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'There will be scars that linger from this pandemic': Strategist

Christopher Smart, Head of Barings Investment Institute, joins Yahoo Finance's Kristin Myers to discuss the latet markets action, as stocks rise on hopes of a stimulus deal.

Video Transcript

KRISTIN MYERS: Welcome back to Yahoo Finance LIVE. I want to dig in now into today's market moves, as we've been seeing all through major indices in the green. We're joined now by Christopher Smart, Head of Barings Investment Institute. So Christopher, we saw some disappointing numbers in the jobless claims, as we see the pandemic and the surge really starting to heavily impact the labor market.

I'm wondering if you're anticipating more bad news here on this front, as doctors say that, you know, things are actually just going to be getting worse over the next couple of weeks and over the next couple of months throughout winter, which of course, has been prompting, you know, shutdowns of businesses. At least in New York City, we've shut down indoor dining. So what are you anticipating, at least on the jobless front going forward?

CHRISTOPHER SMART: I think in the near-term, it looks like it's gonna get worse before it gets better. And you've seen that, as you mentioned in the initial jobless claims, drifting up towards a million a week. You've seen that in the retail sales numbers, down more than 1% yesterday. And I think it's a combination of increased lockdown measures, restrictions, nothing like we saw back in March or April, obviously, but very serious new restrictions on retail and mobility in many cities.

I think the other thing you're seeing though is an impact of this delayed stimulus package that we may now see this weekend in Congress. But the fact that we've been talking about it now for almost six months, that has begun to wear on household savings, on consumer spending patterns.

And the other big piece of the employment picture that we're concerned about is not just the initial claims numbers but the number of folks who have shifted now to become long-term unemployed. And they've become much harder to get back to work in the spring or the summer, when we hope life returns to normal.

KRISTIN MYERS: So speaking about stimulus, as you mentioned, we have been talking about this stimulus, if we're going to be getting it or not, for months and months and months and months. We do now have optimism, yet again, of a deal. However, we do have signs that we might be getting some sort of aid, at least before Christmas. That is the hope.

And, of course, we see markets now up on that news, the NASDAQ up about 6/10 of a percentage point right now. And, of course, markets are forward-looking. But your note said something really interesting, that 2021 would likely have a lot of economic scars that are still going to need attention, which makes me wonder, if you think investors are going to be facing perhaps a rude awakening next year, if those scars aren't really paid attention to.

You know, I'm wondering what you're thinking about that, how next year is going to go. It feels as if everyone thinks that with this vaccine, there's going to be a light switch. Everything returns back to normal. The economy will take off. Growth will take off. What are you anticipating?

CHRISTOPHER SMART: Well, of course, it's much-- it's gonna be much more complicated than that and much more differentiated than that. And I should pause first, and if we're complaining about how long we've been talking about the stimulus package, our friends in Britain continue to talk about Brexit. And that's been going on even much longer than we have, so a little bit of perspective there.

In terms of the stimulus though, I think what is gonna be a much bigger question than the current package that is passed, because, frankly, markets have pocketed this money. They were expecting it in July, August, September. I think the betting a couple weeks ago was we might not get it until February with the new Congress. So we get it today-- that's good.

The bigger question will be, what does the fiscal picture look like next year as the Biden administration takes office, as the Senate is finally decided as a Republican Senate or a Democratic Senate? In any case, the debate has started over how much fiscal support we can expect for the US government next year. And clearly, it's gonna be less than we got this year.

And that's gonna be important because we will still be in recovery mode. Things will get better first quarter versus this quarter, second quarter versus first quarter. But as you mentioned, there will be scars that linger from this pandemic. And we're gonna see that, I think, in the labor force, in the long-term unemployed, the folks who lost their jobs and aren't gonna get them back very quickly.

We're gonna see them in corporate balance sheets. Companies have been flooded with liquidity, now very easy for large firms to get access to credit, much harder for medium and smaller enterprises. And they're gonna-- bankruptcies in that space, we think, is gonna go higher.

And then, I think, a third thing we have to think about is just, we're gonna be emerging from a period where, yes, there will be some pent-up demand that is released as people go out to eat more, take trips. But there's only a certain amount that that gives you in the recovery. We'll see a surge, but then I think once that passes, we're gonna be dealing with what we were complaining about before this whole thing started, which is an economy that is generally growing pretty slowly and where market returns are pretty low.

KRISTIN MYERS: I want to ask you about tech. Led growth throughout 2020 and this pandemic pulled forward a lot of growth that some of these companies were expecting. Wondering how you think the sector is going to perform next year?

CHRISTOPHER SMART: Well, we've been very constructive on technology stocks, generally, before the pandemic because a lot of them-- and, of course, you've got to pick the right ones-- but they are really transforming the way we live and work, whether it is cloud storage that is much less expensive, artificial intelligence, and machine learning that is beginning to replace a lot of business processes that have been in place, much cheaper forms of communication.

So I think those are the kinds of things that are very important and will continue to be important past this period. I think what we would see though, what we would expect is that a lot of the investment we've already seen a shift into lagging value stocks, often what you call quality stocks, stocks that have strong balance sheets, but those valuations look particularly attractive right now.

I'm a little hesitant to kind of give you broad-brush answers because I think particularly coming out of this cycle, my colleagues at Barings are really looking at a thing-- at these decisions, stock by stock and issuer by issuer. Within a particular sector, you need to look at a management that understands its balance sheet, understands its long-term prospects, and has a plan in place to emerge. And some of those, you know, will be tech stocks. And some of them will be in other sectors as well.

KRISTIN MYERS: All right, that is a point, well-noted. We have been talking about that, the differences even within the tech sector itself. Some companies are obviously going to fare much better than others. Christopher Smart, Head of Barings Investment Institute, thanks so much for joining us today.