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Stocks lifted by stimulus hopes; jobless claims less than expected

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s market action with JP Morgan Asset Management Global Market Strategist, Gabriela Santos.

Video Transcript

ALEXIS CHRISTOFOROUS: You know, this market continues to defy reason, right? And we've got a very toxic political backdrop. We've got a global pandemic. Yet the NASDAQ and S&P hitting record highs during the quarter. Would you characterize this as a new bull market?

GABRIELA SANTOS: Good morning, Alexis. Yes, we would, a new cyclical bull market within what's still a structural bull market. And I think that is such an important point, because it means that really equities are still the growth piece of a portfolio. It's so important to have enough exposure to it, especially if an investor has a longer-term horizon.

And in terms of this more recent direction over the past few months, I think it has a lot to do with the direction of travel. We've started a brand new economic and earnings cycle. It's slowing down in terms of momentum, but we're still moving in the right direction.

And it also has a lot of monetary and fiscal support associated with, which is not expected to be removed anytime soon. The issue is a little bit for us the short term, October, November, December, daily volatility can stay a bit high. So we want to have some protection for the volatile ride, but the destination is still a very positive one.

BRIAN SOZZI: Gabriela, I think so many folks-- so many investors are looking around that next corner on what might take down the markets in the fourth quarter. But what are some upside risks to the market in the fourth quarter?

GABRIELA SANTOS: Yeah, that's a good point, because we always think about risk as being only to the downside, but it can go either way. There are upside risks. When we think about COVID, there are upside risks there. You know, we can have a second round that is not as fatal as the first round of cases, and so we can continue to coexist with the virus better than expected.

We might also have some news in terms of the vaccine front. It may get an approval, one of the vaccines, a bit faster than expected that would give everyone confidence about what 2021 looks like. We also might get a results out of the election a bit faster than expected. We still think it'll take a few weeks, but maybe won't take a few months, as some investors are expecting.

And lastly, just technical. There's still about a trillion dollars sitting in cash more than we had pre-pandemic. That's still a lot of dry powder that needs to be put to work, so you do continue to see investors buy on dip.

ALEXIS CHRISTOFOROUS: Gabriela, do you think that investors have made peace with the fact that it's very likely we don't get another stimulus package before election day?

GABRIELA SANTOS: So I think everyone had very high expectations early August, because it just feels like a very obvious thing that we absolutely do still need support. Just this morning getting jobless claims that are still four times higher than what we had pre-pandemic, there's still a lot of pain in certain sectors of the economy. Those expectations, though, have been brought down significantly over the past few weeks, just given a lot of the political back and forth in Capitol Hill.

So at this point, I think expectations are very low that we'll get a new fiscal package before election day. So it would be a nice upside surprise if indeed we did get something there. Our expectation is probably during the lame duck session before the end of the year we might get something. It's more a question of when, though, not if. So we just need to resolve that uncertainty of the timing.

JARED BLIKRE: Gabriela, I want to get your take on the bond market, because after consolidating for what seems like a few months here, we saw bonds sell off, especially on the long end over the last two days. We've seen the 10-year yield climb about six or seven basis points. What's behind this? And what effect do you think this is having on equities?

GABRIELA SANTOS: So I think it's been a mild increase in 10-year yield, maybe related to a little bit of a better risk appetite here over the past couple of days. But when I kind of zoom out and look at 10-year bond yields, they kind of haven't gone anywhere in months. You've been in this very tight range of a low 0.5 and a really hard time getting over 0.7 on a sustained basis, so it's a really tight range.

And I think that's actually a very positive sign for risk assets. It keeps the risk low in terms of the recovery, and of course, it forces investors to look for returns elsewhere. It is a challenge, though, if you think about the diverse-- diversification piece of the portfolio. If treasuries stay in this range, they just don't give you the offset when we have volatility in the market.

So we can't just have treasuries for diversification. We're thinking much more about the role that investment-grade bonds can play, and also combining that with alternatives like gold, real assets, other currencies like the yen. We need to think more broadly about diversification. I think that's the challenge.

BRIAN SOZZI: Gabriela, what-- what number do you need to see on the jobs headline tomorrow that would keep this rally going?

GABRIELA SANTOS: So I think anything around the 800,000 range, which is around what consensus is looking for, would just confirm that we continue to make progress in job creation. But that momentum has definitely slowed from the million-plus that we had. So it's a story of we had an initial surge in activity, now it's becoming more of a grind, and that's OK. I think that's expected by investors. So around 800,000 would confirm that positive direction of travel.