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Market Recap: Monday, December 7

Stocks regressed from record highs Monday as traders took a pause from an end-of-year rally. The Dow fell more than 100 points, or 0.5%, but was still held above the 30,000 level the index first exceeded in late November. Sevens Report Research Founder Tom Essaye and Albion Financial Group Partner and CIO Jason Ware joined Adam Shapiro and Seana Smith on Yahoo Finance Live to discuss.

Video Transcript

ADAM SHAPIRO: Let's get ready for that closing bell. We invite into the stream Tom Essaye, Sevens Report Research founder, as well as Jason Ware, Albion Financial Group partner and CIO. Jason, let me start with you. Is this market overpriced, or are we headed for some kind of boom similar to the end of World War II once the vaccine is released?

JASON WARE: Hi, good to be with you. I think, you know, depends on your view of overpriced. You know, over the next five years, it's probably not overpriced. We have interest rates that are very low, and we have an economy that is gathering steam once we get past the vaccine here next year. And we have, you know, clearly, like you just mentioned, kind of some brewing optimism around what next year is gonna look like versus this year.

So I think if you look out a little bit further than, say, the next few months, the market is not overly priced. I think it's certainly stretched a bit here, given the strong trends we've had, and we had a really strong November across the board. So if you look at it from the standpoint of kind of near-term tactical, yeah, I think, you know, having a bit of consolidation would be a good thing. But we still like overall valuation with interest rates this low.

SEANA SMITH: Tom, I'm gonna put a similar question to you. With stocks not far from those record highs, how much more do you think is left in this rally?

TOM ESSAYE: Well, I think it depends on how optimistic you are, frankly. I mean, I think that, by virtually any historical measure, we are extremely fully valued, if not overvalued, right now. It's a question of how well do you think things are gonna go over the next three months? I mean, look, if we get this sort of stock Nirvana environment of forever low interest rates, massive trillion-dollar stimulus, COVID vaccine wiping out this pandemic in the next couple of months, and political stability and a divided government, then could we see S&P, you know, above 4,000? Absolutely.

Would it take, you know, investors really pushing this market to valuations we've never seen before? Yes, it would. But at the same time, the ingredients are there. So it really depends on how optimistic--

ADAM SHAPIRO: Right.

TOM ESSAYE: --you are.

ADAM SHAPIRO: OK, Jared, how optimistic are you? Jared Blikre, take it away.

JARED BLIKRE: Well, what's your time frame here? I'm pretty optimistic medium-term and long-term. Short-term, yes, we are a little bit overextended.

Let's take a look at today's price action in the NASDAQ 100, set for a record close, but not along with the S&P 500 and the Dow. Apple taking shares from Intel here in the processor space. It's up 1%. Intel one of the worst losers here, down 3.4% in the NASDAQ. Facebook, notably, up over 2%. Also notable, Tesla up another 7% to 641.73. There's your closing bell on Wall Street.

[BELL RINGING]

SEANA SMITH: That does it for the trading day today. Again, Dow and S&P pulling back from their record closes to end the week on Friday. Today, we have the NASDAQ, though, closing at a new record, like Jared was just saying, of nearly 1/2%. You can see it above 12,500-- 12,519 closing out today. Russell 2000 coming under a bit of pressure to end out the trading day off just around a tenth of a percentage point.

Jason, let me just bring you back in, because I think a lot of people are trying to make sense of what we see going on in the market and the economy, because there certainly seems to be a disconnect-- there has been a clear disconnect, I should say-- over the last several months. The economic recovery continues to slow. We saw that with the jobs report on Friday. How do you think investors should be looking at this?

JASON WARE: So it's a really good question, and I think if you look back over long periods of time, you see that the economy and stock market don't line up if you measure them over a short period. So another way of putting that is over the long term, GDP and stock prices correlate pretty closely. But if you look at it over, you know, six months, 12 months, or even shorter than that, they don't line up very well. So, you know, looking at an economic slowdown, I don't think that should dissuade investors from wanting to stay invested in good companies if you have a longer term view than a few months.

You know, and I think there's something to this idea that, if we do get a slowing in the economy, that means the Fed's going to be a little bit more apt to stay accommodative for longer. I think it means that we're more likely to get a stimulus bill if things don't look quite so good in the economy. So I that, you know, what's-bad-is-good trade is probably one that continues to work.

The last point I'll make on this-- and I think it's an important one-- is this idea that investors are looking through the slowing economy and into a 2021 where we get past the pandemic because of these vaccines. And if that's the case and stocks are doing their job as a discounting mechanism, looking six to 12 months down the road, it's hard to not see the economy open up with all of this stimulus and all of this excess liquidity that's in the economy really coming through as people come out of their homes, inoculated from this virus. So I think those are the important things to think about as you try to align the economy and the stock market.

ADAM SHAPIRO: Tom, some of us tend to be overly optimistic. And reading your most recent note was a good wakeup call in some respects. But I'm curious. You point out that key resistance level for the S&P 500, 3,710. What's it gonna take for us to break that, do you think?

TOM ESSAYE: I think we need to get more clarity on stimulus because, you know, as we've been talking about-- all of us here-- really, there is a path higher for stocks. But it almost creates a historically positive environment for equities. I mean, we've never-- we've never seen a time when the government's been doling out trillion dollars of stimulus, 0% interest rates for, what three, four years into the future. But we have to have those things actually materialize. The market has priced in most of it in anticipation, but now we actually need for it to occur. So I think you get a trillion-dollar stimulus bill, you're gonna see the S&P 500 push for 4,000.

SEANA SMITH: Jason, what if we don't get a trillion-dollar stimulus bill? What if it's less than-- well, I guess we are expecting here with this $900 billion bill, is that going to be enough to satisfy the markets?

TOM ESSAYE: That's a good question. I think if it were, you know, half a trillion, that would be a disappointment because the idea that, you know, we're gonna get 900 to a trillion is becoming the consensus expectation over the last few days, and I want to stress that. This is very short-term stuff. It was just a couple of weeks ago that I think a lot on-- a lot of folks on Wall Street were writing off stimulus happening before inauguration day.

So the fact that we're back on board with something perhaps happening this week, I think, is encouraging. But that's starting to get priced into the market. So if we were to go above a trillion, I think that would be a incremental positive and a tailwind for stocks in the year end. But if it came in significantly below that because Mitch McConnell just doesn't want to play ball or Trump doesn't want to sign something, then I think, you know, we could see a bit of a pullback in the market. And I think that would probably be a healthy pullback, to be honest. It's something that would be good for the stock market longer term, especially as we get into 2021 and the reopened trade in earnest coming to fruition.

ADAM SHAPIRO: Jason, what's gonna happen with the dollar weakening? Is that gonna be a boon to exporters here in the United States, or is that gonna be a problem for exporters because people overseas won't be able to buy our products?

JASON WARE: I mean, all things equal, it should help exporters. I mean, that's typically what you see when a currency weakens relative to other currencies is that it helps exporters. It helps pricing of goods on the international market. So, I mean, best guess would be that that would be an incremental tailwind.

SEANA SMITH: Tom, I want to get your thoughts of what we're seeing going on in the bond market 'cause the 10-year yield today retreating at the most that we have seen in three weeks. What do you think the bond market is signaling to us at this point?

TOM ESSAYE: So, yeah, the bond market's really the linchpin of all of this. All of us on this call, we're talking about, you know, trillion-dollar stimulus, zero rates for forever. The whole linchpin to this bullish argument is that yields don't go up too fast because if they do, then the whole thing kind of can fall on itself, and that would make for a very volatile 2021. I think right now the bond market is telling you that it's optimistic on future growth, whether it's stimulus-driven or organic, and that also it's starting to pay attention to inflation.

They'll get five-year TIPS over treasury's inflation, break even, so you just hit 18-month highs. That tells you the bond market is starting to price in higher inflation, and rightly so. I mean, if we're lumping, you know, trillions-- we throw trillions around now like we used to throw billions around, right? So you're lumping all this additional stimulus onto the economy, 0% rates forever, huge QE, that should be positive for inflation. If yields rise too fast, that sort of could pop this little bubble we're in.

ADAM SHAPIRO: Jason, is it a bubble, as we wrap up? I mean, we're getting the message from the Fed they're not gonna do anything for at least a year with interest rates.

JASON WARE: Yeah. I think there are parts of the market that are frothy, to be sure. But by and large, as we look at valuations across the board, there are-- you know, small caps are significantly undervalued. Mid-cap might be fair valued. Large-cap growth might be a little bit extended near-term. But again, you're plotting this against 1% interest rates. So I think as long as rates stay down and inflation stays modest at best-- you have 1 and 1/2%, 2% core type of stuff, then there's no reason to think the stocks are overvalued.

ADAM SHAPIRO: All right, Tom Essaye, Sevens Report Research founder, and Jason Ware, Albion Financial Group partner and CIO, we appreciate you both being here on a day when the NASDAQ hit another record close.