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'Reflationary trends' are going to continue into 2021: Research Affiliates

Research Affiliates Chief Investment Officer Chris Brightman joins Yahoo Finance Live to discuss how a coronavirus vaccine will impact markets and overall economic recovery.

Video Transcript

AKIKO FUJITA: Let's bring in Chris Brightman. He's Research Affiliate's chief investment officer. Chris, it feels like we've got a little bit of everything going right now-- optimism coming through from the vaccine, some resolution on the political front now that we've got the presidential transition underway. What sticks out to you as we look at the rally today?

CHRIS BRIGHTMAN: Well, I think you hit on some key themes with optimism on the transition and on the vaccine. We're seeing a rotation into more cyclical and more value names. So I would expect this to accelerate and continue into the new year. That includes small caps outperforming large caps, cyclicals outperforming defensives, probably international outperforming domestic. Again, I think it's distinctly a move to a more reflationary market environment.

ZACK GUZMAN: Hey, Chris. We've been talking about cyclicals outperforming for a while now when we first got the Pfizer news kicking off and sparking the positive trove of vaccine data we've been getting. On that front, we look at the chop here as cases continue to rise, hospitalizations arising as well. And there's talk about the delay in getting the vaccines out and when we'll actually achieve herd immunity. Talk to me about what that looks like in the next year, maybe even if you are a long-term investor, what investors should be braced for in that short term.

CHRIS BRIGHTMAN: Well, sure. If we get some really bad news on the vaccines, that could reverse the trends we're seeing at present. But remember that stocks are priced based upon cash flows many, many years into the future. So the fact-- you're quite right that there are distribution issues distributing the vaccines all around the world, so we will have to have some patience before we see confirmation in the real economy. Markets are forward discounting. So absent any news that suggests that we're not going to get over this, I think the reflationary trends that we're seeing now are going to continue.

AKIKO FUJITA: Chris, you pointed to international outperforming domestic and having maybe a bit more of a diversified approach as we go into 2021. How does that allocation look like for you?

CHRIS BRIGHTMAN: Sure. I think we try to look for opportunities where we have cyclical, secular, and importantly, valuation support. And all that seems to be lining up pretty well right now with Janet Yellen coming in as our-- highly likely to be our new treasury secretary, I expect increasing cooperation between monetary and fiscal policy underwriting a considerable additional stimulus. And I expect to see that really continue the trends that I just discussed in this rotation towards more reflationary trades. Over a little bit of a longer horizon, maybe a secular horizon, I think that raises some inflation risks.

And fortunately for investors, inflation protection is priced pretty cheaply-- not gold or bitcoin, which are near all-time highs in their real prices, but capital assets that provide dividends and coupons and that sort of thing are actually cheaper than the defensive. So rotate away from the big tech platforms that have been bid up over recent months and years and near to things like EMs and REITs and commodities.

ZACK GUZMAN: Yeah. No doubt REITs have been beaten down this year. But the second guest today-- it's a little bit of an anomaly. We don't normally have guests come on here and talk about reinflation being the norm or the expectation here on the show every day, but you're the second one today. So talk to me about how that might look if you do have Janet Yellen working in lockstep.

Because obviously, in the recovery, it's going to be very important for her to be working with Fed Chair Jerome Powell to do this in a way that doesn't necessarily risk some of those out-of-control inflations that we've seen in the past. You've got to go back a few decades to actually get to those. But what are your expectations on how the duo might be able to work together?

CHRIS BRIGHTMAN: Yeah, I'm really not worried at all about an acceleration to an out-of-control inflation rate over the near term. That near term would even be a year or two. We have enormous amount of excess capacity and precautionary savings, a high unemployment rate. I expect that collaboration to be very effective and give us a nice, cyclical boost to the economy.

The inflation concern is more after. It's more of a political decision to implement the cooperation between monetary and fiscal policy and to make that simple, having the Treasury just wire money into people's bank accounts. That's what we've been doing.

The risk is that that works so well in solving the current economic problem that we try to use that policy to solve other problems, like inequality or a transition away from fossil fuels. Those are enormous problems, absolutely have to be addressed and solved. But there will be a considerable amount of tax revenue necessary to do so without causing an inflation problem.

AKIKO FUJITA: Chris Brightman, Chief Investment Officer at Research Affiliates. I appreciate your time tonight.

CHRIS BRIGHTMAN: My pleasure.