Markets move higher as Federal Reserve holds policy meeting

Ed Clissold, Ned Davis Research Chief U.S. Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets around Tuesday's opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, let's get back to the markets now, where a nice early rally is underway. Let's check in with Ed Clissold, chief US strategist at Ned Davis Research. Good morning, Ed. Lots of talk this morning, especially out of this Bank of America Fund Managers Survey about there being this tech bubble and this concern that when it bursts, it's just going to take the entire market rally down with us. Do you think we're in a tech bubble right now?

ED CLISSOLD: I think bubble's probably a bit of a strong term. Whenever we see tech make big gains, we think of 1999 tech bubble. Big difference between now versus then is that these mega-cap tech names are very profitable.

So if you were to look at, say, their share of the S&P 500, if you look at the top five stocks, which are these same mega-cap names, they're-- it's the highest weight ever. It's over 20%. But if you look at their share of earnings, it's actually a lot higher than it was then. In other words, they weren't profitable in the '90s. Now they're profitable.

So I think that's a big difference. That doesn't mean that you can't have a cyclical rotation out of these names as the economy reopens. And that could be violent and it could be sustainable for several months.

BRIAN SOZZI: Ed, fund managers seem to be talking out of both sides of their mouths, because also in that same report, they say the new bull market has begun. Do you think we're in a new bull market? And what stocks do you like?

ED CLISSOLD: Yeah, so our definition of a bull market is quantitative. So yes, we're in a bull market. We rallied so much from the March lows that we are in one.

And leadership often shifts in a bull market. What's been unique about this one is that it hasn't. Usually it is the cyclical sectors that do well-- industrials, materials. And while materials have done well, the other cyclicals have not.

So we think as the economy opens up, you're going to get this massive rotation. We're not there yet. So we're still overweight tech, waiting for the rest of the economy to reopen before that rotation takes place.

ALEXIS CHRISTOFOROUS: Ed, within tech, though, what are you concentrating on right now? We saw that huge deal yesterday, the biggest ever for the semiconductor industry regarding Nvidia video and SoftBank's Arm, a $40 billion deal there. We're expecting more M&A in that space. Where within tech are you looking right now?

ED CLISSOLD: We're still in the COVID winners groups-- that is, the areas that benefit most from an economy that's still closed. So that's our emphasis within the tech sector. So it still is the mega-cap names. I think one of the things that went unnoticed last week as tech underperformed was that the small-cap tech sector also underperformed greatly. So that's why we think it still makes sense to stay in the COVID leaders group rather than rotating to cyclical within tech.

BRIAN SOZZI: Ed, is it still-- is it-- are you concerned that so many investors can't find other investments to trade or invest in besides five big-cap tech stocks, maybe some Tesla, maybe some Nikola on the downside? These stocks are-- for a lot of them, growth is going to slow pretty sharply next year compared to what they've put up the past two years.

ED CLISSOLD: Yeah, so I think it makes sense that we need to look for some other areas. You don't want to have your portfolio so concentrated in five names, as you alluded to. But we want to spread our bets out a little bit, which is why we're actually overweight small caps as a group, not just one sector within small caps, but small caps as an area, because they can benefit from the economy doing a little bit better, but you're not going to get hung up on the COVID losers-winners debate for a while. So it's a way to spread your bets a little bit without getting yourself too hung up on any one small group.

JARED BLIKRE: Ed, I wanted to add-- get your opinion on the interest rate structure and the yield curve right now. Just going back to the Bank of America survey, I think it's only 11% thought that the 10-year would break out of its 50 to 100 basis points range. And it seems like there could be considerable pain if that occurs. How does that factor into your analysis?

ED CLISSOLD: Yeah, our base case is that the yield curve is going to remain flat. The Fed has signaled that with Powell's comments that they're not even thinking about thinking about raising interest rates. All that is about managing expectations to keep the longer end of the curve down.

If that were to not be the case, if you do get that breakout, then you would see financials rally, which is one of the biggest value sectors. And that would add even more fuel to that rotationary flame that we think would happen at some point. So that's not our base case, that financials would lead on that. But if you were to get that yield curve breakout, financials are one of the few sectors that are cheap, looking back at their historical valuations for that sector. And so there could be a lot of room to run if that were to happen.