Yahoo Finance’s Julie Hyman, Brian Sozzi, and Myles Udland discuss how the markets are reacting to the this week’s events with Jack Manley, JP Morgan Asset Management Global Market Strategist.
JULIE HYMAN: So let’s take the Georgia race because there was a lot of attention focused on it on the part of market participants leading up to it, and a lot of sentiment that perhaps markets would go down if both of those seats were taken by Democrats. They didn’t, right/ stocks didn’t fall. So what do you think is the perception from here and the read from here as to what the implications are?
JACK MANLEY: So the first thing I’d say, Julie– and we say this about a lot of things– is that markets, more than anything, like clarity. They like certainty. And so knowing what the results of the election were yesterday, knowing what this means for the broader composition of government– it allows markets to price in any potential changes and move forward. I think it’s one of the reasons why we saw a positive reaction to yesterday’s news. Any news is good news when it comes to something like this.
But the other thing, and perhaps the more important thing to consider here, is that what we got yesterday– even though we now have a unified government– the Democrats control both chambers of Congress and the White House– this is not the blue wave that we were talking about leading up into the November presidential election. This is something a lot closer to a blue ripple.
The majorities here that we see in both the Senate and the House of Representatives are about as narrow as they possibly can be. Joe Biden and Kamala Harris both relatively centrist in terms of their political leanings. It means that more extreme policy changes are still going to be very difficult to enact. And I think markets took that in stride yesterday, recognizing that big, fundamental shifts are still going to be a challenge, and continue to look forward to the recovery that we anticipate this year.
BRIAN SOZZI: Jack, when you see people in droves, angry mobs overtake the Capitol, storming the Capitol yesterday– really jarring scenes pretty much throughout the day– why not take some chips off the table here in a market that has gone straight up over the past six months? Doesn’t that tell you it could be hard to get things done in this new government over the next three to six months? I know the market is very optimistic about new stimulus, but can it get past it in this environment?
JACK MANLEY: So what I would say here is that it’s always difficult to get stuff done in Washington. And that’s something we’ve seen happen over the last two years, something we saw happen over the last four years. It’s been kind of par for the course when it comes to the political environments, at least in the modern United States.
But when we do look at something like stimulus, Brian, the biggest thing to me is that stimulus is a bipartisan issue. Both Democrats and Republicans want to spend more money. I mean, probably the biggest implication of yesterday’s victories in Georgia is that the majority leader in the Senate is now a Democrat, and the majority leader gets to set the agenda. It means that more stimulus is likely on the table, and it should pass very, very easily, we think, with that bipartisan support that’s out there.
MYLES UDLAND: We’re about 20 seconds away from the opening bell here on this Thursday morning. Again, futures poised for a higher open across the board. Looking there at pictures from the floor of the New York Stock Exchange. Cardinal Health set to ring the bell on this Thursday morning. [INAUDIBLE] here in the US. We’ll take a look back at the final job report of 2020 for tomorrow morning, 8:30 Eastern right here on Yahoo Finance.
Jack, we’ve talked a lot about the outlook for the equity market, impacts on that from legislation. I want to talk about fixed income. Because certainly, the investors that you’re talking to a lot, they might even have a higher allocation of fixed income than the average 401(k) participant.
What are you saying there? What are concerns there? Because in many ways, the story remains the same. The yield stinks, but I’ve got to have something to put my money in that isn’t cash.
JACK MANLEY: Yeah, and that is a problem that we are hearing from our clients constantly. Where do we allocate our resources given the challenges that exist within the fixed income universe? I mean, I would agree with you there, Miles, that the yield environment is pretty pathetic. But fixed income actually does still offer a pretty attractive protection for a portfolio. It still works as ballast, something that’s going to zig when everything else is zagging.
And given that there is still a lot of uncertainty out there, given that volatility seems to be the new king of the court when it comes to equity market performance, having that balance in your portfolio, I think, is still very much worthwhile. And it still means that clients, investors in general, need to look at fixed income.
What I would say, though, is that that landscape is going to change as we evolve, move through 2021, the interest rate environment likely changing alongside growth expectations. It means that what is already a complicated landscape is only going to become more complex. And frankly, I think it points to the need to work with seasoned, active managers in this space so you can be nimble, agile, really navigate these hazards that exist out there.
JULIE HYMAN: Well, speaking of navigating the hazards that are out there, one of the hazards in the eyes of some investors are the high valuations right now. And you have a chart in your latest deck that looks at the valuation dispersion, which indeed to indicate that we are seeing valuations at historically high levels. This is valuation dispersion between the 20th and 80th percentile of S&P 500 stocks. In other words, the average valuation has gone up quite a bit.
So given the uncertainties that you’re pointing to this year– and we haven’t even really dug into the latest with COVID and whether, indeed, the path towards emergence from this pandemic is going to be as clear as many people think it is– what do we do about those valuations? Are they too high right now?
JACK MANLEY: Well, we introduced this slide to the guide to the markets to answer exactly that question, or at least to help to get that conversation going, because we were hearing it constantly throughout the course of 2020 as markets started to recover. The first thing that is always important to remember is that lower for longer interest rates inherently support higher-than-normal valuations.
So higher valuations in a vacuum are not necessarily something to be concerned about, especially when you consider that the earnings part of your price-to-earnings ratio is still very much in recovery mode. These numbers are only going to get better as we progress through the pandemic into a post-COVID reality. But what’s really exciting about that material that you just showed is that there is a very wide spread in terms of valuations out there. Not all parts of the market are richly valued. 2020 was very clearly a year of the winners and losers of the haves and have-nots.
And as we move into 2021, it means that there are some value-oriented opportunities that exist out there in markets that investors can still latch onto. Yes, the overall stock market is expensive, but there are certainly pockets of relative value out there and areas, I think, for strong performance in 2021 and beyond.