Stocks fell Monday in the first session of 2021, as concerns over a post-holiday spike in virus cases compounded with uncertainty over the outcome of the Georgia Senate runoff elections. Thornburg Investment Management Co-head of Investments Jeff Klingelhofer and Joseph Minarik, The Conference Board Chief Policy Economist & Former OMB Chief Economist under Clinton joined Yahoo Finance Live to break down the details.
SIBILE MARCELLUS: Now, we're looking at the markets. We're seeing red across the board. The sell-off continues-- the Dow down 397 points, the NASDAQ down 192, and the S&P down 56. Now, to take a closer look at what's going on with the markets, I want to bring in our guest, Jeff Klingelhofer, Thornburg Investment Management Co-head of Investments, and Joseph Minarik. He's the Conference Board Chief Policy Economist and former White House Office of Management and Budget Chief Economist under Clinton. Jeff, I want to start with you. What's behind the sell-off that we're seeing today?
JEFF KLINGELHOFER: You know, I think it's a lot of things. I think really what we're seeing today, though, is the confluence of a last couple of weeks that have been incredibly strong meeting the underlying economic realities that we're still in an incredibly uncertain times in terms of COVID, in terms of the political situation, in terms of US-China trade relationships.
So I think in the culmination, we're seeing that come together today to start the year off, unfortunately, relatively negative, but with a lot of optimism perhaps in the future. So a bit of a consolidation after a couple of very, very strong weeks.
ADAM SHAPIRO: All right. Joseph, I want you to sit tight right now, because I got to get to Jared Blikre. We got the closing bell in just under a minute and 20 seconds. So, Jared, what have you got to us? And then we're going to go to Joe.
JARED BLIKRE: You got it. Let's take a look at the YFi interactive here. I have a six-day chart of the Dow up. And why six days? Because we are in day six of the Santa Claus rally. And you can see we actually gave up all of those gains-- even though we're back in the green here, we gave up all those gains in just about an hour-- a little bit over that.
Now, here's the NASDAQ, which is now red over the same period-- down half a percent. S&P 500 sitting on a couple of basis points worth of gains. But this is something that's normally-- that normally happens when you have low volatility melt-ups. You can give back those gains pretty easily. It doesn't necessarily portend anything negative for the year.
But we do want to keep an eye on it. So here's the Russell 2000. It's down 3% over the last six days and really had quite a monster month just before this. It had been one of the market leaders. Let's take a look at the NASDAQ 100 heat map as we head into the closing bell. And the megacaps stand out here-- Apple down 2.5%, Microsoft and Amazon down 2%, Tesla notably, though, in the green-- up 3.5%, guys. Here's the bell.
SIBILE MARCELLUS: And there you have it-- the first closing bell of 2021. It wasn't as optimistic as you might have hoped. We saw a sell-off today. Markets, they all closed in the red. You saw the Dow closed at 308 down-- 380 points, the NASDAQ down 189 points, and the S&P 500 closed down 56 points.
I want to bring in our guests. So, Jeff, now that we've been through the first trading day of the new year, do you expect more volatility this week, given that we're going to be facing the Georgia runoffs, and that's happening tomorrow, and we don't know when the results are going to come in?
JEFF KLINGELHOFER: You know, it's a packed week. It's not just the Georgia runoffs. We have the payrolls report at the end of this week. And ultimately, this will really frame what 2021 is to be, right? We start off the year with a complex situation. Bond yields are very low, equity valuations are relatively high.
And ultimately, this is a challenge for investors as we seek to digest all the incoming information and potential changes ahead of us. As active investors, we have to dig very deep here to provide returns, to find interesting opportunities. And we're fortunate that last year actually, despite significant hiccups-- at Thornburg Investment at least-- we were able to navigate those markets relatively well.
And I think that '21 will actually provide similar background, right, where we're going to have levels of volatility. You'll have to play a bit of defense at the beginning of the year as we digest that volatility. But as we look forward, I think that there's a lot to be optimistic about.
ADAM SHAPIRO: Joe, any earnings in the future are going to be dependent upon American consumers buying stuff. And you point out that there's going to be pent-up demand. It's like, what, $1.5 trillion in savings off to the side. Is this going to be enough to propel this economy forward? Have we got the vaccine and the virus in the rearview mirror now?
JOSEPH MINARIK: The vaccine, unfortunately not. The delivery has not been as rapid as we thought. There have been some delays in acquisition, even, because some of the contracts that had been signed earlier were not expanded. So there's going to be some delay there. That's a complication.
While that delay is going on, we have the economy stumbling, in part because of the delay in the pandemic response legislation a couple of weeks ago, which was late. We thought we had a deal, that went on for a while. So you have a certain amount of uncertainty and jitters in the system. The question now is, with delay in the delivery of the vaccine, with the weakness in the economy over the next couple of weeks and months, what are we going to see in terms of a bounce back when people actually do get the vaccine?
Are folks going to be comfortable going out again and being in crowds? And when is that going to happen? And we don't really know that yet. And it's possible that we're looking at the second half of the year before the vaccine is developed in sufficient numbers that people can start beginning to feel comfortable again to think about going out.
SIBILE MARCELLUS: Before we had the vaccine rollout, a big driver of gains was headlines when we heard that there was going to be more stimulus injected into the economy. What impact do you expect that the stimulus package that President Trump signed a week ago will have on the economy? Or are investors mostly going to be driven by the efficacy of the vaccine rollout?
JOSEPH MINARIK: I would expect that we're going to be--
SIBILE MARCELLUS: Jeff, you can take that one.
JOSEPH MINARIK: OK, go ahead, Jeff.
JEFF KLINGELHOFER: You know, I think that really what propelled markets in 2020 was the insight and view into what may be coming in the future. And you're right-- it was the Fed, it was the political response. And it was massive. I don't expect any difference going into 2021. So I expect the stimulus that we have on the table will be very, very positive, not only in supporting markets, but ultimately in supporting consumer activity.
And I expect with any significant weakness that we might see in the markets, the Fed will be right there knocking on the door to prop up markets again. Now, I don't think this is healthy in the medium to long term. But I think that's the environment that we're in. And it takes a very nimble investor to navigate that effectively.
SIBILE MARCELLUS: And, Joe, I didn't mean to cut you off. I want to give you an opportunity to also answer that question.
JOSEPH MINARIK: I think Jeff is right. I am concerned myself about the fact that the Fed can lend, they can't spend. Some of the entities that the Fed wanted to help, they weren't able to convince businesses to take loans, because businesses didn't want to have liabilities on their balance sheets. So there's some hesitation there.
For the part of the market that has the most access to liquidity, clearly, firms are able to take advantage of the liquidity that the Fed is making available. So that's why if you're nimble, the market has done very well. I am concerned myself about the ability of the rest of the-- the part of the economy that has suffered in the pandemic being able to turn around because of the delay in the vaccine and because of people's hesitancy to get back into crowds, to go to group activities, to travel, to visit restaurants.
ADAM SHAPIRO: Jeff, help us as average investors understand something. Even with the indices closing down today, we're at highs. These are record highs, essentially. And you have the Shiller PE ratio for the S&P 500 at its highest point since the dotcom crash. Now, even Shiller will tell you, if you watch the interviews he did on CNBC in 2017, he says, it's high then-- it's higher now actually, and we still haven't had yet the big correction other than this pandemic that we recovered from quickly. What should average investors take when they hear something that this market's expensive, that the Shiller PE ratio is so high?
JEFF KLINGELHOFER: Well, I think ultimately what investors should take is two economic realities. One, we're in a world of extremely low rates. And I don't think the Fed is going to allow that to change anytime soon. I think the Fed itself is charting new territory, right? I think they're skirting the lines of modern monetary theory. And to be honest, it's another theory that nobody really understands, but that's true of the economic theories that we've been operating with for the past 20 to 30 years.
You know, I think the second thing, though, is that ultimately, the big question of the discussion today is, when do we get back to normal? And when do we focus beyond just big tech and to the many huge companies that have driven this country and the world for many decades in the past? We are in a world of digitalization and a lot of growth and innovation.
But the reality is is how we interact with the world day to day is largely unchanged, even in the pandemic. So I think what investors need to be focusing on is ultimately, as we return to that world, as we return to a world where maybe as the Fed steps back and doesn't prop up markets in an unnatural fashion, how do we digest that? And what I worry is that we're on a high of a permanent stimulus, on a high of the promise of ever larger interventions in the market. And as we have to walk that back, it's going to be a painful path, but it's one that we as investors will have to navigate at some point.
SIBILE MARCELLUS: Jeff, you're talking about us continuing to be on highs. But if Democrats were to win in Georgia and actually get control of the Senate, could that possibly not mean more taxes? And what impact do you think that would have on markets?
JEFF KLINGELHOFER: You know, my own honest belief is I don't think it'll have much impact. There will be a little bit of a short term negative. But the reality is even if they win both seats, we'll have a 50-50 split. And yes, they'll have the majority given that they will control the vice president. But that's not exactly the most great background for a strongly Democratic agenda.
The second thing is is we are in a period of weakness. And I don't think whether you're Republican or Democrat, you wouldn't deny that. So I find it unlikely that they pass significant economic bills that are negative for markets in the short term. I think as the market-- or as the world begins to recover, that is really where the focus will be.
What does it look like into the second half or late '21, perhaps, as economic growth picks up, and what the Democrats want to do then. So we'll be watching very closely, but for sure it can drive volatility.
ADAM SHAPIRO: Joe, I bet you want to get in on this, because all the doom and gloom I hear from some people about, if Democrats win Georgia. And yet, you've been in the room where it happened during the Clinton administration-- what prediction would you have?
JOSEPH MINARIK: If you've got 50 votes in the Senate, every individual Senator has a veto. Because for the vice president to break a tie, first you have to have a tie. And nobody in this country likes raising taxes. I would imagine that there will be some tax increases going forward. And if you look at the level of the public debt as a share of our GDP rising to record levels-- modern monetary theory pooey-- we are going to be in the face of a serious problem if interest rates ever rise again.
So we have to be cautious. We've got to get the budget back into shape. And part of doing that will be raising taxes. Part of it will be cutting spending. The phobia about raising taxes from a political point of view is an equal opportunity infector. It affects both Democrats and Republicans.
And even with a 50-50 Senate, Democrats will have a hard time getting all of their senators in line to favor substantial tax increases. Tax increases will be limited and modest.
SIBILE MARCELLUS: I think that's exactly what Wall Street wants to hear-- that tax increases will be limited if they happen at all. I want to thank both of you guys, Jeff Klingelhofer, Thornburg Investment Management Co-head of Investments, and Joseph Minarik, the Conference Board Chief Policy Economist, and former White House Office of Management and Budget Chief Economist. Both of you, thanks so much.