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Market Recap: Thursday, January 7

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U.S. stocks gained Thursday as traders shook off Wednesday’s unrest in Washington and looked ahead to the policy implications of the incoming presidential administration and Congress. Optimism over more stimulus under a unified Democratic government stoked a risk-on mood. Stifel Chief Economist Lindsey Piegza and RiverFront Investment Group Global Fixed Income Co-CIO Kevin Nicholson joined Yahoo Finance Live to break down the details.

Video Transcript

ADAM SHAPIRO: We're heading toward the closing bell with Lindsey Piegza, Stifel's Chief Economist, along with Kevin Nicholson, RiverFront Investment Group's Global Fixed Income co-CIO. I want to start with you, Lindsey, because we keep hearing about all this pent up demand and GDP is going to boom next year. Do you agree with this? Or is this a bit of a hopeful wish?

LINDSEY PIEGZA: Well, I do think that eventually we'll get back to an upward trajectory of growth and demand. But it's going to be a long, bumpy road until we get to that point. In the near to medium term, it's very likely that the economy continues to lose momentum and really struggle to get back to an organic path to growth.

In fact, depending on the depth and duration of this second round resurgence and the subsequent policy measures that we've already seen put in place, we could, in fact, see the first quarter fall back into negative territory. So right now, the US economy we're hopeful will get back on track eventually, but it will take some time to get to that point.

SEANA SMITH: Hey, Kevin, when you're looking at stocks at these levels right now-- Dow set to close above 31,000, S&P and NASDAQ also in the green-- what do you make of stocks at these current levels?

KEVIN NICHOLSON: Definitely think that stocks are a little bit extended here. When you look at the S&P 500, we look at the analyze the trend a lot and looking at the 200-day moving average. And it's annualizing at roughly about 44% right now, and that's not sustainable. So at some point, we believe that you're going to see the potential of a pullback of 5% to 10% here. However, right now, the market is really moving based upon the stimulus package that they think that's on its way.

ADAM SHAPIRO: Yeah, the $2,000 checks, perhaps. Kevin, let me do this with only about 40 seconds to the closing bell. Which sectors are going to get hit hardest in that pullback? Because right now, almost all are in the green, except consumer staples and utilities.

KEVIN NICHOLSON: Yeah. I think that when you look at the various sectors that are going to be under pressure, you'll probably look at-- you know, utilities I think will continue to be under pressure. You may see real estate be under pressure. But the ones that I really think that are going to do well are going to be those that derive their income from overseas, especially technology and materials because of the weaker dollar. And you're also going to see financial benefit as interest rates go up.

[BELL RINGING]

SEANA SMITH: That does it for the trading day here-- you're looking at gains across the board. Dow, S&P, and NASDAQ all in the green. The NASDAQ closing up just around 2.5%-- you can see that on your screen, up 326 points. Dow closing above 31,000, up 211 points, and the S&P also closing up just around 1.5%.

You look at the sectors, technology and consumer discretionary leading the way today. And also looking inside the Dow, inside that 200-plus gain today, Walgreen's is a top performer, up just around 5%-- Apple and JP Morgan rounding out the top three performers. I want to get to Jared Blikre for a closer look at some of these movers into the [INAUDIBLE]. Jared.

JARED BLIKRE: Yeah. Well, let's go to the YFi interactive and look at all the green on the screen. In fact, the lone exception here is Hong Kong, down half a percent. That was hours ago. But what stands out is a broad-based rally here. We have both the small caps and the large caps participating. Russell 2000, up 1.8%. NASDAQ, tech heavy, mega cap heavy up 2.5%.

And we see this when we take a look at the components of the NASDAQ 100. After getting drubbed yesterday, guess what? Tesla is up 3.4%, Alphabet 3%, Microsoft nearly there, and Tesla-- probably one of the bigger stories of the day, if not the year so far, at least in terms of market action, up another 8%. Jeff Bezos surpassing the wealth-- excuse me, Jeff Bezos just got surpassed by the wealth of Elon Musk. And Tesla is now bigger than Facebook.

Rounding out with the sector action-- tech, discretionary, those were the two outperformers. Each up-- well, tech is up 2.6%. And then we find energy and financials close behind. So we're talking about a rally that included both value and cyclicals. To the downside, the interest rate-sensitive sector utilities-- not surprising it's down 1.3% today given the move upwards in the 10-year T-note yield that we haven't seen these yields since about February or March.

Well, I want to talk about one of our other big stories of the day here. And this is the rebrand of the Burger King logo. So earlier today, we got this. Now, if you're saying to yourself, this looks familiar, it's because we have seen this before in nearly its identical form. Because I tweeted this myself-- this is harkening back to the 1994 logo.

And you can see slightly different font, it's a little bit fatter now. And I'll go back to that other one. But this is a stock which was up today. So apparently, the market and the market participants are liking this rebranding. This is over the last two days, and you can see a nice up trend right here, guys.

ADAM SHAPIRO: Jared, somebody got paid a lot of money to redo that logo to make it look like it--

JARED BLIKRE: That was me.

ADAM SHAPIRO: Like it did back in the 1990s. Thank you very much. And for the record, I think Burger King University is still in South Florida. Let's go back to the guests, and I want to get back into this discussion about utilities, especially with you, Kevin. Because some investors might not understand, me included, the way that bonds and the interest rates impact on utilities. Can you help us elaborate that? Because I would hate for someone to make a bad decision with utilities.

KEVIN NICHOLSON: Well, I mean, most people when they're buying utilities, they're looking for income-- you know, a steady income stream. But for us when we're looking at utilities, I'm thinking that, you know, as interest rates move higher, I'm not going to opt in for a utility, because I can use other investment vehicles to get that income stream. And so that's why, you know, utilities has been one of the sectors which we have underweighted for a long time now.

SEANA SMITH: Hey, Kevin, I want to go back to what you said right before the bell, and that was the fact that we could see a 5% to 10% pullback. And I know that we are at the record highs here, but when we're talking about that, what do you think is going to trigger it?

KEVIN NICHOLSON: Well, I think you could have a multitude of things that trigger it. If we have a vaccine disruption as far as the logistics and the distribution-- because we are right now behind what we previously had planned on being-- having vaccines done. We've only vaccinated about 4 million or so people. And at this point, they were talking that they were going to have 20 million out there.

So it just depends on whether or not we can stay the course here. Also, you could get to a point where, you know, earnings are starting to forecast or starting to come down a little bit. S&P operating earnings up until this week were projected to be $167 for 2021. And now they've dropped down to about $164.

So if you get some earnings surprises that are lower in the first quarter, I think that that would also warrant a pullback in the market, because the market has gotten a bit ahead of itself. We think that a lot of what has transpired, this rally over the last couple of weeks, has pulled some of that information forward over the last month or so. And so you are taking away a little bit from 2021.

ADAM SHAPIRO: Lindsey, I want to bring you back in, because your December note-- I'm going to be very honest when I read it-- was a little disturbing for me. It's frightening-- some of the things you talk about in here-- frightening is not the right word-- but we keep hearing these rosy predictions for the future. And you caution people.

I mean, I'm going to quote from this-- "it will take time for the broader economy to return to pre-pandemic levels." And the reason I asked you that GDP question at the start of all of this is we've had guests say that we're performing with 80% of the pre-pandemic GDP. It seems like we have a long way to go to get back to where the earnings, at least, for companies would be such that this rally we've enjoyed is sustainable.

LINDSEY PIEGZA: Absolutely. And we have to remember that this isn't a market crisis. This was a health crisis. So there really isn't anything that we can expect from the central bank, from even the federal government that can get us back onto this long term pathway to prosperity. It has to come from a health solution, meaning we have a meaningful way of separating the healthy from the sick.

And as your previous guest was noting, we do have the vaccine slowly being rolled out. But the timeline that was presented was assuming zero hiccups in distribution, manufacturing, approval, acceptance of a vaccine by the American public. So it's really an overly optimistic timeline.

And that leaves an extreme amount of downward momentum or downward disappointment for the market when we start to look at the realistic pathway. I think the absolute earliest that we can talk about widespread inoculation is in the third quarter or beyond. And remember, it's not going to be a flip the switch type of scenario. Even after we start to see the vaccine widely dispersed, consumers are still going to exercise caution. They're still going to be concerned about being jam-packed into movie theaters, or concerts, or conference centers.

So it's going to be a very slow, very bumpy pathway back to some semblance of normal. And it could be a year or more that we're still wearing masks or exercising some types of social protocols-- even, again, after we start to see widespread inoculation. So the idea, the hope that the economy is back to normal in the near term just doesn't seem well-founded when we look at the realistic timeline for not only the vaccination, but the timeline for employers to reconnect with employees and supply chains and get those business lines back on track.

SEANA SMITH: So, Lindsey, then when you're looking at that timeline, I guess the big question is-- it's tough to gauge at this point, it sounds like, from what you're saying, but when we are going to get back to those pre-pandemic levels, especially with what you were saying with the movie theaters and a lot of the names inside the travel sector-- because I think it's going to take some time for people to get comfortable with going back to how they were behaving going back 10 months ago. How are you incorporating that into your view here for GDP growth?

LINDSEY PIEGZA: Well, it's very difficult too, because it's going to be a k-shaped recovery, meaning we're already seeing some sectors that are recovering at a faster pace. Manufacturing, for example, has picked up, auto sales very strong, housing has been the silver lining of this pandemic. On the other hand, we're still seeing the consumer somewhat sluggish, the labor market lagged behind.

But even within sectors themselves, we're seeing winners and losers. When we look at where the consumer's spending, which many consumers throughout the pandemic were still out in the marketplace spending, they were spending differently and spending in different areas. And particularly, big business was benefiting at the expense of small business.

Big businesses, which were arbitrarily in some cases excluded from those restrictions, or they had a larger online or web presence so they were able to pull on internet demand from consumers-- and so even as we go forward, again, different sectors and within different sectors, we're going to see very clear lines between winners and losers, making this more of a very uneven, very k-shaped recovery. But this does speak to the broader picture that GDP is going to continue to bump along, where we see fits and starts of improvement in the economy before we get to a long term, sustainable trend.

And remember, we're not trying to get back to 3%, 4%, or 5% GDP. We're simply trying to return to pre-pandemic levels, which if you remember at the start of 2020, we were already losing momentum from a 3% pace in 2019 down to just 2% at the start of the year. So really, the bar of expectations of a return to this normal level is already very low.

ADAM SHAPIRO: Lindsey Piegza is Stifel's Chief Economist. Kevin Nicholson is the RiverFront Investment Group's Global Fixed Income co-CIO. We appreciate you both being here on Yahoo Finance.