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Stocks in red in wake of Powell & Yellen testimony

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Noah Hamman, AdvisorShares Investments founder and CEO and Tony Rodriguez, head of Fixed Income Strategy at Nuveen, joins Yahoo Finance’s Alexis Christoforous to discuss market outlook and reflect on Powell and Yellen’s hearing.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to bring in Tony Rodriguez now. He is head of fixed income strategy at Nuveen and Noah Hamman CEO at AdvisorShares. Good afternoon to you both. Thanks for being with us. Noah, I'm actually going to start with you. Are our tax hikes the next big investor worry? I mean, we spent a lot of time worrying about higher rates in the bond market and higher inflation. But are tax hikes the next big worry?

NOAH HAMMAN: I think it's a little bit of a worry but not a major worry I think that by far the liquidity and the easing that both the fed and the treasury want to do is going to have a far greater positive impact but at some point, they'll will have to be paid for what they're-- not they, but the administration are proposing and spending.

So the tax hikes won't help. But I don't think they're significantly damaging, given everything else that's going on.

ALEXIS CHRISTOFOROUS: Tony, at least Goldman Sachs says higher corporate taxes, which is something that the Biden administration is seriously considering. They're saying it could take a 9% bite out of S&P earnings. Do you think that the market should be paying closer attention to the probability that taxes are going to be going up in the months ahead?

TONY RODRIGUEZ: Hi, Alexis. Good afternoon. Good to be with you. I kind of agree that it's going to be not a huge issue for the both macroeconomy and the financial markets. I think that the magnitude of the increases that they're telegraphing, while again being an increase, are not significant enough to really derail the stronger forces that are in place around the reopening of the economy, some of the stimulus that's in place, a continued low interest rate environment.

And then when you think about a potential infrastructure bill, whether it's the $3 trillion that we're hearing about today, or something smaller, those types of investments I think are probably going to be bigger catalysts for strength in the risk markets like equities, like risk assets and fixed income, than what's being contemplated around a corporate tax increase.

ALEXIS CHRISTOFOROUS: I'd love to break this down into some sectors for investors for a moment, Noah. When you look at what the Biden administration has hinted at proposing in addition to an increase in the corporate tax, they also want to increase the foreign income tax as well. That could affect big multinationals, it could affect tech companies, could affect communications services companies. Are there any moves that you think investors might want to start thinking about making now ahead of those changes?

NOAH HAMMAN: It does seem like, and we've seen a little bit of this so far in the last few weeks, but this transition away from heavy growth, heavy tech, into more value. I think that might continue. When you think of an area where the government may be looking for more revenue to offset some of these things, the tech space, whether it's coming from international income, whether it's multinational corporations, or even continuing to look at other tax ways, even our own state of Maryland where I'm at, they're looking at their ability to tax the advertising revenue that a Google or a Facebook makes on residents within the state.

I think you've got to expect more of those things to come. It can impact margins. It won't change, I think, the trajectory or the growth of those companies. But you'll have to adjust PE and what price you're willing to pay for some of these companies. So maybe a little bit of weakness. Not next week, not next month, but over quarter and maybe over the next few years in that space.

ALEXIS CHRISTOFOROUS: Tony, I know that you are head of fixed income over at Nuveen. So I'd love to get your thoughts on what we've been seeing happening in the bond market. It looks like at least for now yields have sort of calmed down. They've stabilized. And equity investors seem to be OK with that. We've got the yield on the 10 year now down to 1.64%. It was at 1.7% last week. Do you we're going to retest those recent highs here? Or are things going to stick in this level for a while?

TONY RODRIGUEZ: Well, our view would be that we are now kind of consolidating into a new range. Call it a 1 and 1/2 to 1 and 3/4 range for the second quarter. We think that we're going to continue to see an increase in rates to the end of the year. Our forecast would be that we'd be closer to a 2% level on the 10 year at the end of the year. But clearly here in the first couple of months of the year, the treasury market has been repricing to a much stronger economic picture and a better picture in terms of the virus and the vaccination rollout.

In 2020, the equity market priced in a lot of that good news well in advance of the actual [AUDIO OUT] and certainly well in advance of the treasury market. So our view is that the treasury market is now kind of pricing for the new reality of a recovering economy or reopening economy and success on the vaccination rollout. But we don't think we're going to see this type of large increase over such a short period of time continue through the balance of the year. It should slow down from here.

ALEXIS CHRISTOFOROUS: And that was the big worry, right? Not so much that they were rising, which was sort of anticipatory as inflation starts to heat up. It was the pace at which those rates were rising. Noah, I cannot let you leave without asking you about cannabis. I know you have the Pure Cannabis ETF. There might be some legislation coming down the pike affecting the cannabis sector. What are you seeing there right now?

NOAH HAMMAN: So Safe Banking Act is going in front of the Senate today. I saw a law of cosigners on that bill. It seems to be bipartisan. It probably doesn't have anything in it that the category needs. But when you talk about an emerging growing area with 300 plus thousand jobs in that category but no reasonable access to banking, it's an emerging and it's going to be a volatile category. But you've got companies like Trulieve who've announced amazing earnings.

You're putting exactly the right companies that are on the top on the screen. Those are the US multistate operators that are going to benefit from this legislation. So more jobs, more tax income, we like that category. This MSOS ETF that we have is becoming the benchmark for that growth opportunity in the US marketplace.

ALEXIS CHRISTOFOROUS: All right. Noah Hamman of AdvisorShares, Tony Rodriguez at Nuveen. Thanks so much, guys, for being with us today.