Barry Bannister - Head of Institutional Equity Strategy at Stifel Nicolaus & Co joins Yahoo Finance to break down how markets are faring during the covid-19 pandemic.
MYLES UDLAND: I want to start with your price target for the S&P by April next year, 3,800, so a modest advance from here. We've seen 4,500 from some folks across the street. How are you thinking about that price target given what we've seen since the election, given the vaccine news? Has any of that sort of maybe making you more bullish as we head into next year?
BARRY BANNISTER: Yeah, we-- we have viewed most price targets as being short term in nature since Powell's failed exit in 2018. If you recall, Chairman Powell raised the short-term rate to 2.4. And relative to the neutral rate, that was just simply too tight. We had a 20% sell-off in the fourth quarter of 2018.
Ever since then, if you were to look at a chart of the S&P, it's widening amplitude of larger and larger moves in one rescue operation after another. So after the election when we realized the divided government was a positive for the market, we went ahead and went from a 3,100 view to 3,800, and I think that's achievable. But there are a number of problems with some of those 4,300, 4,500 targets that I'm reading about.
BRIAN SOZZI: And Barry, what are some of those problems?
BARRY BANNISTER: Well, when you think about the market, it's been heavily led by growth stocks. And think of the FANMAG stocks, Facebook, Amazon, Microsoft, Netflix, Apple, Google. The higher multiple of the market is attributable to a low, in fact, negative real yield, in other words, the yield on the 10-year Treasury after deducting inflation is a negative number, which is extraordinary.
When you have low inflation at a negative real yield, you get a very high price-to-earnings multiple for the market. And so going from growth to value, were that to occur, would be self-limiting for the market index level. You would lose price-to-earnings multiple, even as you gained earnings.
JULIE HYMAN: So Barry, talk to me about the dollar and how it feeds into this, as well, because right now we are seeing the dollar at its lowest level since 2018. So I just wonder what effect that's going to have on the earnings look, particularly for companies that get a lot of their profits overseas?
BARRY BANNISTER: Well, the dollar is part of that whole reflation, deflation. It's one big trade. God. Have you lost my video, or are we still good to go?
JULIE HYMAN: No, we've got you, Barry.
BARRY BANNISTER: OK, great. So essentially, the dollar is part of that one big trade. This is reflation versus deflation. As the rest of the world improves, as global growth improves, what you find is is the dollar weakening is normal and that sign of reflation. But again, if we get that kind of growth and growth picks up, then essentially what you're looking at is a environment where real yields would rise and the price-to-earnings multiple of the market would fall, and that's not going to be a positive.