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What investors should make of the recent tech rally

Despite uncertainty due to the coronavirus pandemic, the tech space has seen a large rally in 2020. BNY Mellon Investment Management Chief Strategist Alicia Levine joins The Final Round panel discuss her take on the sector's performance, as well as her outlook for the rest of the year.

Video Transcript

[SWOOSH]

MYLES UDLAND: All right, welcome back to the fun around here on Yahoo Finance. Myles Udland with you in New York. Stocks continuing their rally here as we head towards the closing bell. The NASDAQ set for a record close. We'll see if it finally eclipses 11,000 on a closing basis for the first time.

And for more on everything going on in the markets right now, we're joined by Alicia Levine. She is the chief strategist over at the BNY Mellon Investment Management. And Alicia, it's been quite a while, I think, since we've spoken, several months. I think we haven't talked since before the pandemic, if my memory serves correct. So just, like, take me back the last six months. How are you explaining this time to clients who I think probably still remain a little bit confused at where the market has ascended to given kind of where the real world is at.

ALICIA LEVINE: Myles, it is great to see you. And it has been a while. So thank you for having me. Look, I think what we're seeing here is not that the market is disconnected from reality, but there are winners and losers here. And we see that very clearly in the kinds of sectors that have outperformed. So tech, obviously, and health care, and certain kinds of discretionary and certain kinds of staples, their businesses are better than ever and enhanced by the pandemic.

But the bigger issue than that, the bigger issue than that is that the Fed is supporting every asset class up and down the capital structure. So with the Fed supporting fixed income and supporting the bond market, by definition it's also supporting the equity market. And that's how you have to think about it, that in a sense there is a Fed put. And while, clearly, risks abound in the real economy, as you've just been talking about them in the previous segment, ultimately, markets are supported by the Fed.

MYLES UDLAND: And Alicia, do you think investors were-- like, took that message more easily this time around than they did in the crisis? I mean, it was years-- and I think some investors, like, never accepted that the Fed was underwriting what happened in the 2010s. But there were years where everyone said, this can't go on. This can't go on. And it took about five days for this market to realize, the Fed's got our back, so just buy everything.

ALICIA LEVINE: Look, that's really true. There was a-- there's a playbook coming out of 2008 and 2009. And those that didn't get the message the first time did get it the second time. It's only been 12 years. And so that's a very short time for an institutional memory. Everybody remembers that, essentially, when the Fed's buying assets, you buy the market of all different asset classes. And so that's the message we all got. And that's why it was so instantaneous.

And I'll say this. I mean, the Fed was also much faster this time and very quick to understand what was happening and what it needed to do to stabilize markets. And investors heard it and heard it more quickly, because there was already a roadmap for them.

- Alicia, I did want to go off of that, because it's interesting. I was reading through your notes. And you were saying that the market is still looking for confirmation of that V-shaped recovery. And when we talk about the real time data that we've been getting, especially when it comes to the labor market most recently, it seems like the recovery that we had been seeing underway is stalling a little bit. In some areas it's progressing. But do you still think that a V-shaped recovery is on the table?

ALICIA LEVINE: Yeah, so our team actually increased the probability of a V-shaped recovery from 35% to 50% in our latest publication, just because we see that demand is actually really there. And we figure human ingenuity is going to get around this problem.

But the-- we're in the middle of the V now. And the question is, do you turn backwards? Like, do you do that alphabet soup that economists do and go backwards to a W? Or do you just kind of stall out here?

And the reason I say the market's looking for the confirmation, it's because it's-- if you look at the sectors that have not performed well-- so you know, energy, and financials, and other value sectors that have really been decimated here and just can't seem to move, that-- those are the sectors that are really waiting to see the recovery. A medical advancement will move those sectors.

MYLES UDLAND: And then, Alicia, thinking about another part of the market that's had a big move recently is what's happening in the metals space. And certainly gold is an asset that I'm sure you've got questions on all the time. Now above 2,000 What's your view on what's driving the gold move? And what have you been saying when clients ask about that move?

ALICIA LEVINE: So look, the fundamental reason that gold is now on a rocket ship is because we have negative real yields of negative 1%, which is the largest we've ever had a negative yield, which means if you hold the 10 year treasury, you're losing money on an inflation adjusted basis. And-- because even though inflation is low, we do have the 10 year yield at double digit basis points, 54 basis points as of today. That's what's driving gold.

And on top of that, technically, it just looks really good. It just took out the old high of 2011. And when you get a chart like that where you sort of base for all those years and then you make a new high, it tends to be a sign of further gains ahead. So it's the Fed. It's all the liquidity from every central bank. And that's the reason gold is moving.

MYLES UDLAND: And I know that--

ALICIA LEVINE: You get nothing-- you get nothing from fixed income. Nothing and you're losing.

MYLES UDLAND: Yeah. I mean, who-- no one gets excited about 50 basis points, even if it's guaranteed from the US government. And then, you know, I know we talked just a little bit ago. You outlined some of those-- the shapes everyone is so excited about, the future of the recovery and all that. But I do think-- and you highlight this-- there's a couple areas of the economy that are still on very, very fragile footing-- retail, restaurants, commercial real estate.

As we get into next year-- because I do think, you know, that this year has kind of been solidified. Things got very bad. Market says it was getting better. As we look at next year, are those areas of concern for you thinking about follow-through on economic growth after we kind of get this big bounce off the bottom?

ALICIA LEVINE: Look, our real concern here is the labor market. And you saw the data yesterday, which really suggested a stalling out on job creation here in the US. And you know, the concern is that this becomes structural. So if you end the year at a 9% or a 10% unemployment rate-- well, those are the heights of the-- of the Great Recession just 12 years ago. And that could last for a while until we see a recovery in the real economy and some sort of medical advancement.

In the meantime, the longer that this goes on-- and the issue of time is so important. Because individuals' preferences do change. And the longer this goes on, the greater the chance that--