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Market Recap: Thursday, December 31

Stocks closed out 2020 at record highs, with the S&P 500 ending the year at an all-time closing high, securing a gain of just over 16% for the year, or 18% with reinvested dividends. This marked a back-to-back year of double-digit gains for the blue-chip index, after it advanced by nearly 29% in 2019. Hennessy Funds Portfolio Manager Josh Wein and TD Ameritrade Senior Manager of Trader Strategy Shawn Cruz joined Yahoo Finance Live to break down the details.

Video Transcript

[MUSIC PLAYING]

ADAM SHAPIRO: Don't hold your breath, but 2020 is going to close out with markets in record territory. We're watching everything for you as we head into the closing bell. And we want to invite into the stream Shawn Cruz, TD Ameritrade Senior Manager of Trader Strategy, and also Josh Wein, Portfolio Manager at Hennessy Funds. Both of you, thank you very much. Josh, I'm going to start with you. I'm curious-- will the bulls continue running in 2021? Can they?

JOSH WEIN: I think they will, absolutely. Good to be with you. I've been accused of being an optimist, and so I'm very reluctant to get too excited. But I am. I think that the bull continues. And I think it's a rates story and a growth story and all the things that typically underpin a rally. And yes, it's going to be a great year.

ADAM SHAPIRO: What are some of the things you would have us pay attention to in 2021 as investors?

JOSH WEIN: Sure. Yeah, I think that first and foremost, when I look at the market from 10,000 feet, I think a lot about certainly the risk-free rate. And so we're well below-- we're at about 1%, about 90 basis points on the 10 year. And then just looking forward, the earnings yield on the S&P-- so it's about 4 and 1/2%. So that spread of about 3 and 1/2 to 4%, that's about where we were before we ever started talking about vaccines and viruses. So to that-- it's very compelling, about a 4% premium on the 10 year.

So I think about that. I think about just what might drive the market beyond the obvious is things like margin expansion. I think some of these cuts, for better or worse, might be permanent. And so in some cases, that's great. I think we've learned how to do more with the same or more with less. But I think there's a margin story and an interest rate story, a growth story. And to sum that up, I think that the market discounts cash flows.

And so within that equation, all those metrics are moving in the right direction. So I think that fundamentally, things look [INAUDIBLE] a great setup.

- With markets, like we've seen them at all time highs, it always makes me wonder about the fundamentals. Is it too good to be true?

JOSH WEIN: Well, I know where you're coming from. I don't think it's too good to be true. There's still a lot of work that we all have to do with getting people inoculated and things like that. But yeah, it seems strange-- the NASDAQ's up over 40%, the S&P over 16 or 17. And the idea that-- and I've seen this a lot, which is, I guess, a little comforting, and also terrifying, you know, there's a lot of company in the bull camp. And so that's usually a bad thing.

But yeah, it seems like it can keep going. And we've been through the stress test. The Fed has their stress tests. Well, this was a big, live stress test that went on now for about 10 months. And we came through it pretty decently. So it's just hard to understand what, in the midst of reopening, what gets us off this track.

ADAM SHAPIRO: All right, so we're going to go to Jared Blikre, because as was just pointed out, it keeps going and going. It's like the Energizer bunny. It keeps going. Jared, weigh in on this.

JARED BLIKRE: Well, just minutes ago, we got a record intraday high in the S&P 500. Both it and the Dow are set to close at record highs. So what an end to the year. Here's the Dow. It's up over 7% year to date, NASDAQ up over 40%. You see 43 and 1/2% right there. S&P 500 up 16%. And also taking a look at what bonds have done-- Bespoke Investment Group put out an interesting note today. Now, you can see that we started out the year just south of 2%. And right now we're south of 1%.

But check this out, because the total return for the S&P 500 and bonds have coincided. They've converged. So each is up about 17%. And again, that's the total return of both of those. So you can see that red line. That's bonds. And then the blue line, that's the S&P 500. Does it mean anything? I don't know. But it's interesting to point out.

And let's check out the NASDAQ 100 heat map this final day of trading. Kind of a mixed picture for the mega caps. We can see Apple and Amazon each off but not quite 1%. Alphabet, the biggest outperformer among the five, that's up 1%. And then Tesla-- the story of the year, perhaps, is Tesla. That's up another 65% over the last three months, 1.7% today. Trading above 700, as I've been saying, for the second time this year, because way back in January split adjusted-- now, that's when it's basically five times the current price.

140 here equaled 700 then. And so this is the second time that it has surpassed 700. So something to think about. And then looking at the sector action for the day, we can see utilities and real estate kind of an interest rate play maybe playing some catch up. Those are the two leaders there, utilities up 1 and 1/2%. And then we have energy, the worst performer of the year, down 76 basis points here.

[BELL RINGING]

Here's the closing bell on Wall Street.

ADAM SHAPIRO: 2020. That is a wrap. Put a nail in it. We are done for the 2020 trading year. And let's take a look, at least for today, at the S&P 500 and the Dow. They're going to settle up higher. The S&P 500 today is going to settle up a little bit over 20 points. The Dow is going to settle up almost 200 points to the upside. NASDAQ will be up roughly 18 points. Even the Russell 2000 getting in on that last hurrah of the year, up about half a point, barely a tenth of a percent.

Sectors that gained today-- we have communication services up 1%. We had financials up 1.4%. The other one that was up pretty dramatically was utilities at 1.6%. Two draggers, as Jared just pointed out, energy down almost 1%. That's [INAUDIBLE]. Consumer discretionary down about a quarter of a percent.

Let's go back to our guests to figure all of this out. And Mr. Cruz has joined us. Shawn, it's good to have you here as we finish out the year. Let's get you into the conversation. So 2020 is now in the rearview mirror, and good-- I'm not going to say it, but there's a special goodbye that I think a lot of us want to say to this year.

Let's look at 2021. What makes you most optimistic about investors and where they could go with their money next year?

SHAWN CRUZ: Yeah, I think one thing is, although we had a pretty solid rally in cyclicals to close out the end of the year, I still think there's plenty more to go. And I think what really remains to be seen is what kind of a recovery we get. And I think where that recovery needs to come from, it really is going to be focused on the jobs market, and not only the breadth of the jobs that are getting out there, but I think also the quality of the jobs. And that'll be wage growth that will be a key component of that, as well.

So that's really what I think is going to be the determining factor of just how fast of a recovery we can get and how robust that can be in the market. I think if we can get robust job growth, robust wage growth, I think that will be what drives cyclicals even higher here as we go into 2021 and beyond. And that's where I'm really going to be focused on.

- And Shawn, I really like that you mentioned the jobs market, because that brings us to Main Street, right? So even if Wall Street-- the markets are doing well, does that bode well for Main Street? We know there's this new stimulus that's coming into the economy. How much of a boost is that going to actually be.

SHAWN CRUZ: And I think there's always the wealth effects that come along with what the market's doing. But I don't think for the recovery I'm looking at the catalyst for the robustness of recovery coming from strength in equity markets. I think it is going to have to happen in the hard economy. We're going to have to see some of those jobs start to come back.

And I think what will allow that is really more of this broad-based reopening of the economy, not just here, but globally. I think that is what can drive sort of a snapback in a lot of these jobs that have been furloughed or gone away. I think it's going to be a little bit of a challenge of getting everyone back into the labor force and getting them back into their jobs sooner rather than later, and making sure they're coming into good jobs, not something just lower wage just to sort of get them off the unemployment reports. That, to me, is really what I'm going to be looking at.

So I think this has to come from Main Street. It has to come from the actual, hard economy. It can't sort of be driven by the market's going higher and that'll just drag everyone along with it. I actually think it's going to need to be the reverse. I think it's going to need to be the real economy really out there leading the way. And that will be what allows the market to continue upside.

ADAM SHAPIRO: Josh, everybody likes a little tip. And the Hennessy cornerstone mid-cap 30 fund might have a few stocks in there that you'd like to talk about. Lithia Motors is the one that caught my attention, because I love cars. But we had a guest on not too long ago that said, forget car dealerships. They're done. Yet, this-- they have 190 stores in 20 US states. They're not out yet.

JOSH WEIN: No, not at all. And I can see the bear case, perhaps. But I think that Lithia has delivered for many years now. I would point out that certainly for those that are looking at used cars, Lithia derives the majority of their revenue from the used car segment-- which, by the way, has higher margins-- and then, of course, new cars and service and parts and all of that. And I think to build on what Shawn was saying, I think that Main Street-- the market doesn't necessarily rescue Main Street. But I think what helps rescue Main Street is kind of the reopening and the delayed wealth effect.

So usually the market hits new highs and people, if they want, can cash out and spend that money. And we've all been inhibited from traveling and eating out and spending money in certain ways. And for a company like Lithia and others that are in our mid-cap 30 fund, I think they're huge beneficiaries of that delayed wealth effect-- the reopening, the pent-up energy that exists in a lot of people who want to eat out and travel and buy a car. But I think that Lithia fits squarely in that theme.

- And Josh, what are some of the unprecedented moves that you saw this year in the markets as we cap 2020?

JOSH WEIN: Yeah, that's a great question. I mean, Bitcoin-- most years, Bitcoin would just sit on its own. And that would be the story. But I guess it's overshadowed, certainly, by the big five or the big six or seven and the liquidity that they offered and the growth. I would say what's nice to see is I would point to SPACs. I think they were right for the moment, companies going public via SPAC, not having to travel around the country and meeting with investors individually and just kind of somewhat easily transforming into a public company. That was great to see.

I think we are starved for new companies to invest in. And I think the number of public companies have been dwindling for many years. Hopefully that's on an up and up surge. And even though I think it's somewhat vilified very often, I think the return of the individual investor, whether it's Robinhood traders, which I think some are just bored and will maybe-- you know, once they're going back to their office will stop trading. But I think it's good to see individuals returning to the market. It's good to see people talking about individual stocks, some of the themes that are exciting around electric vehicles, and some of the sustainability themes and AI and everything. You name it.

So I think SPACs, to me, is what this year was about. It was kind of everyone figuring out how to move forward. And it really-- it was nice to see.

ADAM SHAPIRO: Sure. Shawn, I mean, we can't ignore SPACs. But when we look at 2021, what I keep hearing from the people who join us is $1.4 trillion in savings. And when you talk about pent up demand, that money's got to find someplace to earn a return. And it will not earn a return sitting in an account at Chase or Citi. So do you expect that money to come flooding in in the first half of the year?

SHAWN CRUZ: Yeah. And I actually think that's a great point of where is that money going to go? And I always say that the base level, a lot of what we're doing here is trying to say, look, there's this stack of money, capital out there in the world. You need to find where it's going to go. Those are the places that stand to see price inflation or better returns.

Right now, I think that is the key of, where does that money go? Does it actually go and do some sort of an investable asset? Or does it actually go out there and just get spent through consumption when we're able to go out there, travel around, go back out to eat? I think that is another interesting point to keep an eye on. And the reason why I'm really interested to see how much of that goes back out into general consumption or demand for goods, that actually can be a little bit of what I think a catalyst for what will be the interest rate story this year, which I do expect to be a big story. Is that going to be such a big driver of demand where there's not enough supply to meet that, which can drive inflation?

We've seen inflation break evens and expectations picking up going into the end of this year. That can really be a catalyst to push interest rates higher. It can push inflation higher. Generally speaking, that'll be the first rate drop. And you'll see rates move higher as a result. But that can really then maybe put the Fed in a tough spot. So I think where that $1.4 trillion goes, if it goes to investible assets, I imagine that would probably be something with a little bit more of a longer term outlook or something that is going to be a little bit more on the equity side. You're right, not going into a savings account, not going into a 10 year treasury yielding just under 1%.

But if it goes back out there into general consumption, that can be the inflation catalyst that can push rates higher. And then it could put the Fed in a tough spot. And that could end up being a very big story. And I think that could play out in the first half of 2021.

ADAM SHAPIRO: Shawn Cruz is TD Ameritrade Senior Manager of Trader Strategy. Josh Wein is Portfolio Manager at Hennessy Funds. We wish you both a happy, healthy, safe new year, and look forward to seeing you again-- well, next year is just a few hours away. So we'll see YOU NEXT YEAR.