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Investors should really look at the risk/rewards across all asset classes: Pres. & CIO

Erin Gibbs, Gibbs Wealth Management President and CIO joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

- I want to shift our attention back over to the markets here, too, because we have been seeing yields rise through all this, through the drama that we've been discussing here. The 10-year, once again, the yield on the 10-year reaching levels that we haven't seen since pre-pandemic last year, when all of the rattles were first trickling through the markets. So for more on that and what it could mean for volatility ahead here, I want to bring on our next guest.

Erin Gibbs, Gibbs Wealth Management president and CIO joins us now. And Erin, good to be chatting with you again here. I mean, it seems like you're stressing that's potentially one risk for equities here, the yield on the 10-year. But obviously it seems kind of strange to be talking about maybe those risks that seem so normal when we're seeing so many other risks now here come up in 2021. So talk to me about what you're seeing play out, where you think the market's at right now.

ERIN GIBBS: Yeah, so it is unusual. It's really because there's been a seven-day massive streak of the 10-year sharply rising and breaking above 1%. And that's why it's been sort of caught in the headlines. And certainly there has been a massive allocation, mainly focusing on equities, because your returns, interest rates, and bonds have been so low.

And if the 10-year can get above 2%, that would definitely cause a reallocation of investors potentially moving some of their gains and equities back into treasuries, because at least you get some positive cash flow, even accounting for inflation. And so that's what's sort of catching people's eyes, people who were a little worried about inflation, given that we could see these potentially $2,000 stimulus checks.

And we're still a ways off. It's just something that is out there. We're noticing a sharp shift in the trend on treasuries. But I think we're kind of far away. I think there are much bigger issues that we're really looking at for 2021 and much bigger uncertainties for 2021 that investors should really be concerned with.

One of them could be potentially corporate tax rate hikes could really have a negative impact, a significantly negative impact on particularly large-cap US equities. And so that could be a much bigger risk going forward into 2021.

- And in terms of, you know, the risks and kind of weighing them out here, I mean, obviously that's one to consider here. But also, I don't want to gloss over the fact that we are seeing an increased warning here from the FBI in terms of maybe the response we could see play out leading up to Joe Biden's inauguration. It seems like you could make the case that maybe markets are looking past that risk.

I know it's difficult to maybe price that in here. But in your estimation, I mean, you have the VIX still under 25, considering all those, and considering the drama we're seeing play out in DC. I know it's short term, and hopefully we'll get past it. But what do you make of that and maybe-- maybe how investors could be overlooking some of those fears now?

ERIN GIBBS: Sure. So right now, when you sort of look at sentiment gauges and optimism, even just valuations, we're almost in the euphoric category here. Sentiment is very positive. Everybody here is-- we're expecting 4 to 5 GDP growth in 2021. Everybody's supposed to have these robust recoveries. We're looking at 24% earnings growth for large caps.

And so investors have really latched on to that as well as the massive increase in online trading. And that's a real shift in the market that we saw in last year is where online platforms have reduced their commissions. We see a lot more trading activity within retail investors and small investors. They are pushing some of these high-profile stocks up and not necessarily looking at the risk and rewards in the overall markets in some of their investments.

They're perhaps looking at some of the positive wins. We know that within social media, when people are following some of the new social media trends of investing, people are more likely to just post about their wins and not their losses versus more regulated investors like portfolio managers like myself, where you have to be-- equivalently say about-- you can't just post your wins. You have to post your losses as well. No cherry picking.

And so that has definitely create-- perhaps created a sense of that the stock market is less risky than it really is and that these new investors are going to have to start really looking at more in depth in fundamentals and what's really going to drive the market once we get out of this pandemic. And certainly we want to advise investors to really look at the risk/rewards across all asset classes.

- Yeah. And I'm glad you kind of mentioned that breakdown here in risk/reward, and particularly tech, as we've seen this play out. You look at the last six months, Amazon and Facebook are largely trading sideways while the S&P is up about 20% over that six-month period here. So you're just kind of stressing maybe that rotation that we've seen away from some of those growth companies.

But looking longer-- longer out here, because of course you can't predict it. I can't predict it. No one would have predicted what happened last week in the short term. But when you look farther out, what is maybe the takeaway there as it seems like more and more people are buying into that rotation away from growth? Where do you see the best opportunities there? Maybe in the small caps.

ERIN GIBBS: Yeah. So again, I really see-- we've seen a bit of a reversal starting in the fourth quarter away from some of the large-cap growth into small caps. We don't see it completely going into value. So it's definitely people are moving down the market cap spectrum as they're looking at potential growth.

And so when you look at risk/rewards, I actually think those small caps are a great opportunity because you're looking at about 2 and 1/2 times the growth rate in small caps versus large. Small caps are seeing 65% profit growth in 2021. Partially that's because they got hit much harder in 2020. But it is also that they are just expected to benefit more as we have this economic recovery.

And when you look at valuations, they're actually trading at about 3% to 4% cheaper than large caps. So you get a cheaper price and 2 and 1/2 times the growth rate. So for me, when you look at your potential upside versus downside, risk/reward, valuations, small caps are very clearly a winner.

I like more diversified ETFs. I'm not saying that you necessarily need to pick a small-cap stock. I like the SLY. It's the S&P 600 SPDR. Or any of the small-cap ETFs are really great ways to get exposure without having to take on too much risk.

- All right. Gibbs Wealth Management President and CIO Erin Gibbs, appreciate you coming on here to chat with us today. Be well.