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Market Recap: Thursday, January 21

The S&P 500, Dow and Nasdaq hit record levels yet again, as traders looked ahead to the additional fiscal stimulus and other government spending likely to occur under President Joe Biden’s administration. Biden began his term on Wednesday by signing a number of executive orders to address the COVID-19 pandemic. Senior Investment Strategist at BMO Global Asset MGMT, Jon Adams, and Credit Suisse Senior Equity Strategist, Patrick Palfrey, joined Yahoo Finance to discuss.

Video Transcript

SEANA SMITH: But just over two minutes here till the closing bell. The DOW, S&P, and NASDAQ holding onto gains. We want to bring in Jon Adams. He's a senior investment strategist with BMO Global Asset Management. We're also joined by Patrick Palfrey, senior equity strategist at Credit Suisse. And Patrick, let me go to you first. We're seeing some buying action today, record highs yesterday, once again today. What do you make of this? What's driving the action?

PATRICK PALFREY: Well, I think when I take a step back, the hope that we're going to have an overwhelming stimulus package coming out of Washington, combined with already record levels of consumer saving, which is likely going to be released as consumers venture out and we get COVID vaccines deployed, it's not next week, but it's on the horizon. And that's really what's driving stocks here.

ADAM SHAPIRO: John, when you take a look at where we're headed for 2021, you expect the accommodative policy to continue, but very quickly, emerging markets or the United States-- where would you go?

JON ADAMS: We're actually overweight both areas, but we have a slight bias toward emerging market equities. We think that the policy stimulus, the reflation trade would be beneficial to high urbane areas, like emerging markets. Also, we expect the dollar to weaken modestly, which should, at the margin, be supportive of those emerging markets. I would say one risk there is with the vaccine rollout being a bit slower in emerging markets. That could be a concern. But we think that the reflationary issue will really overwhelm any type of concerns around the vaccine.

SEANA SMITH: All right, Jon and Patrick, stand by. We want to bring in our markets reporter, Jared Blikre, here for a closer look at some of these movers here into the bell. Jared.

JARED BLIKRE: Yeah, you know, it's been an interesting couple of days here because it's been a real reversal of what we saw, actually, in the last two months or so since November. And let's take a look at the NASDAQ 100. This is where the mega caps have been getting a lot of attention. And in fact, we're going to go to a two-day look. That Apple up 3.73%, that becomes Apple 7.1%. Amazon up over 6%, Facebook, 4%, and Alphabet over 5%. Here's the closing bell on Wall Street.

[BELL]

ADAM SHAPIRO: All right, the fork in it. We've got a closing bell. And you can see we're going to settle roughly. It's going to be a mixed picture. The Dow is going to be negative, down about 12 points. S&P 500 will be up about 1 point. NASDAQ's going to settle up about 73 points. And again, when we talk about the sectors which have been performing strongly, earlier, when we were mentioning that industrials were off today, but had been up about 6% when you look at its two-weeks. The real gainer today, as far as sectors, was information technology.

Let's go back to our guests to talk about this and how you might want to be looking at where we're headed in 2021 and 2022. Let's go back to Jon. And when you talk about this reinflation cycle and people get worried about the Fed-- we're going to have the first Fed meeting coming up very soon-- what do you think? I mean, we're not going to have any real interest rate moves until at least 2022, right?

JON ADAMS: I think that's correct. We're not really worried about the Fed tapering this year or thinking about raising rates this year. You did hear some chatter from some Fed speakers about that a couple of weeks ago. I think the core of the Fed walked that back. In particular, Powell and Clarida. And so, if you listen to those two individuals, they're telling you that they don't foresee tapering at any point this year. We think that it's a very high bar to the Fed withdrawing stimulus at this point.

And if you listen to what they're saying, they're saying that we think that the downside to withdrawing stimulus more quickly is much greater than the downside with to keeping on stimulus perhaps a bit too long. So, we'll see what this average inflation targeting, what that means. But it does appear the Fed's looking for inflation to run for at least 12 months above that 2% target before they'll consider raising rates.

SEANA SMITH: Patrick, we have seen a bit of a bump here in the 10-year yield, still over 1%. What does that mean for equities, and I guess, at what level do you start to get concerned for the pressure that that could ultimately put on the markets?

PATRICK PALFREY: Well, when people commonly think about interest rates, the idea that higher interest rates is an inhibitor for stocks is actually not true. And in reality, higher interest rates signal greater economic vibrancy, particularly when we're at the levels we're at now. So there's a long runway for interest rates to continue to move higher and for equities to respond positively to higher interest rates. That level historically, going back decades, is around 5% on the 10-year. It's likely going to be a lot lower now because of the structurally lower interest rate environment that we're in.

But I would imagine we would be able to see higher rates for at least the next half a point or so before we see an issue with stocks. And as interest rates rise, the procyclical bet, the financials, the industrials, the materials, those groups that had been working so far year to date are those areas where you're going to want to be focused. Because they're responding to that economic vibrancy.

ADAM SHAPIRO: You know, Patrick, one of the things you do for your clients, I'm looking at right now your growth dashboard and a note that you recently sent them. And I'm wondering what is your-- what's the impact of what happens with interest rates in, say, the next six months? Because we're going to have fluctuations in the 10-year yield. On things like you laid out here very simply as far as fourth quarter revenue, margins, and earnings, and you break it down not only to sector, but the kinds of things all of us relate to-- automobiles or durables and apparel. So what do you think is going to happen?

PATRICK PALFREY: Well, I think future trades have an opportunity to move higher. And it's likely going to be at least for another at least half a point on the 10-year in terms of where we can go, just looking at the reflation trade that's taking place. So we're going to see strong stock market performance on the back of higher interest rates. And if you're asking in terms of what groups are benefiting, not just in terms of performance, but in terms of their business, banks are really the area where you're going to want to be in.

The fact that the yield curve is going to be incrementally steeping because the short end is being held down by the Fed, and then you have higher rates, both of those are very, very favorable for their net interest income. And that's really what drives bank profitability. So the opportunity, in our mind, is really in financials. And that's really our favorite sector right now.

SEANA SMITH: Hey, Jon, in your notes, I noticed that you were talking about the likelihood of additional stimulus. And you were saying that we're likely going to get a, quote, "watered down version" of Biden's economic agenda. I'm curious what you think the market is forecasting or what the market is anticipating that we'll get over the next few months.

JON ADAMS: Sure, yeah, I would say policy is really driving everything there right now. We talked about monetary policy earlier. But from a fiscal policy perspective, I think the expectation is that we'll get something like $1 trillion potentially of additional fiscal stimulus. That's very significant when you add that to the $900 billion that we saw in December. And there will likely be some horse trading as far as what the composition of that package really is when it's passed.

The Biden administration's talked about $1.9 trillion as a starting point. We don't think Republicans in the Senate will support anything larger than, say, $1 trillion. But that's still a very significant package. And if you add to that maybe a second part of the Biden economic package a little bit later in the year, focused on infrastructure and green energy, that's really a lot of stimulus that's feeding through. And again, that drives reflation, and we think that's very good for equities overall.

ADAM SHAPIRO: Patrick, I'm pulling out one stock here, and I'm not going to ask you to comment on Home Depot, but it was the leader in the Dow today, up about 1.7%. I would imagine that a lot of the stay-at-home related type of businesses are those that are at least going to gain for another six months. Would that be an accurate call?

PATRICK PALFREY: I think there's still an opportunity for many of these companies to be winners in this environment, at least for the next few months. At some point, the comps, the fact that they are cycling these hard year over year comparisons, get more difficult. And that's where we'd actually recommend investors begin to look more at some of the value sectors, like a financials or like an industrial, something that was perhaps beaten up and is watching their profits recover through last year's easy comparisons. And it really drives some of the stuff that we're likely to see in those names.

And I think it's important. You know, consumers are sitting on record savings. And the fact that they may get more stimulus and stimulus that is going directly to them, the opportunity for companies to really benefit from this reopening trade as the economy improves is tremendous. And I think that can't be underestimated. And that's really what's going to be driving stocks over the next couple of months. So, anything that is tied to the reopening trade is going to just take off.

SEANA SMITH: All right, Patrick Palfrey, Credit Suisse senior equity strategist, and our thanks to Jon Adams, senior investment strategist at BMO Global Asset Management, thanks to you both for joining us today.

JON ADAMS: Thank you.