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Interest rates are going to be the 'biggest risk for the markets going forward': Strategist

David Nelson, Chief Strategist at Belpointe, joined Yahoo Finance Live to discuss his outlook for the market and the biggest risks facing stocks headed into the end of the year.

Video Transcript

MYLES UDLAND: All right, let's go over to Jared Blikre now for a look at how things are opening up here in the markets, Jared.

JARED BLIKRE: Yeah, let's take a look at the NASDAQ 100 heat map first. We do have the NASDAQ opening in the green, but just slightly, 14 basis points. Looks like the Dow is lagging. It's down 6/10 of a percent. Russell 2000 off about 3/4 of a percent, so a flip, again, from the first two days of this week until Wednesday and Thursday as we find ourselves now. But Microsoft's up 4/10 of a percent. Alphabet's up about 1/3 of a percent along with Amazon. Facebook, 3/4 of percent.

And looking at some of the market leaders here, second day in a row, we're seeing some names like Zoom at the top here. That's up 4%. And then looking over the last two days, we can see it's up 14%, So some money flowing back into those names that got hit so heavily, so heavily on Monday and Tuesday. Looking at the Dow, we can see that a little bit of pressure here, especially in the financials and energy sector, those are the biggest laggards. Energy is down 2%. JPMorgan here is down 1.5% over the last two days, knocking off 3%.

And looking at the travel space, that was under pressure yesterday, and we're seeing it under pressure again today. Royal Caribbean down nearly 4%, Delta off 1.5%, and Southwest Airlines down about 2.5% or 6% over the last two days. Now, we can also take a look at the banking sector, and we see some standouts here. Some of the foreign banks like Barclays and HSBC each off more than 3% along with Standard Chartered. We took a look at JPMorgan before. Bank of America down about 1.7% here.

And then the energy sector. We're seeing some losses here as well. In the majors, Chevron and Exxon each off about 1.5%. The biggest loser here, we're seeing FANG, Diamondback Energy and also KOS, Kosmos Energy.

One more look here at the leader board. This is some of our [? sentimentaries. ?] We're seeing the IPO ETF attracting some money. That's up 3% along with the Chinese ETF KWEB, that tracks internet stocks. That's up 3%. And then TAN, kind of a bet on the blue wave, investments in solar energy. That's up about 6% over the last two days, guys.

MYLES UDLAND: You know, Jared, just some of that action making clear in hindsight, [? we ?] sort of knew it at the time, how much Monday's move was certainly driven by positioning, you know, some of those banks, the airlines up 10, 15, 20% in some cases and seeing a little bit of a give back today. Also just want to call out a name in that IPO Index, Palantir up 4% here. The stocks been on an absolute tear since the election, up about 50%, and they'll report their first quarter as a public company later tonight.

All right, let's bring back in David Nelson. He's the Chief Strategist at Bellpointe, still with us here. And David, you know, you brought up the Russell, which I think is a great point in thinking about where a lot of the action's really been at. We focus so much on the NASDAQ and the S&P, and it brings me to a thought that a couple of guests have brought up in the last week or so, which is the idea of the beginning of a new market cycle and a new bull market. That could be a five, an eight, a 10 year event in some cases. Are you kind of seeing those dynamics right now, or are you not as sure about the futures as some folks we've talked to?

DAVID NELSON: Well, I'm sure that the place to be right now is the equity market, so you know, water seeks its own level, and it's looking for an asset class. And right now, there's no competing asset class. Outside of gold this year, what's the competing asset class? So where are you going to go? I would say the biggest risk for the markets going forward is likely going to be interest rates. And I think if you start to see the 10 year start to approach the dividend yield of the S&P 500, which is just over 1.6%, that'll be a kind of line in the sand where you might start seeing capital start to move out of the equity markets.

Think back to 2018 when rates started to hit 3%. That was a competing asset class. You couldn't get out of equity markets fast enough. Money was being pulled out by large institutions, endowments, pension plans, insurance companies, because they could fund future liabilities with something other than equity. Right now, they don't have that choice, so they have to stay in this market. It's the only game in town.

JULIE HYMAN: We're still a little ways from those level of low interest rates, so I want to come back to something you were talking about in terms of the growth versus value flows that we've seen and the positioning jockeying that we have seen over the past week or so. Where are we in that process, do you think, because that would seem to be informed by perhaps rates moving up as well, but--

DAVID NELSON: True.

JULIE HYMAN: What signals are you looking to?

DAVID NELSON: Well, reversion to the mean is a pretty powerful force. And coming into the week before we had the announcement from Pfizer, the spread between the NASDAQ and small cap stocks or even the equal weighted S&P 500 was 40% year to date. That's gargantuan. So even if this is some partial reversion to the mean in their trade, it still has a lot of legs. And I think I would just warn investors have some balance in your portfolio. You don't have to give up all your growth stocks, but trim them a bit, make some room for some of these other sectors of the economy.

Industrials are essential businesses. I don't care whether you're shopping at Amazon or you're shopping at Walmart, somebody is going to manufacture it, and somebody has got to ship it. That's the industrial sector. And if interest rates do rise, that's certainly good for net interest margins at banks. Banks deserve some portion, maybe it could be a small portion, but don't just crowd into the stay at home trade and large cap secular growth. It's broader than that, and we should rejoice in that.

JULIE HYMAN: David, staying on the industrials, I know you follow the defense contractors very closely, and they have minted money over the past four years under the Trump administration. How concerned are you about those trades no longer working under President Joe Biden?

DAVID NELSON: You know, the knee jerk reaction is that a lot of capital would be pulled from the defense industry, but look around the planet. The last time I looked, every corner of the planet is still a geopolitical hot spot. And now, the threat of China, I think both sides of the political aisle, frankly, most Americans understand that China is going to be an existential threat in every sense of the word for years to come. So money may be pulled out some. I think it's going to be repositioned on how the assets move, and I frankly hope that there's a drill down into the defense area to make things more efficient so we don't waste money. There's a lot of awful lot of waste in military contracts.