.85%)
     
  • Nasdaq

    12,920.15
    +196.68 (+1.55%)
     
  • Russell 2000

    2,192.21
    +45.29 (+2.11%)
     
  • Crude Oil

    66.28
    +2.45 (+3.84%)
     
  • Gold

    1,698.20
    -2.50 (-0.15%)
     
  • Silver

    25.30
    -0.17 (-0.65%)
     
  • EUR/USD

    1.1916
    -0.0063 (-0.5243%)
     
  • 10-Yr Bond

    1.5540
    +0.0040 (+0.26%)
     
  • Vix

    24.66
    -3.91 (-13.69%)
     
  • GBP/USD

    1.3834
    -0.0060 (-0.4344%)
     
  • USD/JPY

    108.3600
    +0.3840 (+0.3556%)
     
  • BTC-USD

    49,440.24
    +655.02 (+1.34%)
     
  • CMC Crypto 200

    982.93
    +39.75 (+4.21%)
     
  • FTSE 100

    6,630.52
    -20.36 (-0.31%)
     
  • Nikkei 225

    28,864.32
    -65.79 (-0.23%)
     
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

'This is a great earnings season and the economy looks like it’s doing okay': Strategist on the state of the market

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Jonathan Golub, Credit Suisse Securities Chief U.S. Equity Strategist, joined Yahoo Finance Live to discuss today's market action.

Video Transcript

SEANA SMITH: Jonathan, the speculative trading, I mean, this has been the story of the week. It's been the story, really, now for quite some time, I guess you can say. Just what's your assessment of this and the implications for the broader market?

JONATHAN GOLUB: Well, I mean, first of all, the real story here is that this is a great earnings season, and the economy, it looks like it's doing OK, even despite the vaccine slowness to roll things out, and that the back half is going to be strong. And this story is going to be gone in three or four weeks from now.

So I think that we have to be careful to over-extrapolate the short-term news not on everything that's highly shorted, but on a half dozen stocks that are capturing all the news headlines. And that's really what's happening here. I think that's the most important takeaway.

ADAM SHAPIRO: I'm going to go away from shorts real quick because a lot of people had concern before we got a dip, like we're getting right now, that maybe things are-- we need to let some steam off. Are we at that moment? Because I've had analysts on all week. We've talked about, no, we're heading even higher for the rest of the year.

JONATHAN GOLUB: Yeah, I don't buy into the we need to let steam off argument. But take a look at this earnings season. Companies are coming in, beating by 17% versus the analyst estimates. Let's put that in perspective. Typical earnings announcement over time, Wall Street estimates are whatever they are-- $1, let's just say-- and they come in-- the actual results come in at $1.03. Now they're coming in at $1.17. Those are just unbelievable numbers, compared to history.

The expectations are-- first of all, the Fed is telling you they're going to be on a hold, but the expectations are that the really good news isn't even now but in the back half of the year, when we're all out of our homes and we can spend some of this money that the government is handing out to people. So you know, you could say, OK, yeah, maybe the market pulls back a percent or two-- and even right now, the market's only off by a few percent off its all-time high. So I don't buy this whole cooling off thing. It doesn't mean anything.

SEANA SMITH: But does it mean, though, that we'll see more volatility, at least, in the short term?

JONATHAN GOLUB: You know, if you take a look at the story for the last year, it's actually that volatility has not been that high. The reason that the VIX, which everybody talks about as volatility is high, is because people are buying calls. They're buying options to get more leverage in the system, not to buy downward protection.

The market hasn't had a meaningful drawdown since April. And even the swings tend to be, you know, almost exclusively to the upside. And even this that we're seeing right now, while it's kind of a little bit unnerving watching things move around the way they are, they're still reasonably contained.

So yeah, I don't think that we have a period of crazy volatility. And I think that with policymakers-- the Fed and the US government-- saying that they're there to catch the economy, should things falter, I'm not expecting a big pick-up in vol.

ADAM SHAPIRO: Jonathan, you brought up, you know, the government. I want to get into the weeds about the regulators. Could they look at all of the trades regarding GameStop, and including the options contracts on GameStop, to figure out if there was some kind of manipulative pump and dump from some nefarious source? Could the data show them if that actually happened?

JONATHAN GOLUB: You know, anything's possible. I don't-- if you go back and-- I mean, the movement up in some of these names-- I'm not going to comment on individual securities, but the movement up just is parabolic, right? I mean, they're just going from, you know, low single digits to the hundreds in a short period of time. So it seems quite-- you know, let's put it this way, it seems extremely speculative.

I would argue that the biggest driver of speculation is zero cost of capital. If the government says that it's free to borrow money and if the brokerage firms say that it's zero to trade a security, then why do we not believe that the public is going to say, OK, let's participate? And then all of a sudden, you get some activities that from the outside, and even to me, look a little bit crazy.

But to say that there's some nefarious conspiracy here, like, I don't know. But it's-- I think that we're-- I think we're probably try to-- trying a little bit hard to make up some of those storylines. But I have no idea.

SEANA SMITH: Jonathan, when we're taking a look at the losses today, if you switch over to the 10-year yield, we're seeing yields rise a little bit. I'm curious just to get your thoughts because some investors and some guests that we have had on the program say that higher yields, they then expect it to pressure stock prices. How are you viewing this?

JONATHAN GOLUB: Yeah, so we did a pretty-- we did, actually, three research notes on this very topic, and here's what we actually find. Rising rates are good for stocks-- period, end of story. Now, here's a reason why, because it's not what you think.

First of all, number one is rising rates tell you that the economic data is better. The reason that rates are going up is because it's a sign that the economy is good and that's a positive. Number two is that a 10-year bond yield is not the discount rate for a stock. It's their total cost of capital, which also includes a credit spread.

So if you look at the cost of borrowing for a company-- whether it's in the S&P 500 or a small cap, it doesn't matter-- it's the cost of a Treasury plus some extra risk premium that investors needs to get because they're taking this extra corporate risk. When the 10-year Treasury yield rises, the spread-- that extra risk premium-- collapses, and so the combined number together is what matters.

So what's the big story this year? It's not rising or falling 10-year Treasury rates. It's the fact that you've had a big decline--

ADAM SHAPIRO: Right.

JONATHAN GOLUB: --in the overall cost of capital for companies. That's the number to look at, and that's what's going to drive stocks.

SEANA SMITH: Jonathan Golub, always great to get your perspective-- chief US equity strategist with Credit Suisse. We'll talk to you again soon.