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U.S. Treasury yields near highest level since June

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John Petrides, Portfolio Manager at Tocqueville Asset Management, joins Yahoo Finance's Akiko Fujita to break down the latest market action as investors await stimulus update.

Video Transcript

AKIKO FUJITA: Let's kick things off this hour with John Petrides. He is a portfolio manager at Tocqueville Asset Management. And John, it's good to talk to you on this Friday. Let's start with the election because despite the earnings, despite the stimulus talk that seems to be really front and center with just over a week left to go, you said that the results of the election is not as important as the reaction to the results. How do you view that in the context of the markets?

JOHN PETRIDES: Yeah, I mean, we could go through all the combinations and permutations of a blue sweep or a split Congress. But in the short-term, you know, much like in 2016, I'm going to be looking at what the futures market is doing, just as much as I am the election results.

Because, you know, the odds are that if it's a Dem sweep, you know, stocks in the short-term may not like that. You know, it's going to be see how bonds react in a Dem sweep, and gold. Those are the three asset classes that really moved in the late hours or, actually, in the next morning when President Trump was gaining in the polls, or leading in the polls four years ago.

I mean, stocks sold off aggressively early or late that evening, with bonds and gold rallying. And then by the morning at 9:00 AM, the market opened up positive, and stocks took off for the next 10 months with, like, a 30% rip. So, you know, I'm going to be more interested in the short-term of the reaction to the stock market, the results as they come out.

AKIKO FUJITA: So what are you telling your clients right now who are maybe getting a little nervous going up to November 3? Just uncertain about how things are going to play out, especially with all of the talk about a prolonged result, or maybe not-- no clear results on election night.

JOHN PETRIDES: Yeah, well, we're guiding our clients to make sure they keep their investor hat on and not their trading hat on. And to be focused on that long-term objectives because the data has been proven that on election years, the market is up-- finishes up about 8.9%. And in non-election years, it's up about 8.1%. Those figures are from Vanguard. So you're really-- it's only an 8/10 of 1% difference in election year versus non-election year for the market results.

So don't take a position on who or who may not be in the White House the day after or voted in. You know, keep your eye on the long game and what it is you're trying to achieve financially. And again, as we saw in 2016, I had many clients who were looking to go to cash on the eve of the election if President Trump won.

And had they done that and the market reacted to that as positive-- it has, and the stock market really hasn't looked back all that much, at least up into COVID-- you know, they would have left a lot of money on the table.

So it's, again, I always focus on what the individual is trying to do what the family is trying to do for their long-term goals and objectives, rather than focus on, you know, a day after the election.

AKIKO FUJITA: John, I want to get your thoughts on the moves that we've been seeing in the bond market. You look at the 10-year T-note there hitting a four-month high. It was at 0.859. We've seen it pull back at 0.84 right now, but we've seen a real run-up in a very short period of time. Why do you think we've seen that accelerate? And what is that telling us in the long-term, or at least, the medium term, about the inflation picture?

JOHN PETRIDES: Yeah, right? I mean, we just spent all this time talking about the stock market volatility in and around the election. But really, the volatility action is in the bond market that you'd never think. I mean, just in the beginning of August, the US 10-year, right, the sleepy 10-year was yielding-- returning half of 1%. And now it's 0.85% or whatever the number you just quoted, which means yields have backed up, and bond prices have gone down, because they go in opposite direction.

And I think what you're seeing is-- you know economic trends are improving, particularly with the jobless claims coming in better than expected yesterday. Company fundamentals are improving. We have more than 80% of the companies in the S&P 500 beating analyst expectations so far this quarter.

And then you have the amount of quantitative easing the Fed has pumped into the economy, the amount of money printing, right? The Fed actually wants inflation. That's why it's printing so many dollars that it is. And then you have stimulus package one that was passed earlier in the year. And I do believe that after this political staring contest gets put to rest, you will have a second fiscal policy kick through.

And once we get a vaccine approved and distributed, you have all this money that's rushing into the economy. And investors' expectations for inflation, which are now that basically inflation is dead, if you look at long year bonds, is going to change. And it could change quite dramatically.

So that's why I think you're seeing some positioning and backing up in yield. Now listen, 0.8% on the 10-year really isn't all that much. You know, it's not like bonds have fallen out of bed. But they really have come off their highs. And it's something that I don't think investors are taking a lot of-- paying a lot of tension to, particularly longer dated bonds, which we think there's actually a lot of risk there.

AKIKO FUJITA: John, we've had so many guests coming on, talking about this barbell approach, the need to diversify beyond equities. We're talking about the Treasury yield here. But what about commodities? You talked about gold. I mean, how are you looking at the need to reduce exposure outside of equities and where you think you should be allocated right now?

JOHN PETRIDES: Yeah, well, I think you have to come into-- you set the asset allocation plan in the beginning, you know, in the beginning of a relationship with clients to match what their risk profile is and what their time horizon is and their tax situation. And if you get that right, you know, over time, you don't have to move levers too aggressively one way or the other.

But in this environment, on the fixed income side of things, we would keep bonds very, very short. We do think that there is an argument to be made to own bonds, despite my previous comments. But we will just be much shorter in terms of the duration and maturity of the bonds.

Listen, I don't know-- you know, we're in a 100-year pandemic. I don't know-- I can't say I would guarantee that we're going to get out of this within the next eight or nine months. Who knows, right? So you do need some protection on that portion of the portfolio.

On the equity side of the coin, listen, growth stocks have really crushed it this year. And the gap between growth and value is really high. So now is the time to be adding more dividend producing securities to the portfolio, which has been an underperformer year to date.

Now is the time to start looking at some energy companies, time to start looking at financials. You know, the value portion of the market that has been an underperformer to growth I think is where investors should begin increasing their allocation to.

AKIKO FUJITA: What about diversifying beyond the US? We've heard a lot of plays for the emerging markets, especially seeing the strong growth out of China. Are you seeing any opportunities outside?

JOHN PETRIDES: Yeah, so we definitely have an allocation international within most of our client portfolios. Again, the main catalyst to what's going to drive international stocks versus domestic in our opinion really is the function of the US dollar. What's the strength of the US dollar? And the US dollar has been stubbornly strong over the last five years.

And, you know, given that the US is still mired in the social distanced economy, given the amount of debt that we're undertaking, given the amount of money that the Federal Reserve is printing, it's really been confounding that the US dollar has been so strong, relative to other currencies. And we don't think that lasts at this level, going forward.

So we would expect-- listen, international stocks had been down-- ex China, maybe down mid single digit on a diversified global basis for the year. And if you are a long or overweight US domestic, adding the international here is a good idea.

AKIKO FUJITA: John Petrides, portfolio manager at Tocqueville Asset Management, good to talk to you.

JOHN PETRIDES: Same here. Thanks.