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'There's just so much pent up cash': Strategist on why he predicts the market will grow despite American division

Chief Equity Strategist and Senior Portfolio Manager at Nuveen, Bob Doll, joined Yahoo Finance Live to break down why despite the divisiveness of America, he predicts the U.S. economy will grow.

Video Transcript

SEANA SMITH: We want to take a look at the market's reaction to this news. We still have the Dow and the S&P holding onto gains. Although, we are off the highs of the day. We're seeing stocks lose some ground here, as we see the unrest on Capitol Hill with the Capitol in lockdown.

And, for more on that, we want to bring in Bob Doll. He's a Chief Equity Strategist and Senior Portfolio Manager at Nuveen. And, Bob, when you're seeing these events play out, as we are at this point, how are you looking at this from a market's perspective?

BOB DOLL: Well, you never like to see these sorts of things, this unruliness, this lack of order. It reminds me of some of the summer evenings when I'd turn on the news and see those riots. It'd make me wonder is this really America. It feels like a third-world country. As your prior guest just said, we'll get through this, but it's not a fun period, and it's not what we're used to.

ADAM SHAPIRO: Bob, it's Adam. Thank you for joining us. You know, as we keep these images from Washington, DC playing before us, I do want to turn attention to what the next several months, even the next year, holds for us. And one of the things that you've pointed out is that the US economy, even with this kind of division, is expected to grow. You think it might actually grow as strong as 4%, the fastest pace in 20 years. What makes you believe that?

BOB DOLL: Well, there's just so much pent up cash sitting around. If I can put it this way, Americans have saved almost a trillion and a half dollars of excess savings because the government gave them some money. They wanted to spend some money. They couldn't because they couldn't do things.

Other people didn't spend the money because they're scared and hiding under the covers. You know, we get some visibility on vaccine penetrating our society, and the economy opens further back up. And I think we'll have very strong growth. That coupled with all the stimulus from the Fed, very low interest rates, the economy is-- economy and, therefore, earnings are looking very good for 2021. It should be the strongest growth we've seen in 20 years.

SEANA SMITH: Bob, does the unrest that we're seeing right now-- does this change your view of the market, at least, in the very short term? I mean some of the volatility that we could potentially see, not only as we close out today's trading day, but also over the next couple of days.

BOB DOLL: Unlikely. Like the summer riots that we saw, not that this is exactly the same, you know, it didn't keep the market from doing what it was going to do related to the economy and earnings. And, to repeat, the economy looks good. Earnings look good.

Look, we're going to have, as we've seen today, modestly higher interest rates, which begins to put a bit of a lid on valuation of the market, so the P/E ratio. So my guess is earnings will be great. Stocks will be good this year, but not as good as earnings, as multiples come down a little bit from these very lofty levels.

ADAM SHAPIRO: So one of the things you point out is that stocks will outperform cash. Cash will outperform treasuries this year, even though the 10 year is now above 1%. How high could the 10 year go for that equation to stay intact?

BOB DOLL: Well, already, if the year ended today, at 1.05, people will have lost money in Treasury bonds, and, therefore, cash will have beaten bonds. My guess is, unlike the consensus, which is arguing for 1.25 by year end on the 10 year, I think we'll be closer to 1.50, which is still very low interest rates, relative to history, but you get these forces moving, and I think rates could creep higher.

SEANA SMITH: Bob, at what level or what point do you think that higher yields become a headwind or a challenge here for stocks?

BOB DOLL: Yeah, great question. A part of the question is how fast do we move up. If it's gradual, and we end the year at 1.50, I don't think it's a big problem because the yield in the stock market is higher than 1.50. So stocks are yielding more than cash and more than a 10-year Treasury, even if we get to 1.50.

I think, within the market, though, things will happen. A 1.50 10-year Treasury is different from 75 basis points where we spent a lot of last year when it comes to valuing high P/E, high-growth stocks. That's where we'll see some of the air come out of the balloon. That's what we're seeing today, probably more of that to come.

ADAM SHAPIRO: You know, these kinds of experiences, especially the economic cycle we're in now, add fuel to the fire that active managers are what many of us who really aren't in this every day need, as opposed to the kind of passive investing that a lot of us do through our 401(k)s. What's going to happen to passive investors who might just tie their retirement investments to, say, an index fund?

BOB DOLL: Well, there's no question, when stocks go up, you know, a double-digit percentage a year, the index looks just great, but, if we end up having a year where it's more about stock selection, and it's more about identifying the companies with good earnings and good cash flow, being careful about the valuations, that's when active managers can shine. We, obviously, hope and pray it's that kind of year, and we suspect it probably will be.

And so some of those people who ran into those indexes, which helped drive up those mega-cap companies to, in some cases, very high valuation levels, some of that air could come out of that balloon as well. And then the indexes do OK, but not as well as many active managers.

SEANA SMITH: Hey, Bob, where do you stand just on this need for more stimulus? From a market perspective, I guess, how important is it that we do get additional fiscal stimulus from the Biden administration over the next several months?

BOB DOLL: You know, that's a great question, and I think that's going to be part of the debate. Obviously, the minority party now, the Republicans, some of them will argue we've got plenty in the system. Let's take our time, and I lean a little bit in that direction.

Look, if we could take some of this money and target it specifically at businesses and individuals who have lost their way as a result of those industries and employment being in a deep recession, if not a depression, yeah, I'd be more interested in that. But this was a pretty broad program and the next one likely to be. You know, I've got friends and relatives who don't earn a lot of money who are getting these checks, even though their income hasn't changed at all, hasn't been cut at all. I'm not sure that's where the money should go.

ADAM SHAPIRO: Bob Doll is the Chief Equity Strategist and Senior Portfolio Manager at Nuveen. We appreciate your being here on what is an historic day. All the best to you in the new year, Bob.