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U.S. economy will be 'very strong' when the country reopens: Dennis DeBusschere

Yahoo Finance’s Myles Udland, Julie Hyman, and Brian Sozzi discuss stock market outlook with Dennis DeBusschere, Evercore ISI Senior Managing Director.

Video Transcript

MYLES UDLAND: All right, let's turn our attention back now to what's going on in financial markets. As you mentioned, a mixed open today. Not a whole lot going on, but it's been an eventful couple weeks. For a bit more on that, we're joined now by Dennis DeBusschere. He's a Senior Managing Director and the Head of Portfolio Strategy and Quant Research over at Evercore ISI. Dennis, great to talk with you on this Thursday.

Let's begin with something that you discussed right at the top of a recent note. And we talk a lot on this program about stocks, public equities, but you mentioned the bond market, the role that plays in the sectors that come into favor. What have you seen there that has changed and informed your view, and how are you thinking about the role of the yield curve today?

DENNIS DEBUSSCHERE: Yeah, it's a great question. So what's changed is obviously since the vaccine news has come out, you saw a bit of a uptick in 10-year yields-- more of an uptick in 10-year yields-- going from about 70 basis points to 96, compelled it in some, and the yield curve steepened.

But what's so important about the move higher in the Treasury yield, specifically the 10-year yield, is that it's happening for the right reason. Post the election, obviously odds of fiscal stimulus have gone down significantly. And with the vaccine news, you saw Treasury yields go up, which means that investors are seemingly discounting a better real economic growth backdrop.

And if you're discounting a better real economic growth backdrop, then the E, earnings, should come up with that rise in US Treasury yields, and it won't be, A, a disappointment to the market-- i.e. the S&P multiple shouldn't come down just because 10-year yields go up a little bit for the right reason. And more importantly, it's very good for cyclicals relative to defensives. So the internals of the market become a lot more attractive for cyclical sectors, which include industrials, materials, financials, energy, et cetera.

BRIAN SOZZI: Dennis, you've called-- you've coined something called the human-ingenuity trade. What is that, and how can investors make money?

DENNIS DEBUSSCHERE: Well, the simplest way for investors to make money on that is playing for reopening, a full reopening of the economy. So if you assume that human ingenuity in the form of vaccines, treatments, and just changing behavior, which has been a hallmark of, you know, our ability as a society to handle this pandemic since it started-- if you assume that that's going to continue, which seem more and more likely given the vaccine news we've seen, then you want to be long a normalization in economic activity.

And that means open-- that means owning reopening-type stocks. What are reopening-type stocks? It could be commercial real estate. It could be airlines. It could be travel and leisure. It could be things that are related to ticket sales, et cetera. So that's how you play that trade.

And importantly when we do reopen-- and this is very important-- the economy is going to be very strong given how strong housing is, how high savings rates are, and the Fed's commitment to keep real rates essentially negative as far as the eye can see.

JULIE HYMAN: Dennis, given all of that though, from what we understand-- it's Julie here, by the way. Hello.


JULIE HYMAN: From what we understand about deployment of the vaccines, even if we do indeed get the emergency-use authorizations and the encouraging news that we've got on the vaccine front, we've got deployment to think about. And as we know, there are a lot of logistics challenges with deployment, particularly of the cold-storage vaccines. We've got adoption by the general population to be concerned with. So even if we're going to come roaring out of this thing economically, do you think that we've got the timing right in terms of our understanding of how long it's going to take?

DENNIS DEBUSSCHERE: I don't think we need to get the timing perfect. I think a couple of things we have to assume-- one, whatever deployment issues we have are likely to be figured out. Yes, Pfizer's vaccine appears to have to be stored at some ridiculously low temperature. Moderna's does not. And we still have AstraZeneca and J&J and those trials coming, which could be more like normal vaccines.

As far as distribution is concerned, whatever bottlenecks happen, assuming they're not catastrophic, I don't really care from a discounting point of view and thinking about your future earnings growth if normalization of the economy is in July or in October of next year. It might make a little bit of difference near term, but it ultimately doesn't make a big difference in the long-term scheme of things, which is why I think investors will look through it. It really has to be a catastrophic problem, meaning just we just cannot get these deployed.

And secondly on uptake, you know, my big catchphrase on this is I think for sure that people are going to take their freedom shots. I mean, we talk a lot about a willingness to take these vaccines, but all the data more recently has been trending in favor of-- you know, relative to about a month ago-- in favor of people being comfortable with taking vaccines, and this news helps. And I highly doubt that if the choice is we don't take vaccines or we actually get our lives back that we're going to, you know, side with not taking the vaccine.

MYLES UDLAND: And, Dennis, you have this idea of rates being up for the right reasons that I like. I think we can all agree that not all 1 and 1/2 handles on the 10-year are created equal. But, you know, something that is related to that, I guess, is the housing market. Today we just get, you know, existing-home-sales numbers. This is 2006 type stuff, you know, 7 million homes at an annualized rate. This with a supply shortage.

And I know in your note you cite your colleague Steven Kim's recent note which was just a tremendous outline of where the housing market stands right now. How are you thinking about the housing market in the context of the current market cycle, in the context of a reopening in 2021, 2022, and the way that buying the home changes a lot of people's outlooks? And we've seen millions do that in the last few months.

DENNIS DEBUSSCHERE: You know, I think the most important thing that we were thinking about the housing outlook is if you put it in a very longer-term trend is that coming out of the global financial crisis, you had baby boomers exiting the labor force and downsizing, and millennials were not filling that gap. Now you have millennials more or less filling that gap and starting to think about moving out of city centers and obviously buy homes, improve homes, build up homes, et cetera. So that's point number one.

Point number two, there's a huge consumer-net-worth benefit. So when you look at how low real rates are likely to be, it implies a lot higher home price over time, which is really important for spending and driving the savings rate lower. Kind of goes hand-in-hand. So your home price goes up. Savings rates come down, and the economic growth goes much higher than would otherwise be the case.

And then third, an obvious pushback-- you can be like, hey, dummy, aren't 10-year yields going to go up to a place-- call it 1.5%, 2%-- that's going to kill the housing market. Well, keep in mind that the mortgage spread-- so 30-year fixed versus-- minus 10-year yield-- is still at the 75th percentile. So mortgage spreads are very high relative to US Treasury yields. So you can afford a 1.5% or 2% 10-year yield and still support the housing market assuming mortgage spreads continue to collapse, which will happen if US Treasury yields are going up for the right reasons.