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Reasons to be optimistic about the market for 2021

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Brian Nick, Nuveen chief investment strategist, joins Yahoo Finance to discuss the volatility of Bitcoin, inflation concerns, and the outlook on the economy for 2021.

Video Transcript

JULIE HYMAN: Stock futures here in the US pointing to a slightly lower open. This even as we had some comments yesterday from Jay Powell, saying, economy's going to take a little while to improve, rates are going to stay low for a while. And as we got some positive incremental news on the vaccine front this morning, Johnson & Johnson's vaccine getting an endorsement from the FDA. Although, it's not yet gotten to final approval.

Let's now talk about what all of this means for the markets and bring in Brian Nick. He's Nuveen chief investment strategist. Brian, it's good to see you. So we've caught this sort of push and pull, if you will, right? We have this economic optimism on the one hand, we have positive vaccine development, we have an improving trajectory, it looks like, for the path of the virus in the United States.

And then we've got rising bond yields, on the other hand. I don't know if that's the only sort of thing in the negative column at this point. But how are you thinking about that balancing act?

BRIAN NICK: Yeah, I think they go together. If you asked us six months ago to kind of game out base case upside, downside, this would be the upside scenario. Where we are right now is the upside scenario. We've had better than expected news on the vaccine, on fiscal stimulus, the Fed has become incrementally more dovish.

And the only real, I think, source of risk, obviously aside from COVID at this point, is the bond markets' fear that the Fed is going to pull out of the situation early. And Jay Powell is on Capitol Hill today, he was on Capitol Hill yesterday doing everything he can to disabuse markets of that notion. The Fed almost intentionally wants to be behind the ball a bit, be perceived as maybe not even believing that the economy is going to do as well as it's going to do to try to increase those inflation expectations maybe a bit more but avoid the kind of tantrum with respect to pulling back on QE and raising interest rates, which neither of which I think the Fed is even thinking about doing this year.

BRIAN SOZZI: You know, Brian, speaking of tantrum, all eyes continue to be on Bitcoin. Should investors avoid the volatility in Bitcoin when investing in stocks?

BRIAN NICK: It's very hard to place Bitcoin into any kind of asset allocation model because, as you said, it's so volatile. And it's very hard to optimize for what the right size should be.

So we don't think it's an investment. We think it's sort of a speculative play that people can do sort of outside their core nest egg or 401k portfolios. If you want to own Bitcoin, do it as sort of more like a hobby, and don't think of it as something that's going to complement a portfolio of stocks, bonds, real estates, other assets that tend to be more stable and deliver more certain returns over time.

MYLES UDLAND: You know, Brian, coming back to that outlook and that upside scenario, are people still too conservative on how the economy might play out? I mean, does that seem to be where the balance of risks lies, as you're thinking about it?

BRIAN NICK: I think we are seeing Wall Street sort of frantically revise up 2021 GDP forecasts. After the retail sales number we got last week, Q1 2021 GDP forecasts are getting frantically revised up. So we may be approaching what I think is a more appropriate reality here. The other big ingredient, obviously, is how big is the fiscal package going to be?

If it really is 1.9 trillion, that's not a number that a lot of economists had baked into their forecast for this year. They maybe were saying 1 trillion. It was going to have to get through this whole kind of sausage-making process. But if it's really going to pass sort of like the way it was proposed, that's a much bigger hit to GDP, a positive hit to GDP this year.

So I think in that 6% to 7% range is realistic. That would obviously be the best year we've had in several decades, I think, 35 years, in terms of GDP, bouncing back from last year. But I think the key is how investors are reacting to it. I think the rise in interest rates is probably appropriate, given what we know is in the pipeline for growth this year.

Maybe what people are not as focused on is the rise we should be expecting to see in corporate earnings. We just got a really good Q4 report that, I think, set the expectations a little bit higher for 2021. But if we can get into some semblance of reopening or normalization of some of the service areas of the economy, Q3 and Q4 earnings are going to look really good.

And there's going to be more room for the equity market throughout. So if people are being too conservative by pulling back on stock portfolios after the performance of the-- performance we've seen, maybe we think that they should probably think about staying in.

JULIE HYMAN: There we have the opening bell this morning, RiverNorth ringing, which is an investment management firm. Brian, you know, if the economic outlook looks good, you know, at some point, then, one would think that we'll see a more sustainable so-called reflation trade, right, where we see a lot of the closed businesses start to reopen, the stocks improve, et cetera. Maybe we start to see more of a sell off in tech as well.

We've seen, like, feints in that direction that haven't quite stayed put. When does that start to happen? And should people be making those investments now in anticipation of that, even though it hasn't quite happened yet?

BRIAN NICK: Yeah, the second half of last year, the first part of this year has been more friendly to the cyclical versus defensive trade, the value versus growth trade. But tech's going to be a big part of the US market, regardless it's been an underperformer this year. I think tech, if you think of it almost like a bond, it's a longer duration asset than a lot of these other companies because the earnings are just so high.

So when you're discounting them at a higher interest rate, it takes a bigger hit to the current value of the stock. So I think that's why you're seeing this inverse correlation between interest rates and the relative performance of technology. But in an environment where we're kind of reopening, you could see a rotation away from some of those areas that performed well last year because of the unique nature of the economic structure last year.

And I think more towards some of those names that are either reflationary in and of their own right, so it could be the energy stocks, which have done obviously quite well, or even companies oriented around more infrastructure, more investment, and just services. Things that people haven't really been able to spend money on. So some of those consumer names that are more related to, say, maybe travel, leisure, hospitality.

I think we're seeing a mix of that start to perform better. We certainly are incorporating more of that in our portfolios this year rather than the very heavy growth overweight we had during most of last year.

BRIAN SOZZI: Brian, anyone on your team tossing about the potential for double digit GDP growth in the second and third quarter? You know, I've seen some estimates out there as high as 8%. But I've been surprised by some of these retail earnings. Consumers appear to be spending very aggressively here in February. Certainly, we're seeing the rise in 10-year yields suggest inflation. Is that double digit growth off the table?

BRIAN NICK: I don't think it's off the table, but the fact that we got such good consumer numbers in January mean that we might see the growth numbers spaced out a bit more. If you had sort of a weak first quarter and then sort of a boom because of the stimulus and the reopening in Q2, Q3, I think you can hit 10% or 11% GDP annualized for one quarter.

But I think the fact that the first quarter now is being revised up, you have-- I think the Federal Reserve estimate, that's been a pretty good one, is currently at 9% or 10%. If that's what we're going to get in the first quarter, we're not going to get double digits in the second and third. It just sort of a sequential thing that's happening. And maybe the growth's being pulled forward a bit because of those stimulus checks.

JULIE HYMAN: Brian, good to see you. Brian Nick, Nuveen chief investment strategist, appreciate it.