Yahoo Finance’s Brian Sozzi and Myles Udland break down today’s market action with Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Senior Portfolio Manager.
MYLES UDLAND: Let's turn our attention back to what's happening in financial markets. For that conversation, we're joined now by Andrew Slimmon. He is a Managing Director, Senior Portfolio Manager over at Morgan Stanley Investment Management.
Andrew, it's great to have you on the program this morning. I'd love to begin by asking about how you see the markets in the context of us doing this program every day and just about everyone who's come through our doors has been bullish in the last 10 days looking at the rest of this year, rest of next year. How do you-- how do you see that outlook? Are you as positive that I think a lot of our guests have been?
ANDREW SLIMMON: Well, I think near term, look, I mean, the market's up 10% for the month. You know, you've seen some of the sentiment figures swing wildly more positive. We've had very strong kind of low beta, so people that were on the sidelines have largely capitulated and have moved into the market. So on the surface, I'm shocked the market has hung in there and has not pulled back at all as we've got, you know, bad COVID news.
The other thing that's going on, however, is the breadth has been unbelievable. So breadth is the number of advances versus decliners. Usually when you get big pullbacks in the market what precedes that is a narrowing in the number of stock that make advances. And that's not happening today. There's actually a broadening out, which is a very, very healthy sign for the market.
And I think, to your question what's really going on here is that the market is starting to anticipate that vaccine will cause the economy to recover next year and that many of these stocks, more cyclical stocks that really got crushed earlier this year, they'll start to benefit fundamentally next year, and the market always being a leading indicator. So you know, I'm not-- I think the point is we're going through a churn now where the market's not making much headway, but it's going to burn off some of this overbought situation.
But for the near-term, I think the market is going up. I do agree with that. Where I don't agree is I think the market will have a tougher go of it at some point next year when we actually get through COVID, because then all the-- you know, all the good news will be priced into the market, and that's when I think the market will struggle. So I'm not so sure next year, overall, is going to be a great year for equities, although I do concede maybe the first part will be pretty good.
BRIAN SOZZI: Andrew, why-- why do you think 2021 might be more difficult? If we do start to get mass immunization, theoretically that'd be good for the economy, you get earnings estimates moving higher again. Why do you-- why do you think it'd be tough?
ANDREW SLIMMON: Sure. Because for all of the-- the four primary reasons, there's four reasons the market is really moving-- has been strong coming off this low. Number one is, obviously, the Fed has been very accommodative, and they've shown that they will continue to support financial market. And the first thing, well, what happens if next year at post-COVID they start-- they won't change policies, but maybe their tone could change a little bit? And I think the market would react negatively to that.
Secondly, keep in mind very few people predicted this V-shaped recovery. We have had stock respond to whether they beat or missed expectations. It's not, you know, whether they had plus 10% or minus 10% earnings growth, it's what was expected.
And right now the expectations were below where companies are coming in. What happens if we get through COVID and then all these economists and all of Wall Street raises their outlook next year? The bar is going to be tougher next year for companies to exceed it. That's the second thing.
A third thing is, you know, we will get these vaccines, and I think that will price in. And fourth, and I hear this over and over and over, I hear people say, well, I'll feel more comfortable investing when we get through COVID. Well, that sentiment is a contrarian indicator.
And we know there's piles of cash-- even though cash has started to come back in, there's piles of cash still on the sidelines. Once that comes back in the market, I don't-- you know, you're going to run out of that buying power. So of the four reasons why I think the market's moving up now, I think that will reverse at some point next year.
MYLES UDLAND: Andrew, it kind of sounds like you're outlining like a, I don't know, Frankenstein version of 2017's market, right, where we pulled forward all the tax cuts and everyone got all excited. Is that kind of analog that is interesting to you?
ANDREW SLIMMON: Absolutely. You're dead-on right. The stock market's a forward predictor. I'll give you another analogy, 2009, 2010. In 2009, off below, the market went straight up. We had a very good year off below, and yet, boy, oh boy, people were very cautious, because, you know, they're looking backwards in the financial crisis and, you know, will the banks survive.
The market continued into 2010, and it was at a point when financial conditions started to feel a little better. You know, the Fed backed off a little bit, the market got a little bit more volatile, and the returns regressed. So the point is, is, you know, the market pulls that good news forward at a time when it doesn't feel very comfortable. And I think that's what's going on today. That's why these reopenings stock are working.
You know, I looked yesterday, there was bad news on the cruise ship lines, and yet they're up. So I think you have to look at the messages of the market. And you know, I always say, don't think you're smarter than the market. The market is a very good indicator. And I think if you look under the hood of what the market is saying, it is saying we like the cyclical recovery stock, but I think the message of that is we're beginning to price in a recovery next year.
MYLES UDLAND: The old cliche is, you know, the-- what's it, greedy when others are fearful? And there's a reason that cliches endure. It's because they often end up being true. Andrew Slimmon of Morgan Stanley--
ANDREW SLIMMON: Well, I'll give you one other. I'll give you one other-- don't fight the Fed, right? Don't fight the Fed means to be, you know, bullish when the Fed's accommodative.
The problem is is the Fed is accommodative when there's a problem out there. And so people tend to focus more on the problem than the Fed. So it's a, you know, great-- great line.
MYLES UDLAND: All right, Andrew Slimmon with Morgan Stanley Investment Management. Andrew, really appreciate you taking the time today. Hopefully, we can talk soon.
ANDREW SLIMMON: Take care, Myles.