S&P 500 reaches record high, Dow jumps after J&J, 3M earnings top estimates

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman discuss today’s market action and outlook with Lori Calvasina, RBC Capital Markets Head of U.S. Equity Strategy.

Video Transcript

JULIE HYMAN: We've got stock futures indicating a higher open this morning. And to talk more about the outlook, not just for today, of course, but for this year, let's bring in Lori Calvasina, RBC Capital Markets Head of US Equity Strategy. Lori, it's great to see you. Lori has been on maternity leave. So welcome back to talking to us and to work for you.

You know, I do want to dive more into your forecast. But first, I do want to ask you what we were just talking about as well with these-- and yes, I know you're a macro person, you're not a micro person with these individual stocks. But has the game changed at all in terms of having to pay more attention to what retail investors are doing and how they are influencing the market. And are you factoring that into your strategy when you're constructing it?

LORI CALVASINA: So look, I think it's a great question. And I think the answer is yes and no. I think throughout time, you know, in the history of stock markets, people have always tried to figure out, when we've seen these points of excessive valuations, when we've had these big run ups in the market, is there too much froth? And sort of what's going on in the individual investor part of the market is always something that people look at. If you go back to 2000, people looked at excessive flows into growth focused mutual funds as evidence of retail investor froth and that it was time to get out of the market.

Now today, funds flows are not that great of an indicator of market tops. But I think there is a lot of chatter going around about whether or not what you're seeing and what I call the new generation of retail investors, is that signaling excessive risk taking? Is that signaling froth? And I think the answer there is, yes, it is showing that things have ramped up on the risk side. I think it sort of doesn't pass the smell test with a lot of Wall Street bets.

But the problem for someone like me is that there's no data to analyze. So we know that it is telling us something about how much risk is out there. But just because it has bubbled up today, is that telling us that we're at a top in the market now? I think you can't make that argument. I think this could go on for a while.

MYLES UDLAND: And Lori, speaking of flows, we've certainly seen a lot of individuals but a lot of institutions underweight and moving out of equities, really, for the last decade or so. And in terms of thinking about that kind of money, what conversations are you having there with respect to investors that saw a 10-year bull run, maybe missed some of it, and then saw the markets not back in 3 months and are kind of back in the same spot as we get 2021 under way.

LORI CALVASINA: Well, you know, what we've seen, if you look at asset allocation funds, so people who invest in stocks and bonds and different, you know, kind of geographical categories of US equities, you know, I think those folks are looking at their US allocations versus non-US allocations. I had one question a couple of weeks ago where someone said, you know, I'm interested in the UK, can you show me some positioning data on the UK? And we were able to show them that the UK, within the European allocations, is very low, and European allocations in those funds are very low. So I think people are thinking about how do they move their money around in terms of geography within US equities, because we are certainly seeing, no matter how we slice the data, that within equity portfolios, the US allocations have been very high and those non-US allocations have been very low. You see similar things If you look at futures data on CFTC as well.

BRIAN SOZZI: And then we're getting ready to get the opening bell on Wall Street. Dr. Rowan Biswas MD, PhD from Northwell Health virtually-- is virtually ringing the bell today. And really, I think, Lori, we all continue to watch some of these really robust moves like we we're just talking about, and GameStop, you name it. And there, in fact, is the opening bell.

Lori, you do write in your most recent note that you wouldn't be surprised to see a period of / and you call it the potential for a mid-teens drop to a drop of mid-single digit percentages. What has to happen in the market to get that mid-teens drop?

LORI CALVASINA: So I think a mid-teens drop we would think of as more akin to a growth scare. If you look at the post financial crisis environment we keep having, every few years, sometimes in a period within a couple of years, these drops of say, you know, kind of 10% to 20%. And they're always associated with these moments in time where investors have started to say, oh my god, we're about to have another recession, and then the recession ends up not happening.

So I think what would bring that would be, you know, some kind of serious disappointment on the vaccine news. The virus backdrop getting materially worse. You know, I think on Wall Street, we're all obsessed with these kind of high frequency alternative economic data sets, like the OpenTable restaurant bookings. If you were to really start to see some significant deterioration in those, I think that's something that could push you more to that 15% type drawdown as opposed to the 5% type drawdown.

JULIE HYMAN: At the same time, you're looking, your base case is sort of 4,100 by the year end for the S&P 500. So if we do see a drop, that implies we could then see a recovery, obviously.

LORI CALVASINA: Yeah.

JULIE HYMAN: When you're looking at the news flow around the virus, there's increasing chatter about these variants. And yes, the Moderna-- most recent data shows that it's vaccine has shown some success against the variants, but what are you watching in terms of alternative data sets or just overall data sets when it comes to the path of the virus.

LORI CALVASINA: Yeah. So we're keeping a close eye on, you know, I think the same stuff everyone else is looking at in terms of the deaths, the new cases. We're also comparing the US versus Europe, which I think not as many people are showing, and to be honest, that's not as interesting right now. It was much more interesting in the fall when it looked like Europe had a better handle on the virus.

But I think one thing, you know, I've asked my team to do recently is just watch the rate of vaccinations. And what we are seeing is that, you know, there's been so much concern over the bumpy rollout that we've had-- and I'm not trying to say it hasn't been bumpy, but the reality is is that you are seeing vaccinations ramp up very, very quickly. We have gotten this started. It is starting to happen in a pretty big way. And I'm personally optimistic that, especially with the new administration in Washington and, you know, sort of an emphasis on getting a federal plan, that we will see that continue to improve.

But I think that's probably the new big thing that we're watching right now is just making sure that vaccination rate is still going up. And you have seen the new cases come down. So I think it is sort of important with all the hysteria and concern that we all have, you know, sort of looking at this data in our own personal lives, the data is headed in the right direction right now.

JULIE HYMAN: Yeah. That's important to remember, improving trajectory. I want to ask you about the groups that you like this year, because you list financials, energy, and materials. And I'll leave financials aside for a moment. We've had a lot of folks talk about financials. Energy and materials, though, I am curious what the bull case is on those going into this year and what kind of trends are driving that thought.

LORI CALVASINA: Look, I think it's really two things. It's, one, valuation, and it's, two, the reflation trade. And so one thing we've realized on my team is if you try to figure out what's driving market performance in terms of the bits and pieces within the market, you can't look at the CPI data and you can't look at, you know, some of the actual inflation gauges. You need to look at breakevens. You need to look at where inflation expectations in the minds of the market are headed. And when you do that, we find pretty clearly that areas like materials and energy tend to outperform when inflation expectations are rising.

Areas like technology, communications services, health care, kind of these defensive secular growth areas of the market, as well as some classic defensives like health care, they tend to underperform when inflation expectations are rising. So we see-- you know, if you buy the reflation narrative in terms of inflation picking up, and I think there are arguments from an inventory perspective, not just a top level macro perspective, you really want to be in those commodity trades. And then when we look at the valuations material still looks undervalued versus the broad market, energy has moved up, but it doesn't look expensive yet.

JULIE HYMAN: All right. Lori, we will be checking back in with you soon. It's great to see you. Thanks so much for being with us. And welcome back again and congratulations.

Lori Calvasina, RBC Capital Markets and US Equity Strategy. Thanks, Lori.

LORI CALVASINA: Thanks for having me.