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Markets are a ‘forward looking mechanism’ in 2021: Bowen Hanes & Company CEO

Bowen Hanes & Company CEO Jay Bowen joins Yahoo Finance Live to discuss how markets are faring as COVID-19 cases rise across the country.

Video Transcript

JULIE HYMAN: But, first up, let's talk about what's going on with the markets and its perception of what's happening in Washington with Janet Yellen expected to be confirmed later today. Jay Bowen is joining us now of Bowen Haynes & Company. He's the President and CEO. Jay, it's always good to see you.

We've been talking a lot about what's going on in Washington in terms of stimulus, but I do want to focus on Janet Yellen and the Federal Reserve, Jay Powell, and what that is going to look like, what that partnership is going to look like for this year and the years to come. What's your view?

JAY BOWEN: Yeah, I'll tell you Janet Yellen, I think, is the perfect individual to oversee what I've been calling a de facto merger between the Federal Reserve Board and the Department of Treasury. Of course, she was chairwoman of the Fed and is a classic Keynesian and always wanted to err on the side of accommodation from a-- from a monetary standpoint.

And I just think that, with these ambitious spending programs coming, it's going to be a situation where the Fed is going to remain an extreme disruptor in the debt market and that Janet Yellen, with her background and her vast experience, not only on the monetary side, but on the fiscal side and now at the Treasury, is just the ideal person to oversee this. They're going to be working hand in glove.

The Fed is, as you know, buying over a trillion annually now in terms of government securities. And I just don't think that's going to slow down. I think it's MMT in the spotlight for the foreseeable future. And Yellen is the perfect person to facilitate this.

MYLES UDLAND: You know, Jay, maybe coming back to what we're seeing in the markets, just today even, the speculative mania that is happening out there, I mean today's star of the show seems to be heavily shorted stocks going up 20%, 30%, 40% in a single session. What's your view on the overall market setup right now and with respect to how animal spirits are playing a role in what we've seen? Does it have you concerned at all about the current market?

JAY BOWEN: Yeah, I think we might be in for a couple of reversals this year relative to last year. As you know, last year, you had the market do substantially better than earnings obviously. And I think it's just a classic example of how the market is a forward-looking mechanism.

When it's all said and done, earnings are going to be down about 20% last year for calendar 2020. And, as you know, the market was quite strong with double-digit returns. This year, you're going to have earnings up anywhere from 30%, 35%, but, yet, the market isn't going to be-- in our view, is not going to do nearly that well and is going to be somewhat subdued.

The other reversal I think you might see this idea of the large-capitalization companies playing such a dominant force within the major-- particularly, within the S&P. As you know, the top five or six companies accounts for 25%, 30% from a market capitalization standpoint. And so you have a situation where you can have a-- theoretically, you can have a day where 490 stocks are up, and 10 stocks are down, and the market is down because it's such a-- they're playing such a disproportionate role.

I think that could flip, at least somewhat, this year. And you could have the equal weight do a little better, certainly, close the gap versus the market cap weight this year. And the reason I say that is I think you can have a tilt more towards the value side, particularly, as we move to the second half, and you get a little bit-- and you have a continuation of this increase in inflation expectations and, also, interest rates.

I will say this. On the speculation side, the liquidity backdrop is, arguably, the strongest in history from a monetary aggregate and balance sheet standpoint. If you look at these numbers, they're really astounding.

You've got M2 growth in December over 25% year on year. You've got MZM growth, which is the real liquid money supply, up strong, double digits. You've got the balance sheet up over 80% in the last year. It's accounting for 35% of GDP.

So it's quite a powerful liquidity backdrop, which is, certainly, I think playing into the situation in some respects. So we're thinking we could have a year that the market, as a forward-looking mechanism, as I mentioned before, is going to start focusing on 2021 and so-- excuse me, 2022 in a few months.

And, while we could have somewhat of a mini boomlet in the second half, a real ramp up in nominal GDP in the second half, based on, as I say, this incredible liquidity backdrop combined with the vaccine rollout hitting its stride, our concern would be the aftermath. What comes in the aftermath of that of what could be a mini boomlet?

And I think we could have a correction this year, as the market peers into 2022 and becomes a little bit concerned on a couple of fronts, number one, Fed accommodation if that might need to be pulled back. And then, number two, you're going to have the Ways and Means Committee coming up with a tax bill in a few weeks-- a few months. And I think it will be perceived by the market as anti-growth.

BRIAN SOZZI: Jay, yeah, let me get in there. I am curious just on your thoughts on the speculative activity we are seeing in the markets here, as you mentioned. Do you think it's necessary right now for a Jay Powell or a soon to be-- what looks to be a soon to be Treasury Secretary, Janet Yellen, to come out here and send a message to markets? Hey, you know, valuations are out of control. Don't go out there and take this risk.

JAY BOWEN: Boy, I just don't think that's in the cards. I mean, I think we got a hint of that a couple of weeks ago when rates started to nudge back up. There was almost a frenzy of Fed speakers out on the tape, indicating that they are no-- that they would-- the firm message, the overwhelming message, from the Fed is that they're going to err on the side of accommodation.

That is clear from Powell. It's clear from Clarida, the vice chairman. It's clear from Williams. It's clear from Charlie Evans has indicated he would be fine with 3% inflation for an extended period of time, as long as it didn't get out of control.

I think the dominant force now is going to be this flexible price targeting where they are willing to let the inflation run hot to make up for the undershooting for so many years. And I just don't think they're going to be focused on the asset side and speculation and malinvestment. I really think it's all about getting this real economy going, which, to us, means we're going to have a real ramp in nominal GDP in the second half.

JULIE HYMAN: You know, Jay, if that's the case, what-- and if the market is a discounting mechanism, which it is, why haven't we seen the likes of a Carnival and American Airlines, a Marriott-- why haven't we seen them really start to meaningfully rebound yet? Is it because the market doesn't quite believe that narrative just yet that vaccines are going to get widely distributed, and people are going to start to come back?

JAY BOWEN: I think, on those, particularly, certain industries, it really is more of a wait and see, as opposed to really looking too far ahead. There's just-- there are a lot of crosscurrents out there. And, every day, you can catch a whiff of concerns that pop up on new variants and if the vaccine is going to be effective against those new variants.

And with the-- you know, it's a momentum situation. And, from a psychological standpoint, we all know-- we all know where the momentum is right now, particularly, in certain industries and sectors. And it's really more of a real-time situation when, if, indeed, we do get this mini boomlet, moving forward into the second half, then I do think you're going to have, at least, a modified rotation into some of these areas that would be-- fall more on the value side of the spectrum.

JULIE HYMAN: Right, well, we'll see if and when that starts to happen in a more meaningful fashion. Jay Bowen, always good to talk to you. Jay is the President and CEO of Bowen Hanes & Company. Thanks again.

JAY BOWEN: All right, thank you.