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'We’re probably going to see 5% to 6% GDP growth next year': Great Hill Capital Chairman

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Thomas Hayes, Great Hill Capital Chairman, joined Yahoo Finance Live to discuss his GDP outlook as we head into next year.

Video Transcript

[MUSIC PLAYING]

- With 14 minutes left in the trading session, we've got the Dow up more than 60 points. S&P 500 up more than five. The NASDAQ back and forth. It's now off about 11 points. Keep an eye on that.

But we're keeping an eye on how you can invest and inviting to the stream right now, Thomas Hayes. He's Great Hill Capital chairman. Good to have you here, Thomas. And before we dive deep into the specific kinds of stocks that you like, I am perplexed-- my normal state of mind-- when we look at energy, and we look at the energy sector today, it is back up there. It's leading the sectors. It's up over 3%.

And yet yesterday and the day before, it was doom and gloom, especially with oil. What gives? Why is it so high today?

THOMAS HAYES: Well, two things. Number one, we had a crude draw today. And number two, Adam, the market is anticipating an extension of the cut at the OPEC meeting tomorrow. If you recall, it was delayed for a couple of days. They couldn't come to an agreement. The reports are out this afternoon that things are looking a lot more positive moving forward. And they could extend the 7.7 million barrels another three months, which would be very positive.

- Tom, does this market have enough momentum here to continue on this upward trajectory? Because we were just speaking to another guest earlier in the hour. And he was talking about that there's still a lot of concerns and a lot of risks here in the near term, when it comes to the market.

THOMAS HAYES: Yeah. It's a great question, Shauna. First off, there will be no Grinch this year. And Santa Claus is coming to town.

Over the last 25 years, we know 90% of the time, the market is up between Thanksgiving and Christmas. If the market is up 10% to 15% through November, since World War 2, it's up 100% of the time in December.

And we're coming off a 33.1% annualized GDP last quarter. The most recent reads for Q4 from the Atlanta Fed are now at 11% for Q4, which is much higher than expectations given all the regional shutdowns and slowdowns that we've seen due to COVID spikes.

So you know, people are getting a little bit cautious because of the euphoric measures that you're seeing in the market. For instance, the AAII Sentiment Survey, at 47% bullish. That's a euphoric level. The CNN Fear and Greed Index is at 92. That's a compilation of seven different indicators. The National Association of Active Investment Managers have 106% equity exposure.

So when you see some reads like that, we've had these type of reads, we had them in Q1 of 2018. And yeah, we got a quick 10% to 15% pullback.

But we also had them right after the election in 2016. And that was the beginning of a very long 12, 14 month bull run. So usually, Shauna, when everyone's looking for a correction, is when you generally don't get it.

So these metrics, while they're extended, they're known. And you have to keep in mind, many managers went into this election flatfooted, short, or over-hedged. And now they've got to play catch up into year end.

- Thomas, we've had guests on who said-- and on both sides of tech. Some have said, no, don't sell your tech stock just yet. Others said, yeah, it's time to be part of the rotation, and go for perhaps even small cap or look for some value stocks.

But a guest earlier was talking about the fact that the low-hanging value stock fruit has already been plucked. Where would you direct people?

THOMAS HAYES: Yeah, I would say that-- two things. Number one, the first six months after an election, cyclicals historically outperform. That's for sure. And secondly for the first eight quarters of a new business cycle, cyclicals outperform.

And the reason is they're economically sensitive stocks that do well when GDP grows quickly, off of low bases. So I don't think the low-hanging fruit is gone for sure. We saw in November the beginning of this trade, triggered by the vaccine. Energy was up 33% for the month of November. Defense stocks were up 23%. Banks were up 20%. And you compare that to tech and communication services. We're only up 9% each for the month of November.

Furthermore, when you look forward at 2021 earnings estimates, the S&P is going to grow at about 22%, 23%. It will probably be revised upward. But banks-- rather financials, industrials, materials, energy, are going to grow at faster paces than the S&P, whereas tech and communication is going to take a backseat. And they're going to grow at a lower pace, 13%, 14%, moving forward.

So, effectively what happened this year is you had a scarcity of places where people or managers could buy earnings growth in a slow growth economy. So they had to bid up a handful of stocks we all know, the FANG stocks that made up about 24% or 25% of the S&P 500 weight.

Those are starting to come down. Those weights now are as low as about 21%. And the breadth of the market is being filled by these cyclical stocks. We like in particular, financials, banks and particularly the yield curve is steepening. It's now at its steepest level since February, pre-pandemic levels.

Number two on the bank front, they're over-reserved. The sector took $110 billion of reserves as a whole in Q1 and Q2. Number one, due to [INAUDIBLE], which is a paper accounting change that went into effect at the exact wrong time in the middle of the crisis.

So they had to take assumptions on the basis of unemployment going as high as 20%. The opposite has happened. We went from 14.1% to 6.9%. And I'll make a bold call that the jobs report tomorrow is going to be even better, based on continuing claims continuing to come down each week. We could hit 6.7%. We could potentially even hit 6.5% tomorrow, which very few people are expecting.

So a lot of positive things that support the rotation into cyclicals moving forward. And finally on that front, you've got a money supply growth. M2 money supply up 25% year on year. That usually has a six to nine month lag before the effect is felt in the economy. We're probably going to see 5% to 6% GDP growth next year. And that bodes extremely well for the cyclical stocks.

- Tom, real quick. We've got to go in just around 30 seconds. But when you're taking a look at those cyclical names, just tell us just in terms of some of the characteristics that you're looking for, two or three things that you are identifying when you're looking at potential opportunities to buy.

THOMAS HAYES: Yeah. So my favorite stock, and this has been an unpopular area, is Wells Fargo. It was the most hated stock in the S&P 500 a couple of months ago. It was trading at a 43% discount to book. It's only done that two times in its history. It recovered to book value, which is trading around-- which is about $40 per share.

It recovered within months, not years. And I think the same thing we're going to see happen in the next 6 to 12 months. We're going to see Wells Fargo continue to accelerate off those lows, regain its book value, benefit from the net interest margin, and most importantly, benefit from reversing those over-reserves which is going to come back as earnings power that no one's priced into the stocks as of yet.

- Thomas Hayes is the chairman at Great Hill Capital. I think we've got to line you up to get you back when the banks report the next quarter's earnings. All the best to you.