Market Recap: Friday November 13th

Stocks extended gains Friday afternoon as the three major averages ended the week on a high note. Barry Knapp, Ironsides Macroeconomics Managing Partner, and Tom Essaye, Sevens Report Research Founder,joined Yahoo Finance's Jared Blikre, Seana Smith, and Adam Shapiro to break down today's market action on Yahoo Finance Live.

Video Transcript

ADAM SHAPIRO: We've got Barry Knapp from Ironsides Macroeconomics Managing Partner joining us, along with Tom Essaye. He's Sevens Report Research Founder. Tom, let me start with you. We've got the Dow up 9-- it's roughly 9% since the election. Is this sustainable with the recent COVID news?

TOM ESSAYE: I don't know if the pace of the week is sustainable. And thank you, guys, very much for having me on. But certainly, there was good news this week in the form of the vaccine and also further election clarity. I think the issue is that those medium and longer-term positives are having a hard time against the near-term negatives of, frankly, parabolic coronavirus increases and the likely lockdowns that are going to come.

And we just heard New Mexico and Oregon are now taking measures and that there are-- you know, there are going to be more over the weekend, I'm sure, and early next week. So look, the pace of this week is not sustainable. But I think if you look out over the next six months will the market be higher than it is now? Yeah, probably so.

SEANA SMITH: Barry, we only have about a minute here, a minute and a half, until the closing bell. But some of this buying that we're seeing in these stay-at-home names, in these travel stocks, do you think that's premature?

BARRY KNAPP: Well, I never thought that playing stay-at-home versus work-from-home made a heck of a lot of sense. For me, there's three trends that are really likely to persist into 2020. One is we're going to have, or already the beginnings of, a ferocious comeback in global trade, manufacturing, and an inventory restocking cycle that began in mid-2018 during the Trump trade war. That's going to persist well into next year.

So buying industrials and materials will benefit from that, almost regardless of the pace of the pandemic here in the US. Additionally, inflation is headed higher as well. And capital spending should come back robustly for the same reasons that global trade and manufacturing are. So you know, trying to buy airlines versus DocuSign to me is a really tough trade. I'd prefer just to be in those multi-line industrials, maybe even financials, depending on how that runoff comes out in Georgia on January 5.

ADAM SHAPIRO: Yeah, we--

BARRY KNAPP: And I think those would be much more solid long-term plays than trying to buy airlines.

ADAM SHAPIRO: All right, Jared Blikre, as we get ready for the closing bell in roughly 20 seconds, let's avoid the airlines, but what are you watching?

JARED BLIKRE: I'm watching the Dow here, and Dow's been the outperformer of the week. We are set for some gains of about 1,100 points. But the Russell 2000 really shining as well. That's up 6%. And then you look at the S&P 500, equal weight, that had two record closes. And by the way, we are heading for the first record close of the week for the S&P 500.

[BELL RINGING]

ADAM SHAPIRO: All right, so we've got the closing bell sounding as the markets settle. You heard Jared talking about the Dow, up about 380 points. NASDAQ right now up about 120 points, and S&P 500 up about 40 points. We're going to watch where these markets settle for the day and for the week.

But let's go back to Barry. I'm curious, when you were talking about the different sectors, I mean, we've seen some pretty remarkable sector growth, especially among financials and energy. What is that signaling to you?

BARRY KNAPP: Well, I think, you know, when you consider what's going on with COVID and the outlook going forward, you have to step back and say-- you know, look at global cases and the rate of change in global cases, which actually peaked at the end of March, right when the stock market bottomed. The same thing happened in the Sun Belt in the US at the end of June. Although cases were going up, that rate of change started to roll over and slow. And industrials versus the tech sector has outperformed by 9 and 1/2% since the beginning of July, not withstanding the fascination with tech through this whole period.

So I suspect we're about to see the same thing happen in the Midwest with our third and what's likely to be our final wave here in the pandemic. And that's what the energy sector and financial sector are likely reflecting, is that we may have finally gotten to the third and final stage of the pandemic, and the outlook for 2021 is better. Now, I haven't bought energy, and I'm not quite ready to do so. But financials have been a big missing piece of the puzzle, and I do think the story there is favorable.

SEANA SMITH: Tom, you're shaking your head right now. Our viewers can't see that, but it seems like you're agreeing with what Barry is saying, just in terms of seeing some opportunity in financials.

TOM ESSAYE: Yeah, I think that as you look around, I think that now, for the first time since this entire pandemic has begun, it actually-- there is a viable catalyst via the vaccine to wade back into the value names, like Barry's spot-on in favoring industrials. But I think look, if we're going to see inflation, and we're going to see stimulus and Fed staying at 0% and more QE, then we've got to see yields go up too, right. And that should benefit financials, which are still historically cheap. So I think as you look around for places to go, there's finally, for the first time really this year, a positive case to be made for the financials.

ADAM SHAPIRO: Tom, Steve Sosnick was on with us earlier this week, and he said it's no big deal if we see the 10-year yield go above 1%. But everyone's expecting that the Fed would intervene to try and lower it below 1%. Would they? Or would they perhaps hold off, maybe try to-- you know, it would be a boon for the financials, but it also gets some inflation going?

TOM ESSAYE: Yeah, I don't think-- I don't think 1% would necessarily cause that much consternation. It's only 10 basis points from where we are right now. I think 1% and maybe a little bit before-- above it, would be actually a healthy sign that the bond market is starting to price in some inflation and some future growth.

Now, we go quick to 150 or 175, then, yeah, I think you see the Fed step in, because the one thing this market does not want is a disorderly rise in interest rates and yields as people stampede out of bonds. That can't happen. That would be a significant negative. But 1%, I don't see a problem with that.

SEANA SMITH: We're looking at some of these critical levels-- or these record closings, I should say. Jared Blikre, you're watching this. And it's interesting what we're seeing play out in small caps. We've talked about the fact that small caps had been coming back into favor with investors here. But the Russell 2000 marking its first record closed today since all the way back in 2018.

JARED BLIKRE: Yeah, you'd have to go all the way back to August, so I think it's telling. You know, we had a bunch of intraday records on Monday on that big spike up, and we gave a lot of that back. And there were a lot of people who were calling the top. Hey, it could still happen.

But I think if you look at the charts here, this is what's happened with the Russell this week. And these are sizable gains. Let's look over a three-month period here, and you can see how these small caps composed of value and cyclicals, a lot of financial, a lot of regional banks in here that have done well, they've just really lifted off in November. And for that matter, they had a nice leg up in late September and October as well.

You look over the last five years, a lot of people went into the Russell 2000 saying that it wasn't confirming the rally under way. There are structural reasons. I'm not going to get into why the Russell really hasn't led for most of the last two decades, but here it is. So it's difficult to make the argument when you've got the Russell 2000, the transports, you got the SOX, you got just about all these markets making record highs, you just need the NASDAQ to get along here.

And just getting back to the S&P 500 quickly, let's hit a three-month chart here. Here we go. This is what I've been saying the entire week. As we broke out of this negative trend line here, we had the day, we had that bad close on Monday, but we've just consolidated around the breakout period-- or breakout area, and now we've accelerated.

And this close, I think, is very telling of the future direction of the market. Everybody wants to play for a market melt-up into the end of the year. Could be wrong, but that's what people are playing for right now.

ADAM SHAPIRO: Barry, I'm curious, what Jared was just saying about the performance of the Russell 2000, we've had a lot of people talking about the-- the alleged rotation, perhaps, out of tech to, quote, "value," forgetting that you could still have growth within small cap. What do you make of this?

BARRY KNAPP: Well, I've been advocating small cap since the lows. And if you measure the performance from the lows and assume on March 23 we started a new business cycle for investors, Russell's been pretty consistently above S&P for that entire time frame, and that's not unusual. In the history of the Russell index, early in the business cycle, meaning the first year or so, it always outperforms. So this is not surprising. I've been advocating that trade all along.

I'd love to add a quick point on the Fed reaction function, if I might, because I think this is kind of critical. If rates continue to rise, and I expect them to at least to 130, for sure, it really depends on the nature of that rally. If it's driven by the inflation component, or so-called inflation break-evens, those are currently sitting around 1 and 3/4%, or longer-term break-evens, if it went to 2 and 1/4, the Fed would actually be congratulating themselves on generating some market expectations of higher inflation.

If it's driven by the real rate component or TIPS yield, the Fed might be a little more concerned about that. Right now there's been a persistent rise in that market and implied, or market expected, inflation component, that's a good thing, and that's a good thing for banks. And so that's the key way for me to think about any further rate increases is, is the inflation component driving it? Or is it-- is the real rate component driving it? I think it'll be the inflation component.

SEANA SMITH: Tom, I think a lot of people are just still trying to wrap their heads around exactly what is driving this market. Because this comes in a week when we started the week, we had pretty positive news-- or very positive news, I guess, on the vaccine front when it comes to Pfizer. And then-- but we end the week with another day of a record number of cases. The buying action, though, that we saw this week, do you think that was based on fundamentals? Or was it more of a case of emotional buying?

TOM ESSAYE: I think it was a bit of both, but more emotional, in so much is that there's been a lot of capital that has been essentially waiting, right, for this vaccine for-- to appoint an all clear, and I don't mean, obviously, an all clear right now. But essentially, a 90% effective vaccine from Pfizer, regardless if that's to be transported in dry ice or not, that's the beginning of the end of COVID. Now, whether it ends in March or June or August, you know, we don't know. We'll see. But it's the beginning of the end.

And I think that that's when you saw capital kind of leap out. And this is the hardest thing for investors right now is that there are a lot of institutional investors who are looking out to that June time frame and thinking gee, that could be a really good setup for stocks. Meanwhile, we've got 150,000 new COVID cases a day, and hospitals are starting to be overrun.

So we really have to separate out that short term from the long term. And the takeaway from this week for me is that the future is brighter down the line. It's just we're going to have a bit of a rough patch here with COVID, unfortunately, in the short term.

ADAM SHAPIRO: Barry, as we prepare to wrap this up, I am curious, what should my-- as an investor, my horizon be right now? Should I be looking in terms of three months, or six months, or even longer?

BARRY KNAPP: Well, you know, you always want to think through to that what's going to persist for six months or even through to a year, which is why I point to the recovery in global trade and manufacturing, the recovery in capital spending, and the inflation outlook. Because all of those things were-- even pre-election, they were likely to unfold regardless of the election outcome. They're likely to unfold regardless of whether, as Tom says, we end-- the pandemic effectively is ended in March or June. Those trends are likely to persist.

So you should always think that way, though I will say there are a couple of still scenarios to be considered in terms of the policy outlook. Is there a stimulus deal? Does that affect reconciliation? How do those January 5 runoffs go? So we're not completely out of the woods on a policy front, but I think the six-month horizon is pretty bright.

ADAM SHAPIRO: Barry Knapp, Ironsides Macroeconomics Managing Partner, and Tom Essaye, Sevens Report Research Founder, thank you both for being here on Yahoo Finance Live.