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We're continuing to 'dig ourselves out of a deep hole': Strategist on market recovery

Edward Jones Investment Strategist Craig Fehr joins Yahoo Finance Live to break down why 2021 will be the start of a ‘multi-year economic expansion’ and explain how Joe Biden’s policies will help improve the global economy.

Video Transcript

- As we await this momentous political occasion here in the US, let's turn our attention back to the markets for just a bit and bring in Craig Fehr-- he is an investment strategist over at Edward Jones-- to talk about-- where are things set up, Craig, as we kind of get the Biden administration underway but also get 2021 underway and the beginning of what you guys are calling a "multi-year economic expansion" that the US is now embarking on? We had a guest on earlier in the program saying we could see multiple years of GDP growth in excess of 4%. How are you thinking about those kinds of numbers? Does that sound directionally correct, given how you're thinking about it?

CRAIG FEHR: I think so directionally and maybe from a magnitude perspective as well. It's a reminder that we are-- as an economy, we are digging ourselves out of an exceptionally deep hole, and while we've seen a pretty heavy rebound thus far, we're still 3% to 4% below pre-pandemic levels of output or GDP. So we've still got a ways to go, and that's not even including the fact that I think we'll continue to exceed that for many years to come.

I thought your point was a great one before, which is today is probably a good symbolic if not emblematic representation of what markets tend to focus on, which is, today, all eyes are on Washington. They're on the inauguration. But the markets are going to pivot forward, and they're going to look to the longer term fundamentals. And that's exactly what's led this rally of about 70% off of last March's lows, so while I think we'll get in spurts-- we'll get the market that will be somewhat myopic around politics or policy-- I think broadly markets are going to continue to be guided by those broader fundamentals of where the economy is headed and ultimately what that means for corporate profits over time.

- Craig, I can't help myself but to look at some historical data on markets and changes in the White House. In one stat that stood out to me that I came across this morning is that the S&P 500, in the first term of a Democratic presidency, on average, rises 19.4%. Do you think the gain in the first year under Biden might exceed that really for the simple reason we are likely to see a strong rebound from the burst of the vaccine? And now you have Biden potentially pushing through a $1.9 billion stimulus plan.

CRAIG FEHR: I think the underpinnings that you just mentioned absolutely are supportive of the markets. I don't know that we can get to that 19% level or something close. It's certainly a possibility. I think some of those gains that are built on exactly what you just mentioned, which is a growing or rebounding economy, certainly policy stimulus, both monetary and fiscal, which will be a tailwind for the markets-- but I think some of those gains and some of that expectation was pulled forward into 2020.

Again, if you think about that better-than-65%, almost 70% rise for the stock market off those March lows, much of which came in the back half of 2020, that was pulling forward the expectation that the economy is going to rebound, that policy stimulus will be there. It doesn't mean that now those won't provide additional upside for the markets, but I think we'll probably see a bit more moderate gains, at least in the interim as we kind of navigate our way through this next phase of the pandemic.

So you're right. The stats would bear out that, you know, something we tell our clients quite frequently, which is that politics tend to matter for very short spurts of time for the market but not for long periods. Politics themselves are not the guide for the broader markets. If you just look at the first year of a presidency-- it doesn't matter who is in-- since 1950, the average gains a little bit better than 10% in the first year of any party's presidency. And interestingly enough, if you look at the pivot from a Republican president to a Democratic president, that first year gain has been an average of about 14%. The point being is that the market doesn't really, at the end of the day, care about which party is in place. It cares about what policy backdrop sets the tone or the guide for where the economy and profits head.

- So Craig, I have a policy question for you then because we've been hard-pressed to find any market participants who are critics of this new aid package that the President-elect has proposed. We're going to talk to Douglas Holtz-Eakin in just a little bit, and he thinks it should be more targeted. But he, of course, is not a market strategist. Are there any knock-on effects? Is there anything you're concerned about in this aid package with regards to the markets?

I think the point that you just made is probably one that if it's not being vocalized is at least being internalized by many, which is the notion that when you start dealing with these larger numbers, remembering that we had the $2.2 trillion CARES Act last year-- we had a $900 billion kind of boost in a stimulus package late last year, and now we've got the proposal for another $1.9 trillion. At some stage, these numbers become so large, it's hard to even process the idea that we could be more surgical with this, and I think, frankly, the reality is it's going to be very hard to do so.

There are certainly parts of the economy that are continuing to do well or thriving even in the current environment, and there are portions of the economy that have been completely decimated. We know that. You've been reporting on that for some time, leisure, travel, entertainment. So it would be nice if we could at this stage, given the impact of budget deficits, if we could be a bit more surgical and get the aid directly to the spots that need it most.

I think that's difficult to do with precision and speed, and so my guess is the administration is going to take the approach of, let's-- let's perhaps overdo it a little bit on the broadness of it, and what we get out of that would be speed of this aid to the economy. So what's going to happen is some of it's going to go to areas that aren't households, or businesses, or industries that perhaps don't need it as much as others, but I think the challenge would be that we still have to see fiscal policy build a bridge to the other side of this chasm.

Now, we know there is another side. The bridge doesn't reach it yet, and that's what all of this aid and stimulus is meant to do, which is help households and businesses continue to add a few planks to the bridge along the way. I think it's going to be a process that is not going to be surgical. It's going to be a blunt instrument. And the after-effects are going to be that the deficit is going to continue to get blown out. This is going to continue to add to the debt load. So there aren't an absence of side effects. I think that perhaps the approach here is, let's not let the perfect be the enemy of the good, and I think that at this stage the economy certainly needs some additional help to continue to put some planks in that bridge.

- Certainly. We'd love to get to the other side sooner rather than later. We'll see if this blunt tool helps us get there faster, Craig Fehr, investment strategist over at Edward Jones. Craig, thanks so much for joining the program this morning. We really appreciate you taking some time.

CRAIG FEHR: My pleasure.