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'Markets don't trade on good or bad, they trade on whether things are getting better or worse': Global Market Strategist

Invesco's Global Market Strategist Brian Levitt joins The Final Round to discuss recent market volatility and how investors are navigating the turbulence.

Video Transcript

MYLES UDLAND: Welcome to the Final Round. Here on Yahoo Finance, Myles Udland with you in New York. Let's talk a bit about what's going on in the markets today over the last couple of weeks and how to think about next week's big event, of course. We're joined now for more on all of that by Brian Levitt. He's a global market strategist over at Invesco.

So Brian, let's start with just what you-- how you're making sense, I guess, of what we've really seen in the last call it 5 to 10 trading sessions, particularly this week. I mean, through yesterday's close, S&P down 5%. That's a pretty sharp sell-off in just a couple of days. S&P is now flat over the last three months. How have you thought about this whole period for the market?

BRIAN LEVITT: Yeah, well, volatility almost always emerges when there's policy uncertainty. And of course, right now we're dealing with concerns about fiscal policy, we're dealing with concerns about reopening policies, and we're dealing with concerns about the election and the prospect for a contested election. And so the markets have been challenged [INAUDIBLE]. And at the end of the day, we're questioning the efficacy of this recovery.

Now in my mind, we knew this was going to play out like this. We knew that there was another wave of cases going, coming that was going to slow human mobility and perhaps weigh on markets. What investors should be focusing on is how we come through this period and what type of recovery we get as we move through 2021.

MYLES UDLAND: And so thinking then about the role of the virus, do you think that investors are surprised by maybe the magnitude of the surge we've seen into the fall? And also granted that this is just the beginning of colder months really across the country, across most of the Western world. We've already seen the situation in Europe is-- is more dire than it is here. It's very much shades of March and April. How much do you think the market is reacting to a surprisingly grim prospect, maybe, for the winter?

BRIAN LEVITT: Well, sure, in the last few days, I think the market has responded to this pickup in cases. Although I would argue a lot of the investors who I speak to have been overwhelmingly cautious throughout this period. And if you look at the amount of money that's sitting on the sidelines in money market funds, there's $4.5 trillion the amount of money that continues to go into bond funds rather than equity funds. So I think there's been a lot of skepticism this whole way.

And you know, look, the case rises-- you know, it was maybe not to this extent, but many of us had seen that this was likely coming. The difference between now and where we were in March is, of course, the Federal Reserve has worked to ease financial conditions significantly and investors have a better sense of what this may look like and how it will play out. I mean February and March, we were dealing in very uncharted territory.

So this is a bit different. And what we know now, Myles, is we know how to compress cases. We know how to keep ourselves safe. And we ultimately know that some type of medical or scientific breakthrough will emerge, we're just waiting for when.

MYLES UDLAND: And I want to go back to that flows point you made in terms of money sitting on the sideline, money moving into fixed income instead of equities. I mean, it's really kind of the playbook we've seen over the last decade, where there's a lack of belief, whether it's at the retail or the institutional level, in this rally. Do you think, I guess, is that maybe just the market that we're in? Is that the psychological framework of the investing public broadly? Is there a prospect in your mind for folks snapping out of that and realizing, hey, you know what, even though I'm 55, I probably still need to have 70%, 75% allocated to equities, whereas those folks right now are, you know, maybe 50/50 at best?

BRIAN LEVITT: I try to tell investors all the time that the markets don't trade on good or bad, they trade on whether things are getting better or worse. And unfortunately, what ends up happening is investors wait for good. And it's going to be a long time before things are good. We even saw that in the aftermath of the '08 crisis. If you go back and you think about 2009 through 2012 or 2013, there was nothing that any of us would say was good about it, but conditions were incrementally getting better because of the policy response and and the ability to emerge out of that Great Recession.

What investors should be looking for over the next couple years is things getting incrementally better. That's what the market's going to respond to. Good? We're not going to be good for a while. And, you know, that's going to be a challenge. Investors tend to get back into markets once they've seen markets up substantially, and then tend to move in at the inopportune time, and tend to sell at the inopportune time. It's troublsome to see that over $1 trillion went into money market assets right around the market bottom in March, but unfortunately, that's the way these things tend to play out. I'll try to keep pushing back against it.

MYLES UDLAND: And then I guess, you know, finally thinking about some of that psychological framework against what has worked so well and with so much enthusiasm, you know, we see what's happened with the FAANG names and some of these specific at-home plays. And on the flip side of that is what we continue to see in financials and value and, you know, areas of the market that I think people are still believing in like it's 1993. How have you kind of navigated those conversations with clients who, they're like, I don't buy growth, and you're like, Apple is not a growth stock, Apple is the most profitable company in the world, you know, how are you kind of navigating that environment?

BRIAN LEVITT: I remind investors that value needs a catalyst. You know, value-- there's not a values cycle out of nowhere, it requires a catalyst. That catalyst is usually accelerating economic activity, higher interest rates on a sustained basis, a steepening of the US Treasury yield curve. And we just didn't have that for the last 10, 11 years. It was a very slow growth world, low interest rates. And in a world where growth is scarce, investors pay up for those companies that are the structural growth performers or the structural long-term performers.

So what you're looking for now is, now that growth economic activity is so weak, rates are so low, you're looking for a recovery over the next couple of years that has a persistent acceleration of economic activity from a depressed level, and higher sustained interest rates, and a steepening of the yield curve, and that would be the recovery trade which would include the economically sensitive cyclical parts of the market, the deeper value parts of the market.

But I would suggest that that recovery trade, while it could play out in 2021, will ultimately prove short-lived. I suspect that that recovery will give way to another slow expansion. And in that slow expansion, you pay up for those companies who are able to generate the results in what is still a weak economic environment.

MYLES UDLAND: All right, Brian Levitt with Invesco. Brian, always great to get your thoughts. Talk to you soon.

BRIAN LEVITT: Thank you.