The market ‘isn’t pricing in a shutdown of the economy’: Nationwide Chief of Investment Research
Stocks are mixed today on falling jobless claims and vaccine hopes. Nationwide Chief of Investment Research Mark Hackett joins Yahoo Finance Live to discuss.
Video Transcript
AKIKO FUJITA: Let’s bring in our first guest for the hour. We’ve got Mark Hackett, who is Nationwide Chief of Investment Research. Mark, it’s great to talk to you.
Let’s take a look at this in the context of the markets because it does feel like that vaccine rally is at least on hold for now. We were talking earlier in the week about the rotation out of tech. We saw that a bit reversed yesterday. How do you see things as they stand right now?
MARK HACKETT: Yeah, I think it’s obviously been a very good week and a half here, but there’s still a lot of uncertainties remaining. We seem to be in a bit of a tug of war for the market right now. You know, the market has rallied, but we haven’t been able to eclipse that September high.
So there’s a lot of good things, as you mentioned, with the vaccine and the kind of election period ending. But there’s still a lot of uncertainty remaining out there, and I think that that’s where we’re starting to see this churn in the market. We’re not– it’s not clear yet what’s going to be that next catalyst to drive us to the new record highs.
ZACK GUZMAN: Yeah, and Mark, I mean, when you think about trying to search for the catalysts there on the plus side, it seems like there’s plenty to focus to on the negative side, the longer we wait for a stimulus package to come through Congress, especially the case count that we’re talking about right now.
Yesterday we had one of President-elect Biden’s doctors from his coronavirus task force on hinting at the idea that we could see lockdowns, potentially pointing to the idea of a four- to six-week lockdown to get the pandemic under control. I wonder if the market was looking too far ahead in terms of that positive vaccine news and overlooking the fact that there was that lockdown risk still out there, perhaps not nationally but still on a state or local level. Talk to me about how that might not be priced into the market, at least when it comes to the next couple of months here.
MARK HACKETT: Clearly the market can absorb a choppy economic recovery, but it’s going to be very difficult– you know, the market clearly isn’t pricing in a shutdown of the economy in that four- to six-week category.
The market’s been incredibly resilient. You know, we’ve seen cases and hospitalizations rising pretty consistently over the last several weeks, but we really haven’t seen the market react yet. So I think the market is taking a bit of a wait-and-see approach here, having the glass-half-full approach until some of these actions are taken.
Keep in mind, we’re still looking at January or beyond before the Biden administration can make any of those, you know, decisions.
AKIKO FUJITA: So, Mark, with that uncertainty, how do you play some of these stocks that have been especially sensitive to the vaccine and then just concerns about another potential lockdown?
MARK HACKETT: Yeah, we’ve seen a really impressive rally in the value space and kind of the procyclical camp, including small caps and international stocks recently, but don’t forget about the large-cap space. You know, there really is very strong momentum in that area for most of this year and a lot of interest from retail investors.
So a lot of the attention in the last week or so has been towards the kind of value, small cap, international space. But, you know, keep in mind, there’s an enormous gap between growth and value, large and small for the entire year.
ZACK GUZMAN: Yeah, regarding that gap, it’s kind of weird to watch all this play out internationally because you can look at China and kind of see how cyclicals had rallied once they got their case count under control. You can look at what happened in Europe when they saw cases surging about a month before we saw that play out here. Now we’re in it. So when you kind of plan out what could happen in 2021 in terms of that rotation you’re talking about, is that just going to be a rolling process in your mind, or how quickly could we see cyclicals catch up to the growth we’ve seen from some of those FAANG names?
MARK HACKETT: Yeah, in a lot of ways the market’s acting a lot more like a late-cycle market than an early-cycle market at this point. We’re seeing strength in the growth space. We’re seeing a lot of IPO activity, a lot of M&A activity.
So, you know, 2020 has been strange in a lot of ways. I think certainly the behavior of the market in that regard has certainly been part of that. But a lot of optimism has been placed in kind of the procyclical camp very quickly here. But again, that tends to be a little bit reactive in the upside and the downside. I think we have a little bit more recovery to go before you can really buy into these procyclical names taking the lead from the growth names.
AKIKO FUJITA: Mark, you’ve noted the pullback we’ve seen in emerging markets this week, particularly China. We were talking yesterday about the big selloff we saw in the big tech names because of the regulatory crackdown, but we’ve also had a number of guests on who’ve talked about the relative weakness in the dollar being supportive of a case to invest in EMs. How are you looking at allocations outside of the US right now?
MARK HACKETT: Well, much like the growth-value and large-small gap, the domestic-international gap has actually been a multiyear phenomenon. You know, the relative valuations between the US and the rest of the world is extremely wide at this point. A lot of the positives that have driven this recovery since March domestically, particularly very heavy liquidity levels and also aggressive central-bank action, is really the case across the globe.
So you mentioned China. China is its own specific category at this point because of the regulatory environment. But we think once we get the vaccine in place and once we get some of these progrowth initiatives from the central bank starting to take hold, there’s a very large valuation gap between domestic and international. You could see an extended period of catch up, not only in the developed markets but particularly in the emerging markets.
ZACK GUZMAN: So also obviously Akiko was talking about Disney. We’re going to get those results after the bell, but it’s also, you know, Q3 earnings season here. We have seen analysts upping their expectations heading into it, which is a little bit unusual in terms of the historical precedents there. So far in aggregate, companies are reporting us their earnings about 18% above expectations. That’s well above the 8.7% average we’ve seen over the last four quarters.
So Q3 seems like it’s going to be strong. A lot of people knew that coming into it. But when you look ahead to Q4, if there is kind of this lockdown question looming over some of these companies reporting and analysts were already expecting the strength to continue, how shaky does that look as something that, you know, the market’s going to have to chew on here when we approached Q4?
MARK HACKETT: Yeah, earnings certainly haven’t gotten the attention perhaps that they deserve simply because there’s been so many other news items. But the second quarter and the third quarter had been record breaking not only in the number of companies beating estimates but also the degree to which they beat estimates. So it’s very encouraging what we’ve seen. We’re seeing positive estimate revisions not only for the fourth quarter but also for 2021 and 2022.
This is fairly uncommon historically. You don’t generally see estimates revised higher this close to it. So clearly there’s positive momentum with regards to earnings. Companies still aren’t providing much guidance. As you mentioned, the level of uncertainty, particularly with the potential lockdown or variation of the lockdown coming. Companies are going to be incredibly reticent to provide guidance.
When that happens, analysts tend to guess low because you’re always better off, you know, targeting low and having them beat them. So I think that’s perhaps what we’re seeing a bit here, certainly what we’ve seen over the second and third quarter. But I would expect the estimate trends to continue to trend higher throughout the next, let’s say, 12 months or so. That’s actually pretty important here given the S&P 500 trades at a fairly high valuation relative to the current estimate.
AKIKO FUJITA: And, Mark, finally we’ve gone a few weeks without talking about the stimulus. Of course, we also haven’t gotten any progress in several weeks because of the election last week. Where do you think the market expectation stands right now on that front, and do you expect a deal by the end of the year?
MARK HACKETT: I think the market is perhaps pricing in a bit of an expectation for the end of the year. That seems awfully optimistic, frankly, given the uncertainty with the Senate leadership, the looming election in Georgia in the beginning of January. It seems unlikely that the two sides can get together simply because the Democrats want a much larger bill than the Republicans, at least by reports. So I think that, you know, expectations for a deal happening in the near term seem a bit optimistic, at least to me.
