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Stocks extend declines as vaccine rally cools further

Stocks fell Thursday, with the Dow and S&P 500 adding to Wednesday’s losses as optimism over a COVID-19 vaccine moderated further. Chris Retzler - Needham Small Cap Growth Fund PM joined Yahoo Finance to discuss the market action.

Video Transcript

ADAM SHAPIRO: Let's get some insight into these markets with Chris Retzler. He's Needham Small Cap Growth Fund manager, and it's good to have you here. I want to talk to you about so many things that are at play, like the word gridlock. Usually, you don't like gridlock. But these days, in a locked-down city, it's great to see traffic return. Same in Washington-- markets like the gridlock, right?

CHRIS RETZLER: I think that investors like a Washington that really doesn't change much. Things that are predictable are what investors like. And so if we have a gridlock in Washington, which is really the base case that we're looking at right now, that you would have divided government of at least a red Senate, you know, we think that the market is celebrating that. And that's what we've seen in the last week.

You know, the Georgia races are certainly very critical as to how that comes out. But I think, right now, the market's building in that the government will be divided and that there won't be a lot of these really progressive, anti-business, anti-growth policies that could be put in place. I think that the tax hikes that have been threatened and discussed are probably less likely. But if something changes and it's all blue, I think we would become extremely more nervous going into the end of the year. But we're not going to have a firm answer on that probably until some point mid-January, when the election's done in Georgia.

SEANA SMITH: Chris, you said you would be a little bit more nervous if that were the case. How would you then change your strategy based on that?

CHRIS RETZLER: We would certainly be looking to get out of many of our higher-multiple companies-- you know, valuations. We think that growth would be more compressed. I think you would see probably more of a rotation to more value names. And so that's where we would be looking.

But we don't have that determination yet that investors are going to just sell their winners yet. Because if there's not going to be a higher capital gains percentage next year, it would behoove them to wait till January. But you know, we're remaining very flexible right now. We expect a volatile market. We expect it to continue to be volatile through the end of the year. You know, the VIX is still somewhat elevated, and we think that that's going to be with us for a while.

ADAM SHAPIRO: Chris, even if the Democrats were somehow to get control of the Senate, you can't stop technology. 5G is coming. You point out that there's still support for continued growth in technology. Would it be a mistake to do the rotation out, even if Democrats get control?

CHRIS RETZLER: Well, as an active manager, I do have to be invested some amount. So what we're really looking for right now are industries like semis and semi-cap equipment that we think are still going to do well, whether it's a full blue government or a gridlocked government. You know, I think there's a lot of value being placed in some of the software retrenchment of stock prices that we're seeing come in. But software has clearly been a real winner over many years, and we think that's going to continue. But one of the big areas that we're really digging into right now is more renewables. We think that, you know, returning to a Paris treaty and a lot of the focus on climate could be a big-- those stocks could be big beneficiaries here, even in a divided government.