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Stocks dipped as traders considered details of President-elect Joe Biden’s newly unveiled stimulus proposal and weighed the likelihood of the package getting advanced quickly through Congress. COVID-19 concerns also flared anew as stay-in-place restrictions tightened across parts of Europe, and new data showed U.S. retail sales unexpectedly fell for a third straight month in December. Stifel Head of Institutional Equity Strategy Barry Bannister and Los Angeles Capital's Hal Reynolds break down the details.
- Six minutes to the closing bell here at "Yahoo Finance Live." And we want to invite into the stream, along with Seana Smith and myself, Barry Bannister from Bannister's, Head of Institutional Equity Strategy at Stifel. And also Hal Reynolds from Los Angeles Capital. Hal, good to have you here. Barry, good to see you as well. Forgive me for double mentioning your last name there.
But let me start with you, Hal. As we head toward the closing bell, your firm represents what? $27.2 billion assets under management, and you've got to do-- well, your strategy, a lot about buying on the dip. Are you still using that strategy? Are you still going heavy when markets are down? And are they down enough, you know, on a day like today to get you to go in?
HAL REYNOLDS: Well, we're very fortunate. Our clients are institutions that really have a long-term commitment to equities. So we're not timing the market. But we do change the beta of the portfolio. So we've been dynamically pricing factors. We've been doing this for about 20 years and trying to find themes that are sustainable. And you know, we have been increasing the risk of the portfolio really since August. And for the first half of the year, we're very long what we call COVID-resilient stocks. So growth-oriented, typically mega-cap growth stocks. And we've been building the value exposure since, really since mid-August.
And so we're getting to the point now or the portfolios are pretty balanced. Interest rates, of course, have moved a fair bit, and economic expectations, of course, have really picked up. But we're not trading so much on intraday dips. We're trying to look for themes that are sustainable in the market.
SEANA SMITH: Barry, what is your take on what we've seen most recently? Because, yes, stocks are under pressure today, but more broadly speaking, the market has been able to look past the turmoil in Washington over the past week, the surge in COVID cases. Nothing really seems to be able to kind of stop this momentum. Do you think the market is right to look beyond all this?
BARRY BANNISTER: Yeah. What had happened is, in the weeks after the election, there was just an immense run-up. We, on the night of the election, we had been neutral and we switched to a bullish view of six months out, up about 500 points on the S&P to 3,800. And the market hit that in just under three months. So we turned neutral again, believing that at 3,800, based on a lot of the work we do, everything related to earnings, interest rates, equity risk premium, dollar outlook and so on, that the market would just level out here at around 3,800.
This is a very important line. It's a line that divides either a major multiyear top or the beginning of a bubble, a bubble that could take the S&P to 5,000. So we have to figure out what's going to happen next, and we're watching the right variables, we think.
- Barry, I do want to follow up on that bubble question, but I got to go right back to Hal on something before we hit Jared for the last minute to the bell. And Hal, your institutional investors, what we're seeing happen with interest rates right now has got to, I would imagine, be putting pressure on the strategy that you're employing. Is it causing you to sweat yet?
HAL REYNOLDS: Well, I don't think we're sweating, but there's no doubt. I mean, the 10-year Treasury's doubled since August. The equity risk premium, if you compare it to AA corporates, is probably still in the 3.5 to 3.75 range. And quite frankly, our investors really don't have any other place to go. So you know, some argue that the market is priced for perfection, for continued growth and sustainable growth and low inflation. And I think there's an argument to be made there.
On the other hand, I just don't think our clients have a choice. And I think right now, they're not really willing to extend their long bond allocations knowing that inflation risk may be on the rise. So I don't know, I think the market, there's no doubt it trades up on the good news and down on the bad news. There's been a lot more good news with all the stimulus, and of course, the vaccine excitement. But VIX is still in the, you know, it's in the low 20s. I mean, risk is going to continue to be high throughout 2021, much higher than, of course, we're accustomed to, particularly in the last decade.
SEANA SMITH: We've just under 90 seconds to go in the trading day. We want to bring in Yahoo Finance's Jared Blikre for a closer look, Jared, at some of these movers here into the close as we wrap up the week.
JARED BLIKRE: Yeah, a little bit of a sell-off to end the week here. I'm looking at the Wi-Fi interactive. We have the Dow heading down, never got green on the day. But the biggest loser today, aside from tech, is the Russell 2000. And that is about the midpoint of its day session average here. Now, let's take a look at the NASDAQ 100 heat map, and we can see today is kind of a reversal of what we've seen for the rest of the week. Now, the big caps have been under pressure at various times, but I'm going to look at some other sectors. I just want to point out that Apple is down more than 1%, Tesla off more than 2%.
You take a look at the banking sector today, we've been talking about the banking earnings from JP Morgan, Citigroup, and Wells Fargo. JP Morgan faring the best, only down about 1.7%, still up 1 and 1/2% over the last year, but Citigroup and Wells Fargo down about 7%, 8% respectively. You take a look at what they've done during the week, though, still sitting on some gains. This is a five-day look. Also, looking at the energy sector, the worst performing sector today, still holding on to gains for this week. Exxon's up about 5%, and you can see what's happened today, though, giving back quite a few of those gains. As we head into the closing bell here, taking a quick look at the chip space, that's also been under pressure today.
SEANA SMITH: That does it for the trading week. As Jared was saying, stocks under pressure here for a second day in a row. All three of the major averages ending the day in the red. You see, we took another leg lower here in the final couple of minutes of trading as we shake out the final trades of the day.
The Dow looks like it's closing off at a strong numer, 177 points. That's going to be off about 7%. The NASDAQ off [INAUDIBLE] today, going back below 13,000. The Russell 2000, [INAUDIBLE] The Russell 2000 under a decent amount of pressure, off just around 1 and 1/2%.
Then you look at the sector action. Energy, financials, industrials, amongst the biggest decliners today. And inside the Dow, a couple of individual groups here as the Dow closes lower for the third day in a row. Dell Inc., Chevron, and Intel, the worst performers inside the Dow today.
We want to bring back our guests Barry Bannister and also Hal Reynolds are standing by. And Barry, just to get to the point that you were talking about before we went to the bell, some of the talk about a potential bubble. What exactly do you think, or I guess, what metrics are you closely watching in order to identify them?
BARRY BANNISTER: Well, I actually think that the next 5% is down before up. I would say that it's more likely that the market pulls back. There's just been a lot of euphoria, and most of the measures we watch look overbought relative to moving averages. Your other speaker said the elevated VIX. You know, long elevated VIX is a sign of a weak market. But it's the repression of the real yield, the 10-year yield, or the yield after inflation, called the 10-year tips within this equity risk premium framework. If you repress that -1%, which is what it is, you effectively drive down earnings yield and you drive up PE ratio, which is the mark of a bull market.
And we've had that for two years since the Powell pivot of January, early January of 2018. When he realized that fourth quarter sell-off in 2018 meant a bear market could easily happen if the Fed kept tightening, began to loosen. And ever since then, the market's been on a tear, nearly a doubling in the price-to-earnings ratio. So we watched that tips yield like a hawk. I think it's going to be the key, besides reflation, on whether the market can or not go higher. If they repress the real yield and equity risk premium drops, yeah, it's to the moon. But we just don't see that yet, so we're watching.
- Barry and Hal, stand by. Jared, I'm curious. What's your final thoughts as we wrap up the week?
JARED BLIKRE: Well, I'm looking at the US dollar index. Now, that kind of broke out to the upside in the last few days. And you can see, violating this negative trend line, there's so much positioning short the US dollar now that I have to think that, if we go higher next week, that is going to weigh on equities, and that next move could very well be down 5%. Who knows, maybe even 10%.
It was only yesterday we were talking about the negative seasonality that we have for the coming two weeks, the end of January. A lot of that has to do with the options expiration, which just finished today. Not going to rehash all those points, but we do have the makings for a potential slide in the coming weeks here, guys.
- Jared, thank you. One final question, let me go back to Hal. If we are going to be facing a dip, as Barry's predicting, a pullback of about 5%, would you be looking at US stocks or would you still focus outside of the country?
HAL REYNOLDS: Well, I don't know that looking at yesterday's returns ever gives you the answer. I mean we're forward-looking at our firm. We're always looking at the fundamentals relative to prices. And we all know the discount rates with value stocks and small cap stocks continues to be very high. But the sentiment still slightly favors, in our opinion, growth, even though we know values outperform for the last two or three months. So when we look through what we refer to as fundamental momentum, we think the growth sector still has it. And I know, of course, everyone's worried about valuations. There's no doubt about it. The discount rates of growth stocks are a good percent, if not a percent and 1/2, lower than the long-term discount rate with value stocks.
But we don't really pay attention, just because stocks have dipped 5%. The question is what caused them to dip 5%? If the fundamentals deteriorated by more than the price, then of course we're going to become more bearish on the way we position portfolios. So I don't know. We try and keep-- stay out of the rear view mirror, and we try and look ahead.
- Hal Reynolds is with Los Angeles Capital, and Barry Bannister is Head of Institutional Equity Strategy at Stifel. We thank you both for joining us.