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Stimulus could prove to be 'temporary buffer' for markets: Nationwide Chief of Investment Research

Nationwide Chief of Investment Research Mark Hackett joins Yahoo Finance's On the Move to discuss the latest market action.

Video Transcript

JULIE HYMAN: As we are getting these headlines about an increase in cases, we have seen a downtick in stocks. Let's bring in Mark Hackett now. He's Nationwide Chief of Investment Research. We also, of course, still have what seems to be halting, if any progress, on stimulus negotiations.

But let's talk first about coronavirus, if we could. It seems as though the market is pricing in a vaccine early next year and kind of operating under that scenario. But is the market pricing it appropriately? And really, the question becomes what kind of damage is being done in the meantime to the economy that could become more permanent damage?

MARK HACKETT: Sure, I think that the optimism on the vaccine was clearly part of the recent rally we had. But keep in mind, it was also against the backdrop of what was an expectation for another stimulus deal and also a rebound in the economy. So clearly, hopes for a permanent solution to coronavirus was part of it.

I think that's still there for sure. I think that's perhaps a bit optimistic, simply because there's so many unknowns remaining in that area. But keep in mind, it wasn't just the vaccine that drove the strength so far this month and clearly the, you know, very strong rebound since March.

ADAM SHAPIRO: When you talk about headwinds, structural headwinds, that the economy and that markets face, weakening revenue growth, does that take into effect the recent study that eight million people have fallen into poverty? And no matter who wins the upcoming presidential election, that's not going to change dramatically fast, and that's going to impact stocks, right?

MARK HACKETT: Yeah, clearly. Now, some of the more recent optimism in the market's been driven by the fact that if there is a Democratic sweep, I guess there's the perception that there will be a very large stimulus deal which will work at least as a temporary buffer against some of these structural headwinds, but you're right. We're facing not only economic headwinds that persist, but also some in terms of the market as well in the fact that dividends probably won't increase to the degree that they used to and also share buybacks are quite a bit limited relative to the last several years.

JULIA LA ROCHE: Mark, it's Julia La Roche, and I was hoping we could unpack that further. You're talking about buybacks possibly being limited, dividends, those sorts of things as being some of the structural headwinds. What does that mean for, you know, our audience? We have a lot of retail investors who are watching. Walk us through how long you think this could persist and what it might mean for their own portfolios.

MARK HACKETT: Well, there's two factors that drive both the dividend and particularly the share buyback. One is the balance sheet deterioration that we've seen from some of the challenges that we've had this year. If you think about some of the more dividend centric sectors, like REITs, like utilities, and financials particularly as Gerard's going to talk about. That is a very difficult thing that increased dividends and even do buybacks during that period.

The other more important one though is political, and we've seen throughout the year increasing pressure on companies that are utilizing share buybacks as part of their capital plan, simply because a lot of money has been given from the government into some of these industries, and particularly, you know, a lot of noise I think will continue to be there, regardless of who wins the November election, limiting some of those buybacks going forward.

BRIAN CHEUNG: Hey, Mark. Brian Cheung here. So on that thesis, it does seem like there's kind of a unique position for different types of industries when it comes to capital distributions there. So is this really kind of a value approach that investors should be having as we do get closer to election and trying to pick through this earnings season certain types of industries that might be winners as opposed to those that might be losers?

MARK HACKETT: Yeah, I think it's a little bit more nuanced than the traditional growth versus value debate, because there's parts of the growth sector-- growth area, like technology, that actually have more flexibility to grow dividends than some of the value peers. And in the value space, there's clearly some areas where dividends and share buybacks will continue.

But then there's other areas, like I said, financials, that will have both the Fed and the political sphere acting as a headwind for that area. So, you know, there's going to be pieces of the growth space and pieces of the value space to kind of what you traditionally would think it was quality that will benefit relative to some of those other areas.

JULIE HYMAN: Mark, I want to ask you also about a specific stock, just as it pertains to a trend that we've seen, and I'm talking about Fastly. This is a company that makes the internet go faster for its clients. And one of its biggest clients, if not its biggest client, is TikTok. So the company came out and cut its forecast, Fastly did, and the stock is still up something like 300% this year. It's not alone.

Of course, we've seen a lot of these sort of work from home bets that have gone up a lot. Does it coming down, does that hold any kind of lesson for investors? Do people need to be a little wary of some of the high flyers that we've seen this year?

MARK HACKETT: Clearly, a lot of what we've seen this year in terms of the optimism in the growth space has been in some of these stories stocks. Obviously, there's a lot of momentum and a lot of perhaps retail money through some options activity that has driven some of these to perhaps unsustainable levels. But beyond that, though, a lot of the technology space is clearly in very strong position. Those like, you know, some of the larger cap names that have more levers to pull as the environment gets more difficult, then those areas I think are justified where clearly some of the more, you know, story stock type of names perhaps have some way to go down. But from where they've come, that's a long way down.

ADAM SHAPIRO: When we look at this negative, essentially zero, in some cases really negative interest rate environment, we saw how that impacted with the bank earnings. We understand why people are nervous with a huge amount of savings on which they're not making any money. Do you foresee, again, depending on the results of the election, a massive rotation out of safety back into equities with either candidate to free up the trillions which are being saved right now?

MARK HACKETT: Well, obviously, the flows have been very strongly into the fixed income space, regardless of the rate environment. The corporate spreads are quite tight at this point despite the fact that we're seeing a rise in defaults. So obviously, investor demand still is for safety. I think eventually we're going to have to dole a little bit out the risk spectrum to equities, simply because the real yields and, you know, even corporate bonds are negative throughout most of the yield curve at this point.

That throws a lot of things in flux in terms of traditional modeling by strategists and investors. But obviously, equities have more levers to pull for returns than bonds at this point, given the low level of absolute rates and also the very tight spread environment. So I would expect through time, retail investors and even institutional investors are going to have to be a bit more equity centric than we've seen throughout the last cycle, which was very heavily oriented towards bonds.