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Markets mixed, as Honeywell, Amgen and Salesforce join the Dow Jones Industrial Average

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Nela Richardson, Investment Strategist at Edward Jones, joins Yahoo Finance's The First Trade with Brian Sozzi and Ines Ferre to discuss what's moving the markets on Monday morning.

Video Transcript

BRIAN SOZZI: Nela, always good to us speak with you. What am I missing about this market? It's trading at 20 times forward earnings. I've been mentioning it all morning long. Is the market suggesting that 2021 will be really strong for US growth as we come back from the pandemic?

NELA RICHARDSON: Hi, great to be with you this morning. And yes, what you're feeling is what the market is reflecting. This market has rallied based on two essential beliefs. The first, I think we can agree on pretty quickly here-- interest rates are going to stay very low, near zero for a very long time to go, calm on those short-term interest rates.

The second is that at least when it comes to earnings, the market is expecting a quicker-than-normal recovery from a trough, maybe even a V-shaped recovery in earnings. And so the stock market currently reflects those two views. And, of course, that view is going to be under contention as we head into the fall and the potential for a second wave of COVID outbreaks.

BRIAN SOZZI: Nela, in its simplest terms, why do investors like 0% interest rates? What does that mean for them?

NELA RICHARDSON: Well, it-- what it really means-- it means a couple of things. It means that they can buy more for the future, that the future actually has more value than the present. And so the stocks can stay future-oriented. And the future looks bright in terms of the stock market's view of earnings and the recovery.

It also means that in terms of debt, that the balance sheet can stay strong for these companies, that they can continue to issue debt at very low rates. And so it also means, finally, that there's no other trade in town. With very low interest rates, bonds are not producing the kind of income that investors have expected under higher interest rates regimes.

They still have a role. They still help cushion volatility. But really, it's going to be stocks that drive growth in portfolios over the long term when interest rates are this low.

BRIAN SOZZI: Are you having-- and I've had flashbacks. Are you having any flashbacks to the '99 tech bubble?

NELA RICHARDSON: No, because it's really tech, I mean, the leaders-- we're talking about the highly-concentrated firms in the S&P 500, those five or six firms that are driving the S&P 500 forward-- also have what we look for as long-term investors-- strong balance sheets, good management, and the ability to drive dividends over time. Furthermore, these stocks have actually benefited from the stay-at-home COVID-induced economy. And so it's like a win-win in terms of what the drivers are.

What we'd like to see, what we'd like to continue to see is a broadening out of this rally to more cyclical stocks. That would be more copacetic with an economic recovery. We haven't seen that quite sustained yet.

BRIAN SOZZI: Nela, how will-- how will you be able to tell that we've reached a period of maximum euphoria in the markets? If we're not there yet, what are the signs?

NELA RICHARDSON: We won't know until it's too late, let's be honest. That's like trying to time the market. And it's like trying to time the market's psychology. We'll know in retrospect, just like we did with the dot.com bubble. But really, if you look at the fundamentals and you believe that those fundamentals are the future, even if they're not the present, then the stock market makes sense.

What's really difficult to square is the labor market with the rally. And that's where I think the rubber is going to meet the road later this year. If those job losses that we've seen continue to make this transition from temporary losses to permanent, it's really going to be hard to justify the current rally. And I think that there is going to be some bumpiness after this initial bounce going forward. And so investors should be prepared for some volatility.

INES FERRE: Nela, and speaking of volatility, what about the elections coming up? What do you see there, and especially if we don't get results on election night?

NELA RICHARDSON: Well, we're all going to be waiting for those results, I am sure. But in terms of the long-term performance of stocks, we've seen even in divisive elections-- and this will likely be quite a divisive election-- that politics play a minor role in this saga of what drives stocks over time. We expect that there will be a knee-jerk reaction in the markets to whoever will be sitting in the Oval Office. And if there is a degree of uncertainty about who after November 3, we expect that volatility to continue.

But over time, it's going to be economic fundamentals that matter more and the performance of the economy. So politics are going to be a big driver in the short term. And that impact will be less and less the further out we get from November. The economy will take control after that.