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'We still have risk on the horizon': Strategist on market outlook

Omar Aguilar, Charles Schwab Investment Management SVP and CIO of Passive Equities & Multi-asset Strategies, joined Yahoo Finance Live to discuss today's market action and his outlook.

Video Transcript

[MUSIC PLAYING]

SEANA SMITH: Just under 20 minutes to go until the closing bell, and you're looking at a mixed picture for the markets. The Dow at a new intraday record, up just over 100 points. S&P and NASDAQ, though, in the red. The NASDAQ off just around a half of a percent. In terms of sector action, energy and consumer discretionary leading the way today.

We want to talk more about today's market moves and also what we can expect going forward. For that, we want to bring in Omar Aguilar. He's of Charles Schwab's Investment Management. And Omar, it's great to speak with you again. Looking at a record here for the Dow, we got that much better than expected retail sales number out before the bell this morning. How are you looking at this? And I guess, does this help that bullish thesis, that bullish sentiment that we've been talking about for so long out there on Wall Street?

OMAR AGUILAR: Yes, thank you for having me. And yeah, well, the market seems to be behaving more normally than what we all expect it to be, especially in the year after 2020. The cyclical rotation that started back in November continues to unfold. And it still has some room to go.

If you actually think about all the things that are lining it up with a day like today or even yesterday when value outperforms growth and momentum underperformed, when you see risky assets being in high demand, you can actually see how that cyclical trend that is consistent with optimism about economic recovery continues to trend from the day that the vaccine was officially announced back in November. And we continue to see that trend.

Now, what has happened is that these-- cyclical rotation continues to be supported by, obviously, the stimulus program that puts the consumer at the front end of what may come down the road. And therefore, it's not surprising that you actually see higher yields in treasuries. You actually see risky assets being in high demand. And when you combine that with the fact that commodity prices are also rising, you actually see that combination that gives us a little explanation on the action of today.

ADAM SHAPIRO: So Omar, when you say to your client, stay disciplined, avoid market timing, don't chase returns, don't chase yields, when's the appropriate time to rebalance? Is it when we are at a high point like we are now? Or do you wait until the dip begins and then go to the rebalance?

OMAR AGUILAR: Well, that's a great question because, you know, what we always stress to our clients is the fact that in order for you to look at your long-term objectives, a disciplined rebalancing strategy needs to happen. And in periods like this, when things are relatively normal, this is the time where you just need to be consistent with your risk profile. You don't need to overreact. You don't need to overtrade. You need to be consistent with your long term objectives.

Yes, the opportunities of rebalancing and repositioning usually comes when you actually see changes in the market. In this particular case, what we are discussing with our clients is that even though we continue to see the cyclical rotation I was referring to earlier is, you know, we're not at the end of the line. We still have risk in the horizon. And therefore, you know, maintaining a healthy exposure to a stability, which, in this case, tends to be more growth stocks or largecap names, you know, tends to help in mitigating a lot of those periods of volatility.

So having a disciplined strategy when you rebalance, whether it's on a quarterly basis, whether it's on a monthly basis, having an execution strategy that allows you to maintain your asset allocation is what we stress to the clients, even though they may see asset classes that run very high or asset classes that get depreciated. Having a discipline around the times of rebalancing is usually what we recommend.

SEANA SMITH: Omar, when you take a look at what's going on in the bond markets, we have the 10-year yield right around 1.3 right now, under slight pressure today. But is there any risk, or do you think yields are rising too quickly at all? And I guess, what does that mean for equities?

OMAR AGUILAR: Well, that's-- you know, the situation with the yields is kind of interesting. I actually do think that the speed of the changes in yield is what is surprising. You know, we started the year at our very low levels, and we have gone up to 1.3 very quickly. And the reasons why this could happen is, one, is there's a significant amount of optimism regarding economic growth.

And I think when you look at the trajectory of the 10-year yields and you compare it with the rollout of the vaccine and the number of positive cases going down, that seems to be at very high levels of correlation as, you know, the expectations for the bond market is that, you know, the economy will get better in the second part of the year. And it's confirmed on a day like today when you have retail thirst and the prospect for consumers to basically go out and finally start spending.

So when you actually think of the main reasons why those things are happening, you know, there are positives, which means expectations about future economic growth out there. I think to answer your question about the risk, it has to do with inflation. Inflation expectations are also rising.

And therefore, the potential for having a spike in prices and a spike in rotations, you know, a lot of that is temporary because of the commodity prices and oil and the weather that we're going through right now. But the question becomes whether the inflation expectations match with the actual price increases. And therefore, that will actually put pressure on future growth. And as such, it will actually put pressure on global central banks.

That's really the risk that we run when you see these pieces. You know, we don't think at the moment the actual inflation is of risk, at least the short-term inflation. However, as we continue down the road and depending how we reopen the economy, it's something for us to continue to watch.

SEANA SMITH: Omar Aguilar, always great to speak with you, of Charles Schwab Investment Management. We'll talk to you again soon.