Stocks drift near records as Biden prepares to sign more executive orders

Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland break down today’s market action and outlook with Daniel Morris, BNP Paribas Asset Management Chief Market Strategist.

Video Transcript

JULIE HYMAN: And let's turn back to the markets now and not just the market reaction to all that's going on in Washington but just a trajectory generally. Daniel Morris is back with this is BNP Paribas Asset Management Chief market strategist and co-head of its investment insight center. Daniel, good to see you. You said in your notes to US equity markets are perhaps not as frothy as some would suggest because there have been a lot of sort of warnings about bubble areas of the market or even the market as a whole.

What is it telling you? What are the indicators that you're watching that show you maybe it's not quite as bad as some are saying?

DANIEL MORRIS: Well, let's start with some of the indicators that do suggest there is-- I don't know if I'd go so far as to say euphoria but certainly high expectations. So if you look at the put/call ratio, for example, that is quite low. So as a contrarian indicator, that would suggest you had the potential for a bigger drop in the market.

But if you look at the two parts of that ratio, the puts and the calls and why is the ratio so low, it's not because you necessarily have so few puts. The number of puts right now is about average. But you do have a lot of calls. So that's why the ratio is low.

But if you think about the environment that's ahead of us, coming out of a recession, uncertainty certainly around how things are going to develop around the pandemic. You know, things still could get better in terms of the rollout of the vaccines. The questions that, of course, we just discussed on how much stimulus we're actually going to get. So a lot of uncertainty, but at the same time you would appreciate there's a decent amount of potential upside in that. And so why not have calls on the market in case things do go better than expected?

So yes, the ratio is low. But the motivation behind that I don't necessarily find so confusing.

Other things you can look at, bulls to bears ratio is elevated for some of the indicators but not at extreme levels. And probably one that I think is quite telling for me, if you look at fund flows and compare the situation today with what you had back in 1999 and 2000, when investors were kind of selling anything they could to raise cash to buy equities, you had huge inflows into equities in the run up of the tech bubble.

You don't see that now. You haven't seen inflows into equities for quite a while. And if anything, over the last couple of weeks, you've seen redemptions. So not to say there isn't a risk of a downturn in the market, in a sense there always is. But at the same time, we see, you know, in general, our market indicators certainly signaling enthusiasm but not at an extreme level where we're anticipating a very significant drop in the market.

BRIAN SOZZI: Daniel, what's the one thing that could cause a market correction in the first quarter? Because to some of your points, I only see a lot of optimistic indicators. You have the Fed essentially printing money. You have the COVID-19 vaccine rollout continuing. You have companies starting to, perhaps, turn the corner on their earnings growth. Is there something you're seeing out there that could really surprise people?

DANIEL MORRIS: Well, and you highlighted, really, the three potential risks that are out there that could upset the market. But at the same time, I think we do appreciate what those risks are. We've already had a less smooth rollout of the vaccines than we might have thought when we had the initial news of their high efficacy rate. But we all appreciate that that may continue to be a challenge. But nonetheless, we're moving to a point where you're going to have much wider availability than-- [AUDIO OUT]

You mentioned-- we've talked about the stimulus. So perhaps it turns out Congress is extremely obstructive. And instead of 1 and 1/2, it's 1 trillion or 500 billion. Certainly, that is, relatively speaking, disappointing. But on top of the 900 billion we just had, that's still a lot of money that's going to be coming into the economy. But again, it's always the reality versus the expectations.

And then the one that conceivably really could upset things, though here the probability does still seem to be quite low, again, it's around inflation. Now on one hand, the Fed wants inflation. We all want a bit more inflation. And we're looking for above trend, above target growth or inflation above 2% into next year. It's just that you saw a much more rapid acceleration of inflation expectations.

But even then, with the Fed continuing with its quantitative easing program, you could have an increase in inflation expectations. But nominal yields likely to remain contained thanks to the Fed. And so that removes some of the risk of a higher discount rate to equity markets.

MYLES UDLAND: And then Daniel, related to that, maybe this is the positive side of a reflationary trade, we should say, is what we've seen in value stocks, particularly in the banks as rates have gone higher. How much higher, nominally, do you think the long end of the Treasury yield curve can go? And I mean, I want to ask at what point does it become a concern for the markets. But how long does this tailwind for some of those beaten down trades last?

DANIEL MORRIS: Well, I think that's one of the crucial questions for this year. I mean, we've had this rotation out of growth and into value for a while now. We do think there are still legs on this trade. But I think at the same time, we need to have reasonable expectations about how far it can go. And it really does come back to at least partly the Fed.

You do want to have higher interest rates, certainly for net interest margins for the banks. You want to have higher oil prices for the energy sector, which has a good weight in the value indices, in order to pick up. And we think that can continue for a while.

At the same time, even 2% Treasury yields on 10-year Treasuries seems quite high at this point. So even if we do expect the rotation to continue, it's certainly not going to reverse the underperformance that you've had for value, arguably for the last decade or so.

JULIE HYMAN: Daniel, good to see you. Daniel Morris of BNP Paribas, we'll catch up with you soon.