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Markets volatile with earnings, economic data in focus

Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss what’s happening in the markets today with Verdence Capital Advisors Director of Portfolio Strategy, Megan Horneman.

Video Transcript

BRIAN SOZZI: What are you thinking? Are you just surprised by how bullish the market has been the past month and a half? And maybe you could break down for the average investor why we're seeing this latest flood into some areas of the market.

MEGAN HORNEMAN: So this is all still part of the euphoria around the V-shaped recovery that we saw in the economy. And we knew that this would happen.

I think that some of the things that are really driving the market, especially if you want to break it down for those retail investors, has been that economic data is coming in much better than expected. When you look at something like the Citigroup economic surprise index, it's at a record high. And that's not just in the US, but it's also in Europe. So you have economic data that's better than expected.

You do have improvements from the coronavirus and from the health side of it, where we had some of those hot spots in some of those particular states, we've started to see cases decline. We've started to see that reproduction rate number, more states pick up that have a reproduction rate number under 1. So this is all positive news for the economy.

And then the reopening in some of the pent up demand that we've seen in, whether it's retail sales or auto sales, we've seen consumers coming back out. So this has been part of the rationale on the market rallying in recent weeks.

And then particularly this week, we're getting closer to what looks like some sort of another stimulus package for pandemic relief.

ALEXIS CHRISTOFOROUS: Megan, having said all that, we're continuing to see the rally in equities be concentrated in a few large cap companies, particularly large tech. Why aren't we seeing a broader based rally, and does that concern you? I mean, what does that tell you about investor conviction right now during this rally?

MEGAN HORNEMAN: You have seen some of-- of course, the entire large cap part of the market's been driven by a handful of names. And you're right, they're technology names. But at the end of the day, what have we been using the most since the pandemic? It's been technology.

So whenever people come in, they want to buy what we're using. I don't know if you've tried to get a router or a computer or a computer fixed recently. This is very difficult to come by, because there's this flood of money into the technology sector just to survive in this pandemic era.

Now this won't last forever, though. This is one of the reasons why we would be careful of looking at those very pricey, high tech names. Because eventually, we will get a vaccination, eventually the economy will recover, and those names, you should start to see some rotation out of those names into some of the different types of sectors that will benefit from an economic recovery.

BRIAN SOZZI: Megan, does the-- ultimately, if we do get that vaccine, does that vaccine upend the market?

MEGAN HORNEMAN: So that was your original question. I apologize when we got disconnected. And the report out of Goldman Sachs is the upending of the market will be this rotation, rotation out of big tech and into some other industries.

Some of the industries that we think might benefit, if there is a rotation out of the tech, would be things like industrials. Industrials will benefit from whether it's fiscal stimulus, rebuilding here in the US, those types of companies will benefit from that.

But we think an upend of the market. I think that there's more risks here in the second half of this year than just the tech, whether it's a tech bubble. I think there's more risks that the market's not looking at. We do know that we're getting closer to a fiscal stimulus package.

But we do have the aftermath of the pandemic that we have to deal with right now. There's over 20 million renters right now at risk of losing their homes when this moratorium goes away. We know this is part of the stimulus package. But there's a lot of things, whether it's bankruptcies that are piling up. These are the after effects from the pandemic that we know we're going to start dealing with in the second half of this year.

So we think whether you want to calling it an upend of the market or at least a market pullback after we've had such a record run, we think some of these risks may be catalysts for that as well.

ALEXIS CHRISTOFOROUS: So if those are some of the risks, some of the headwinds, what does it mean for the markets where people are hedging right now? I'm thinking gold, right, which continues to just march higher, despite whatever else is going on. We've got a weak dollar. No signs that that's going to change any time soon. That's helping to buttress the demand for gold. Where do you see gold going, and are you concerned there's a bubble there?

MEGAN HORNEMAN: Yeah, I've never really been a gold bug, because it doesn't have-- there's no value. It's more of a speculation type of trade. And right now, what are your other options to speculate in? Are you going to speculate in the Treasury market, where your yields are next to nothing? So you're getting a lot of speculation into the gold market.

In our opinion, if you're looking to hedge some near-term volatility in the market, or at least a modest consolidation, there's nothing wrong with cash. We have an overweight cash position in our portfolios. We're looking for opportunities, and we think that they will present themselves as we get into the second half of this year.

BRIAN SOZZI: All right. Let's leave it there.

Megan Horneman, Director of Portfolio Strategy at Verdence Capital Advisors. Always good to see you.