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Markets ‘largely expected’ stimulus deal: Strategist

Yahoo Finance’s Alexis Christoforous and Brian Levitt, Invesco Global Market Strategist, discuss market moves and stimulus.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to take a look now at the markets because we started the show by telling you that the Dow had bounced back from a steep sell off this morning. And as you can see there, actually moving higher now. New York's best level of the day, up about 87 points throughout the broader market-- still a bit lower, with the S&P down about 11 and the NASDAQ off about 23 points.

Joining me now is Brian Levitt. He is a Market Strategist at Invesco. Brian, always good to see you. So we've got this $900 billion relief package finally going to be OKed on Capitol Hill. Why isn't the market rallying on that news?

BRIAN LEVITT: Yeah, I guess it's a little bit of a buy the rumor, and sell the news going on here. I mean, the markets have largely been expected to get something. And it was in line with expectations. It wasn't substantially higher. And so I think the market largely views this, rightfully, as a bridge to move some of the hardest-hit families through this. It's not sufficient to lead to a new higher sustained level of economic activity. It's a bridge. And the markets largely expected it.

ALEXIS CHRISTOFOROUS: You know, everybody keeps talking about the recovery trade, Brian, right? How we're going to be seeing this rotation to small caps-- which have been doing quite well-- and this rotation to value. Do you believe that that's going to continue to be a trend early next year?

BRIAN LEVITT: I do. And I think that we should just note that the word trade is trade. It's not-- you know, this recovery portfolio doesn't outperform for the next five years, seven years. It's a trade that should have some momentum behind it. And typically, what you see when the economy is at depressed levels and starts to come out of it in that recovery phase, you're right, rates go up. Commodities go up, cyclicals, value, the more smaller cap equities outperform.

And that should persist for some time. I think it ultimately gives way to another modest expansion. And we saw a modest expansion for years after the recovery that followed the global financial crisis. And that was a world where interest rates stayed quite low. And we never really got a higher sustained bout of growth. And so larger caps and growth-oriented markets outperformed. But for now, yeah, the recovery trade should play out for the better part of 2021.

ALEXIS CHRISTOFOROUS: Would you lump oil into that recovery trade? I mean, we just heard from Mike Mayo a few moments ago over at Wells Fargo talking about banks-- one of the big laggards of 2020. He's quite bullish on banks in 2021. Oil-- another one of the worst performers of this year-- lower today on fears that these ongoing coronavirus infections and now this new strain coming out of England is going to pinch demand for fuel going forward. But is oil going to have its day in the sun in 2021?

BRIAN LEVITT: Yeah, the oil patch and the energy sector should participate in a recovery trade, as should financial, as all part of the steepening yield curve, better economic activity, that weaker dollar that tends to support financials and the energy patch. Now I don't think that that takes oil out of a structural malaise. I mean, oil has structural issues that probably don't disappear, nor does a lot of the traditional energy patch. But in a recovery trade, you would expect to see oil prices up and energy participate more in the market advanced than it has for the prior 12 years.

ALEXIS CHRISTOFOROUS: So in the near term, and by near term, I mean the next two to three months, are you bullish on this market? And what are your expectations for next earnings season?

BRIAN LEVITT: Yeah, we're bullish on this market. I mean, it doesn't mean that there's not some churn. Markets are going to assess whether things are getting better or worse, relative to expectations. And is it possible that you could have a few days or weeks where things feel worse relative to expectations? Absolutely. But this is a market that's focusing on what's likely to take place as we progress through 2021. And given the positive news on the medical and science front, then you should see a recovery play out. And we're starting to see. And you should see it take on even greater whole.

Now earnings would do better in that type of an environment. Earnings tend to reflect a nominal GDP, globally. And to the extent that you get this type of global economic recovery, then earnings should improve. And so for all the investors that are particularly worried about valuations, the reality is the market goes first. So you see the pickup in the numerator in a price-earnings ratio. And then you wait for the earnings to reflect it. And we're likely to see that. And so I think that it's a long bull market for equities. And we're likely in the early stages of it.

ALEXIS CHRISTOFOROUS: Speaking of valuations, before I let you go, in the 30 seconds we have left, what's your take on Tesla today? I mean, the stock is up better than 600% year-to-date, but it's selling off today when it's making its debut on the S&P 500. What do you make of it?

BRIAN LEVITT: Yeah, it's also probably a bit of a buy the rumor, sell the news as well. I mean, I'm not asked to make calls on individual equities. I would just say that in what had been a very slow growth world with interest rates never going up on a sustained basis, investors favored long duration assets-- companies that they believe can generate true earnings growth over time. In a recovery trade, you would expect to see shorter-duration assets, more value-oriented cyclical parts of the equity market outperform.

ALEXIS CHRISTOFOROUS: All right, Brian Levitt, Market Strategist at Invesco, good to see you. Thanks for being with us.

BRIAN LEVITT: Thank you.