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'We have long runway here': Strategist on his outlook for the stock market

Brian Belski, BMO Capital Markets Chief Investment Strategist, joined Yahoo Finance Live to discuss what is driving the market and his outlook heading into next year.

Video Transcript

SEANA SMITH: We want to bring in Brian Belski. He's BMO Capital Markets Chief Investment Strategist. And, Brian, great to have you back on the program. Markets today coming down a little bit from what we've seen play out over the last two days. Where do you think we're headed at this point? Are you in the camp that maybe we're in slightly overbought territory, or is there still-- are we still in a risk-on period?

BRIAN BELSKI: Thank you so much for having us, Seana. I would say the death of tech was excessively premature. This binary trading and excessively emotional slash rhetoric-driven investment strategy continues even after the election, and this momentum-driven market that we've really seen for all intents and purposes really since the midway point of 2018, I think it's-- without saying that we're going to continue to see that into 2021 as the concept and makeup of what's working in 2021 I think is going to be a little bit different.

But again, it's this notion, quite frankly, Seana, of stock picking, and I think a lot of people are missing this is that, you know, the stock market is a market of stocks. I think everybody likes to make this awesome and cool call to go into value or go into cyclical, but at the end of the day, it's all about individual company fundamentals that lead that.

And there are several different areas within cyclicals and value that are working. But when growth is scarce, growth outperforms. And you think coming out of a recession and really kind of questioning what growth's going to look like over the next couple quarters and the higher likelihood of additional lockdowns on a state or even nationwide level really puts that increased confidence and bid in the technology stocks. So again, the death of technology stocks and the stay-at-home trade I think is way, way, way too early.

ADAM SHAPIRO: Well, to take what you're saying, though, another step, though, is when we did have people on the program Tuesday and Monday, we were talking about, you know, the transition or the rotation out of tech into smaller cap and more, quote, value stock, and yet the market still kept going up. So what does that signal to you? That actually reinforces exactly what you're saying, doesn't it?

BRIAN BELSKI: You know, it really does, and I think it also reinforces, Adam-- that's a great point-- on how short term people are and really how they, again, want to make these big calls. I mean, I go back to 10 years ago, and what I've been doing is reading a lot of stuff that we wrote 10 years ago as strategists and trying to depict the shape of the recovery and when are interest rates going to go up? And it all took way too longer than everybody thought.

And the biggest thing that I think everybody missed, including ourselves, is this whole transition from bonds into equities. When's that going to happen? It hasn't happened yet. I mean, we still haven't seeing massive inflows into bonds.

So on Seana's question with respect to the risk trade, clearly the risk trade is still on into equities. We have a long runway here. We have basically built a foundation of low interest rates, high risk premiums, low risk-free rates, and that's really going to drive continued equity investment. And that's why we're going to see kind of more of these momentum on/off type of days and weeks ahead.

SEANA SMITH: Brian, you and I have talked about this in the past, that this is a stock picker's market and we really need to examine the company's fundamentals. Once again we had seen an earnings season come and go where a lot of these companies still are not giving guidance because of the uncertainty out there. What are the metrics at this point that you're watching most closely just in terms of identifying some of these potential opportunities?

BRIAN BELSKI: Great question. And, you know, at the end of the day, a lot of these companies have given a-- been provided a free pass by not giving their guidance, especially given what has gone on in the pandemic. We actually reinstated our numbers in August with respect to what we thought for the market.

But I think, you know, we have to come back to simple measures of cash flow and balance sheets, but more importantly from a longer-term perspective, company managements and products and services and themes. You know, the stay-at-home theme is an important theme. Private security is an important theme. Renewables are an important theme. Growth is an important theme in terms of technology companies really being more kind of consumer-staples companies.

These bigger, broader themes aren't going away, and with 70% of the economy really being driven by the consumer, you have to have exposure to those areas that really are driven by the consumer, not just, you know, these daily gyrations of cruise lines or hotels or airlines. Some of these companies had fundamental issues coming into the pandemic and are going to have fundamental issues coming out of the pandemic. So have to be really, really careful on a stock-by-stock basis.

ADAM SHAPIRO: Brian, I want to get back to, you know, where you're going to get your yield, where you can get some return here. And I don't want to talk stimulus from the federal government. Let's talk about the trillions of dollars Americans are saving. Before the pandemic, what was the savings rate, around, 3%, 4%? Skyrocketed up to almost 30%. It's in the 20s now. So that money is sitting there earning nothing. It's going to come out at some point, but Americans are risk averse, perhaps. So would it go to equities, or where would it go? Would it be a foolish bet maybe to go into US bonds, or would it go into muni bonds?

BRIAN BELSKI: Did you say Americans are risk-averse?

ADAM SHAPIRO: I-- when you've got a savings rate close to 30%, yeah, I think so.

BRIAN BELSKI: Well, yeah, I know. I mean, you've got to think about this whole term and the adjective unprecedented, right? 2020 was a year of unprecedented moves. We had a month-long bear market-- cyclical bear market. We had a two-month-long recession. We had prognostications of the Great Depression. It scared the crap out of everybody. And our personal lives and our professional lives are intertwined more than any other time in history, I believe, and that's what really caused a lot of this.

I don't think the savings rate-- I mean, it's pretty safe. That's a pretty safe bet. Savings rate's not going to be what it was. But I think the broader question is if you go back to yield and dividends, dividend growth product, dividend yield product has massively underperformed this year. I mean massively underperform because of this whole notion of when growth is scarce, growth outperforms and you buy tech.

I think dividend income-- dividend income and equity income growth is going to be a very, very important theme for the next three to five years, not so much, Adam, high yield. I mean in terms of utilities, REITs, and some other areas. That's going to be the actual growth in that income going forward.

So guess what? Some of the tech stocks and health stocks out there in America and certainly the financials are some of the greatest dividend-growth names in the world, and we think that there's going to be a very strong bid in those companies for the next three to five years. That's where you get your yield. I think the real rates of returns in bonds are really going to end up being-- to go back to-- circle back to Seana's question in terms of the risk trade, I think ultimately the risk trade is going to be bonds but not until we start to see really the real rates of return turn negative, and we're still at least a year or two away from that.