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Vaccine distribution challenges may signal expensive markets in 2021: Portfolio Manager

Jeremy Bryan, Gradient Investments Senior Portfolio Manager joins Yahoo Finance Live to discus how markets will fare in 2021 as COVID-19 cases continue to surge.

Video Transcript

- But let's take a bigger look at strategy on the part of investment managers. Jeremy Bryan is joining us now. He's Gradient Investments' senior portfolio manager. Jeremy, thanks for being here.

You know, I'm paying a lot of attention over the past couple of days to increasing reports that the vaccine rollout is just not happening as rapidly as it had been predicted. And we've also been talking to a lot of folks who are very optimistic on the market for 2021. And so putting those two things together, I'm just curious what risks you're concerned about, especially given the run up that we've had this year, that could derail things next year.

JEREMY BRYAN: Yeah, I think you hit it exactly. I think vaccine rollout-- because vaccine rollout is going to require-- that's what's going to get us restarted, right? It's going to reduce the restrictions that are out there and allow spenders to become spenders again rather than savers that they've been in here recently, which will get the economy going, which will accelerate earnings. That's what we really see as the playbook for 2021 and for it to keep the markets going higher.

So the real risk there is that we have delays and continued delays in the rollouts of these vaccines that don't allow us to do those kinds of things. And so if we start to see this-- it's not emergency status right now. We weren't expecting a lot of people to be vaccinated right now. But as we enter into the late spring and summer months and we're still well behind and we still have a very low vaccine distribution rate, that could be a problem going forward. And that could bring the earnings estimate numbers down as a result of that. And then you're talking about a more expensive market.

- All right, we see there live pictures on the floor of the New York Stock Exchange final opening bell of the year. Maybe by the end of 2021 we'll see a few more folks down there on the floor. And Jeremy, let's talk a bit about the outlook for 2021 as it relates to corporate earnings and what that might mean for the market.

Right now I think, you know, estimates are 22%, something like that increase for the S&P over last year, obviously quite depressed from what we saw in 2020. But we've talked on this show and we've heard opinions both directions. These are either being too aggressive or maybe even too conservative, I think, given kind of the earnings power that some big corporates might have.

JEREMY BRYAN: Yeah, you know, a lot of that-- I honestly think that there is dry powder for earnings to actually accelerate higher than even anticipated this year. I look at it in a couple of different sectors, industrials being one of them in the cyclical plays. There's a rebound already somewhat assumed in the market. Now, the question is, how aggressive is that pent up demand coming from those?

And, you know, a lot of these companies have really reduced their cost. And so if you've seen it, they're operating better. And now they can get more demand coming through those pipelines. That could really re-accelerate their earnings.

I think the other two markets or the other two sectors that I'm really looking at in that space for acceleration is consumer discretionary-- obviously we're not doing things right now, right? We're not taking vacations. We're not doing those kinds of things that we historically have done. So there's an opportunity now to do that potentially in 2021, which could release some of that pent up demand, again, accelerating their earnings.

The last door I'm looking at is financials. And if we have interest rates that steadily rise-- they don't have to go up aggressively. But if we are going to keep short-term interest rates low and the rising long-term interest rates, that could be really good for financials. They could actually start earning some spread from their money which could accelerate their earnings profiles. And not only that, they can buy back stock as well. So there is a lot of avenues, frankly, in my opinion, for earnings to actually promote upside going forward as long as distribution and the things we can do to recover continue to happen.

- Jeremy, what's your probability that next year stocks flat out underperform, that they just go down? And what would trigger that?

JEREMY BRYAN: Oh, there's always a probability of that. I wouldn't call it incredibly high based upon what we know now. What I always say is what we know now may not be-- and 2020 was a perfect example of this, right, is that last year we thought relatively calm-- we were heading into an election. That was going to be the biggest concern. We did not know what the ramifications of covid would be, and that had a dramatic turn. And then obviously secondarily it kind of worked its way through that.

So in that regard, there's always a probability we could decline. I think the biggest things out there right now would be around delayed distribution of vaccines, delayed reopening. Those kinds of things are the ones that we see the most problematic with regard to-- because again, I think we've already assumed some of that, right? I don't know how much, but we've assumed some of that happening already in 2021. The question is how fast and how far that will go.

If it ends up being below what we anticipate and numbers have to come down as a result of that, you're talking about an elevated valuation. And how far can you stretch that band is a good question. If we decide that the market is now anticipating too much growth and we look at valuations overall and we say, OK, now I'm paying a lot more than even I thought I was, that's where you could have a decent probability for a declining market during that period.

- Jeremy, finally, you were talking about some of the financials and the other sectors you're looking at. You're also looking at some REITs here. And I've got to say, what caught my eye was a senior housing REIT that you're looking at, NHI. Oof, this feels like stepping in front of a moving train given some of the headlines that we've gotten about this sector. But you think maybe they've hit bottom and could recover next year?

JEREMY BRYAN: Yeah, so the numbers aren't going to look great even this coming year. There's-- there's probably no question. But I think from my perspective what I've seen is that we've hit a-- we've hit a bottoming area from that perspective of things getting worse for them. You've got to remember at the end of the day senior housing as we roll into 2021 will be among the first to receive vaccines, right? So there'll be a normality to a certain extent of their business starting in 2021.

Now, I don't know exactly when that will occur. And we're not aggressively going into these things. But we do now buy one because of that-- exactly what you said before is that we think that estimates have somewhat bottomed there. We think valuation is very cheap compared to their long term. If we think rates are going to-- interest rates are going to remain relatively low, these things pay very high dividend yields as well.

So in that regard, there's a lot of things to-- it's one of the plays that we like to say-- it's like, hey, it may not work in the next couple of months. But I think over the next few years this is going to be a valuable space to own and a good piece of property to have as their business starts to normalize and they get back. And they could be among the first to get back to somewhat normality of their life going forward.

- Interesting. All right, Jeremy, thank you so much. Happy New Year to you. Jeremy Bryan, Gradient Investments senior portfolio manager.