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The ‘number one most important thing is the ten-year treasury’: Munson on the driving force in the market

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Lee Munson, Portfolio Wealth Advisors CIO & President, joins Yahoo Finance’s Adam Shapiro and Seana Smith to discuss his thoughts on the current state of the economy and why everyone appears to be bearish in the markets.

Video Transcript

SEANA SMITH: We want to turn our attention back to the markets here. We have the Dow, S&P, and NASDAQ holding on to gains, it looks like, with just under an hour to go until the bell. You can see the Dow up 29 points. The S&P up just around a tenth of a percent. The NASDAQ the outperformer once again today. Let's bring in Lee Munson. He's Portfolio Wealth Advisors Chief Investment Officer and President. And Lee, just starting with the action that we see not only today, but also, I guess, recently, we've seen this outperformance here from the NASDAQ. Is this something-- is this a momentum that you think is going to continue now for some time?

LEE MUNSON: I think it's going to be the summer countertrend to the NASDAQ not performing as well as some of the other places like old economy and value. You know, probably about four or five weeks ago, it was becoming evident to me that the NASDAQ was getting really oversold in relation to value. And remember, for context, for everybody watching this, since really September of last year, we've been in an either or market, meaning that you either have the NASDAQ raging in the queues, doing well, or you've got stuff like the more stodgy banks, materials, energy, financials doing well.

And so this is a continuation of that. Overall, though, I think that this is going to be an opportunity for people-- like, listen, if you really think that the NASDAQ is so wonderful, you really like those valuations, and you really think that the rate, that 10-year is going to go below a 1.5, then have at it, right?

All the people at kind of my camp, because we're looking at the reflation trade the reopening trade, we're looking at dividend payers, again, that value old economy stuff, that's what really raged post.com. And that's what's been on a relative basis doing well this year. Then the thing that's going to be not in my favor is going to see that 10-year go below 1.5. So remember, the lower you see that 10-year drift down, the stronger the NASDAQ trade is going to be. It's a very simple issue. Yields down--

ADAM SHAPIRO: So Lee--

LEE MUNSON: --NASDAQ up.

ADAM SHAPIRO: Lee--

LEE MUNSON: Yields going up--

ADAM SHAPIRO: And Lee, right now, I got to tell you, as I interrupt you, that the 10-year, it's 1.52, so you're going to get your wish, it looks like, perhaps. But you also point out that there's a lot of self-fulfilling prophecy, that people just can't get enough of the bear talk. What are we missing?

LEE MUNSON: Well, you're missing accelerating earnings. You're missing accelerating inflation. I think that there's this general idea that earnings can't be revised any higher right now. That is not true. Remember what was happening in summer 2009. Every single day, people said it's got to go back down. It's got to start selling off. And every single day, it just went up higher. And it was just, like, 10 days up, 20 days up, 30 days up, 40 days. That summer of '09 was unrelenting. We're seeing something a little weaker but similar here.

So I think that, overall, what people miss is that they believe the Fed, they believe fairy tales that inflation is transitory. Higher inflation and higher rates do not serve long duration assets, which is a wonky way of saying tech, biotech, unprofitable tech. And so we might have a summer lull in rates and we might get some softening in commodities, it has softened a little bit. I think the ultimate play between now and the end of the year is not going to be in the NASDAQ. But it's going to be in what's called economically sensitive reflation oriented asset classes. And so, that's all I got to say about that. But again, you've got to have a pause. That's what we're seeing.

SEANA SMITH: Lee, if you had to narrow it down to just one thing, what is the biggest driving force in the market right now? Is it the Fed? Or is it something else that maybe we aren't looking so closely at?

LEE MUNSON: I think the number one most important thing that you're looking right now is the 10-year Treasury. Because that relates to the Fed and how much they can control the yield curve. Again, the only thing I care about really looking at right now is really just the 10-year. Because the 10-year will tell me if my old value positions are paying off. Or it's going to tell me if sort of the broader S&P and the NASDAQ 100 is paying off.

And that's going to continue to be the case for the rest of the year. Because we already know earnings are going to get even better going in, and they're going to revise higher. We already know the main things that could cause a correction. The Fed says something that somebody thinks taper or something. They're not doing anything till the first half of 2023 with rates. I care less about taper, unless you're trading bonds, right? I don't care if Biden says we're going to start taxing at 28%.

You know, my buddy Tony Dwyer already showed me the information. It's like, come on. They're saving-- aggregate earnings are-- there's 20% savings in interest expense. So how-- you know, we're still going to be revising higher in aggregate S&P earnings, even with the 28% tax rate. I don't think that now that we've signed this big national global thing. So I think all you look at is interest rates. It's an either or market. I think the NASDAQ could continue to run for maybe 6 to 12 more months. I'm not sure if February was the top. But that's not the market I'm betting for. I'm betting against that, right?

ADAM SHAPIRO: Yeah, and--

LEE MUNSON: So I think that's all you got to look at.

ADAM SHAPIRO: And when you talk about taxes, you should read Seana's latest article regarding Kevin Hassett and taxes. He told us yesterday, ain't going to happen. So all of that said, you're also saying, come on, bring it on. You'd like a VIX around 30. It's nowhere near that. So this kind of-- I brought a smile to your face. We're not going to see VIX around there unless there's that black swan event, right?

LEE MUNSON: Absolutely. I mean, here's the thing. There's always something we don't know, right? But you're not going to induce me to sell more bonds right now to buy more stock in this market until I get to see some type of softening or pullback. Again, misinterpreting the Fed saying something, I think that's your most likely way to get the VIX up and the market down. But everybody on Wall Street's waiting for that. We're all looking for that. So every time we're all waiting for the same thing to happen, it's probably not.

The second thing is the tax code. But I think that's kind of baked in. You know, what, the Wuhan virus came from Wuhan. I don't think that's going to be it. So for me, I'll give you my inside numbers. Because that's what everybody wants to hear. I think that the S&P for me is viable around 4,000. Don't freak out if it breaks under 4,000. And you've got a lot of Quant machines that are trying to do that. But I think right now, it's been a magnet at 4,200, no interest. So 5% downside, I'm in.

Small cap, I only buy small cap value because it rocks this year because it's a reflation trade. But I've got to see that come down at least maybe 7% or 8% or see the broader Russell 2000 come back about 7%, 8%. I'm using some charts on that, of course. And I think that that's where you can buy it. I think emerging markets, it's viable here, because, folks, the slow rollout of vaccines in emerging market is that's a news story that's going to happen. And as more people get vaccinated in those regions, I think that you're going to have a narrative that's going to extend emerging markets up. And they've gotten beat up. I don't know. See why they're so beat up when the dollars continue and cyclical cycle down.

And then as far as gold, you know, I've got a target of 2,200 an ounce to maybe where I'd, like, bust out of that trade and be gone. But I think gold, silver, I think they have legs. I just caution everybody. There's not as much upside as you would think in precious metals if you watch those commercials about buy gold today. I think it's much more muted. But I think it can give a run for the money versus, like, investing some money in a 10-year Treasury today.

SEANA SMITH: All right, Lee Munson, we always love your energy. Thanks so much for joining us. Again, Portfolio Wealth Advisors Chief Investment Officer and President. We'll have you back. We'll check in on some of your calls here in a few weeks.