John Stoltzfus, Oppenheimer Managing Director and Chief Markets Strategist joins Yahoo Finance Live to discuss how markets are faring during the Georgia Senate election results.
MYLES UDLAND: Hi, welcome back to Yahoo Finance Live. Myles Udland here in New York. We're less than three minutes away from the opening bell on this Wednesday morning. Let's stay on the markets here and talk a bit about the reaction we're seeing in the wake of those results out of Georgia last night. John Stoltzfus joins us now. He is the Chief Investment Strategist over at Oppenheimer Asset Management.
So John, let's start with how the markets are initially taking the news. We know that one seat likely to go to Jon Ossoff, the Democrat-- excuse me, to Raphael Warnock-- it appears that Jon Ossoff will also win. So we'll have both Democrats win. What's your initial reaction to-- the market's initial reaction to this news?
JOHN STOLTZFUS: Well, I've got to say one thing, it looks like the markets are digesting this remarkably well. I mean, we see weakness in the S&P 500 and particularly in the NASDAQ, but it's certainly not a dramatic sell off at this point, considering what the likely implications of a Democratic control of the House, the Senate, and the White House, and prospects for policy to change dramatically.
JULIE HYMAN: So John, as I was pointing out a little bit earlier, stocks are not always very good at predicting first, second, third wave effects of political events. Of course, one would think most notably of the 2016 election, but there have been a number of other examples of this. So how much are we to read into not only what happens in Georgia, but then the stock reaction from it? I mean, does this blue wave really mean things are going to change that dramatically worse for the markets, especially since stocks tend to do pretty well under Democratic presidents.
JOHN STOLTZFUS: Well, Julie, thanks for having me on by the way. I've got to say this, historically, the Democrats have not been bad for the equity markets. And the Republicans have not been as good historically, ironically. I think the big difference here is the concerns about the voice of the progressives, and considering that the progressives are, to put it mildly, not very friendly to business. That said, we have to look at it this way-- the markets are very much like water or businesses, let's say, put it that way, essentially looking for the point of least resistance and looking through how it can work with what it is given.
So I don't think it means we're going to get a bad year here in the market. But what I do think that near term, we could have great volatility and concern is the Biden administration. Gives us an idea of what they really plan to do. There's not much definition yet, except a lot of talk about many changes on day one. We'll just have to see the way it works out. But I can recall when President Obama was elected, people were worried and those turned out to be a great eight years for the market.
BRIAN SOZZI: And there you just had the opening bell at the New York Stock Exchange. Star Peak-- company I'm going to have to look a little more into after the show, guys. But John, I woke up this morning. One of the first things that I saw was a spike-- or a mini spike, I would say-- in the 10-year above 1%. My first thought was, wow, are we looking at a potential 2013 taper tantrum type situation? Are now the prospects for maybe $1 trillion more in stimulus?
We do, in fact, get that inflation. By the end of the year, you have the Fed suggesting in 2022 they pull back on quantitative easing. And as you know, the market would price that in maybe in the middle of this year.
JOHN STOLTZFUS: I think we've got a chance at avoiding the 2013 tantrum effect, mostly because we're going to have Janet Yellen at the Treasury. And recognizing how good she was in leading the Federal Reserve during her tenure at the Fed, I think she brings very much a calming influence to the outlook in terms of policy at the Treasury, and likely to have a healthy influence on the Fed in cooperation as we move forward. So the inflation picture, I think, is less worrisome if we consider the trends of globalization and technology, which are secular at our counter inflationary.
So I think there will be methodology to recognize that what we're going to get is reflation. But there's going to be a point we're going to have to ponder this as we move forward.
JARED BLIKRE: Well, John, this is Jared Blikre here by the way, I just. Sorry, Myles. Well I just wanted to follow up on that reflation idea there because we got the 10-year yield above 1% now for the first time since March, and breakevens at multi-year highs, and we also have the twos 10s at multi-year highs. So at what point does increasing yields become a drag on equities here?
JOHN STOLTZFUS: We'd probably say that from where we sit today-- and I've been in this business for 37 years, so I can remember where treasuries were a heck of a lot higher than they are today. Essentially, even with yields beginning to rise, it's a process of normalization, and to account for the potential for a greater stimulus ahead. But what effect it will have on the economy? And those counter anti-inflationary trends remaining in place, I think, we don't want to get back to 3% on a 10-year Treasury too fast without a lot of growth, let me put it that way.
We think the most important thing to remember is we have seen Treasury yields rise significantly in 2018, when the Treasury went over 3.11% in March of that year, and later on, 3.25% towards the end of that year. And those were erroneous reads by the bond market. The bond market was overreacting to Fed policy and misjudged the relative strength of the economy at that point. So similarly here, cooler heads are likely to prevail. So discipline and patience are very important on the part of investors, not always trends that are known amongst traders. So there you got the volatility
MYLES UDLAND: And John, I just wanted to finally ask the question that I think is going to be on everyone's mind, which is, what, if anything, this means for corporate taxes? That was certainly the big boost to the stock market in 2017. There is concern that this could be a move to raise corporate taxes. But do you see this slim majority as perhaps taking that off the table for the Senate?
JOHN STOLTZFUS: Well, I think that's one of the big risks. That's what was one of our principal concerns. Whenever we talk to institutional investors as well as private investors or retail investors, what we often hear are their concerns over budget deficits, over the debt that has been incurred, as well as the fact with many investors, how pleased they were to see the increased earnings that were given to corporations as a result of tax reform. If that goes away, the concern there is it will impact-- it will make corporations less resilient to dealing with rough waters.
If anything, the tax reform package allowed corporations to keep more of what they earned. It gave them a deeper resilience against the trade war narrative. It gave them a deeper resilience in the case of COVID. Of course, all that aided by technology, that is another booster.
MYLES UDLAND: All right, John Stoltzfus with Oppenheimer. John, always great to get your thoughts. Really appreciate you taking the time this morning and I know we will talk soon.