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Investors gravitate towards big tech due to 'fortress-like balance sheets': Strategist

Belpointe Chief Strategist David Nelson joins the On the Move panel to discuss how the market may be masking economic pain.

Video Transcript

- Want to pick up the discussion, however, with David Nelson. He is Belpointe chief strategist. He's joining us from Greenwich, Connecticut. And David, if we could, let's start with this question that I asked Mr. Scully about the weight of Apple within the S&P 500. No one seemed to be upset-- or perhaps they were-- I'm old, but I'm not old enough to remember people were upset when IBM had that kind of traction. What's the deal?

DAVID NELSON: Look, it's not just Apple. We have a lot of companies that are in the trillion dollar mark. And you're talking-- you're talking about the elephant in the room, and the elephant in the room is really the Federal Reserve and the risk-free rate. It's been able to push valuations a lot higher, because there's no competing asset class outside of gold right now. So right now, for the S&P 500, you've got the top five stocks represent about 23% of the market cap, yet just 16% of the earnings.

Apple is a fabulous company. It will continue to get bigger, but it will innovate slowly. And they do innovate slowly. I look at my iPhone today-- it's really not that different than the iPhone from a couple of years ago. Each year, each release, we get a little bit more. And they can afford to do that. A young company would have to be far more innovative.

- But David, Face ID and-- no, I'm just getting. I'm curious, as well, when you look at an Apple and some of these other stocks that have led, at the same time, their earnings, even though they're a small proportion, they've performed really well, right? So isn't there some logic in those terms? In other words, if you look at the industries that have been underperforming-- you've got travel, you've got retail. So it makes sense that they would go down as various work from homes would go up.

DAVID NELSON: It does. I mean, certainly, we gravitated to these names because they had fortress-like balance sheets. And in some cases, even benefited from the pandemic. And as you move down the food chain, the value food chain, it's kind of like-- it's a barometer on the economy. The reason these companies aren't doing so well is you've got 80% of the states out there right now that are either halting or rolling back the opening up of their economies. And you're seeing it play out in the unemployment numbers, which came down dramatically after the April bottom economically.

It came down dramatically, but we're hovering around 1.4 million a week-- you just saw the ADP number this morning. It was abysmal and it likely means that the estimates for Friday's employment numbers are too high-- they will likely come down, as well. So the economy is not necessarily represented by the S&P 500.

- David, Ines here. Just playing up the point that you were just making earlier about Fed measures-- are you concerned that too much government intervention, the Fed measures, asset prices high-- that this is creating a rise in zombie companies, lower productivity, less startups?

DAVID NELSON: Yeah, all of the above. We put out-- it's an argument that I could have made three years ago, four years ago, even 10 years ago-- the Federal Reserve has been become part of the market I can't argue for higher interest rates right now. We're in the middle of a pandemic, we have massive unemployment at this point. If I was going to be more concerned about something, it would be the massive Mt. Everest balance sheet that they have and keep adding to at this point.

We are clearly, slowly, but surely, going to go to negative rates. If you asked me this two weeks ago, I would have said impossible. How many times have we heard Jay Powell said we're not going to negative rates, we're not going to follow the path of Europe? But if you look at policy trackers right now, you've got 28% of economists are looking for a negative rate of 25 basis points in April of 2021. That wasn't there three months ago. That's what it is right now.

- David, I just want to point out so everyone knows we're going to be talking with the chief gold strategist from State Street Global Advisors in about 15 minutes on the program. But getting back to this issue of stocks and what normal investors-- you know, the small men and women like me and Julie and the rest of the world out there-- what should we do in a world where you just said we're going to have negative interest rates? Where do you go for yield? I mean, you can't buy an annuity, whether you believe in those or not-- you're not going to get much there-- bupkis. You got to stay in the stock market. And then you--

DAVID NELSON: Exactly.

- --as we were talking about Apple. But it's skewed.

DAVID NELSON: Despite the valuations, the market right now is still the better asset class. Why would I want to invest in a 10 year treasury with a 50 basis point yield if the S&P 500 gives me 1.9% just in dividends? I'm being paid to wait. Eventually, this will pass. And even if the pandemic doesn't pass, we're going to find a way to deal with it.

Other countries have dealt with this. Sweden did nothing and they had a massive pandemic run up. But now their numbers are a lot lower, because they practice some of the very simple basic guidelines. If we started to do that, we could probably go back to work a lot sooner.

- All right, David Nelson, Belpointe chief strategist. Always good to see you. We look forward to seeing you in studio.

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