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Portfolio Manager on how the market 'still reflects the expectation' of a stimulus package

Lon Erickson, Managing Director at Thronburg Investment Management, joins The Final Round panel to discuss liquidity in the market, day-of market action, and what investors can expect moving forward.

Video Transcript

- Let's bring in our next guest, who's going to talk a little bit more about the markets and the moves that we've seen recently. We have Lon Erickson. He's managing director and portfolio manager at Thornburg. And Lon, when you just see the market at the current levels, S&P and NASDAQ closing at another record high, are you at all worried or in the camp that the market is getting a little bit too expensive? Or is there reason to get into the market at these levels because you think it's heading higher?

LON ERICKSON: Well, I think anytime you see the valuations we're at in a recessionary type environment, with unemployment in double digits, you have to be a little bit worried. But I think when we think about it here at Thornburg, and as we try to balance the-- what the Fed is doing and the support it's providing for the fixed income market and markets overall, which is a massive amount of liquidity, that you balance that against the realities of the underlying economic data, which has been mixed at best, and certainly very weak from a labor standpoint, where we're still sitting at, I guess, a double-digit unemployment. That's very difficult to get really excited about stocks at this level. But that's why you also have fixed income, to try to provide a little bit of a ballast to any equity allocation you have.

- So Lon, with that in mind, when we look at some of the divergence that we're seeing in stock performance between the sectors that are outperforming and the sectors that are lagging behind, what do you think of that? And do you think it makes sense, I guess, that some of these names that have done well over the last several months will continue to do well in the short term?

LON ERICKSON: Well, I think you look at it and a lot of what the growth has been, it's been more secular growth stories that have really performed well, those stories that are online services and social media, things that are really changing the nature of our economy, versus the cyclical growth stories, which, as you were talking before we entered this section, that we saw actually provide a little bit of, I guess, growth today in the indices, and benefited from the announcement of a vaccine or potential treatments, because that would actually put people back out on the street, back into schools, back into their jobs full-time, and provide some real economic growth for it. But you know, people can get still, with all the money in the market, I think people, even with the fears of the economic downturn, can get behind those economy-changing type of evolution or revolution that we're going through in some of those sectors.

RICK NEWMAN: Hey, Lon. Rick Newman here. You heard at the top of the hour Myles and Seana were talking about the stimulus that has disappeared, and this question of why doesn't the market care. I think the market expectation is not that there won't be any stimulus, but that there is stimulus, it's just going to come in September at some point. And it will probably be at least $1 trillion, which is a lot, even if it's not $3 trillion. What is your read on what the market is expecting now with regard to stimulus?

LON ERICKSON: I think I'd largely agree with you that the market still expects some sort of package, at least 1 trillion, to get the economy going, or keep it going, really, because the animal spirits just really need to be stirred again. You know, there was a lot of money put forth earlier this year, and we just need a little bit of another kick to the economy. And I think we'll get that. And it'd probably be, in my guess, a little bit bigger than $1 trillion.

And so I think the market has taken it as a given. So I would agree with you that the market reflects that expectation right now, in addition to continued stimulus from the Fed, which, of course, we have the Jackson Hole summit this week, and we'll hear from Federal Reserve Chairman Powell later on Thursday. And I think they're expecting to hear continued dovish tones and liquidity as long as we can see. And I think that's still a good story that people can get behind.

- Hey, Lon, what's your [INAUDIBLE] the election risk? Do you think that's already been priced into the market? And then also a Biden presidency, what does that-- what kind of impact do you expect that to have on stocks?

LON ERICKSON: Well, I think what we'll see is perhaps in the-- we could see additional stimulus out of a Biden presidency, you know, as we-- if we haven't really turned the corner from a COVID standpoint, and the market-- and the market and, frankly, the economy needs a little bit more juice to keep going. But you know, I think as it goes-- at first, I think it could be read as a negative, as we see higher potential tax rates and perhaps more regulation. And I think some of that is in the market, just given where the polls are. But I think as we start to hear more banter, more pointed policy proposals, and a little bit more debate, you know, and if Biden continues or widens his lead, I think that could weigh on the market a little bit.

- All right, Lon Erickson, managing director and portfolio manager at Thornburg, great to have you. Thanks for taking the time to join us.

LON ERICKSON: Thank you for having me.