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Markets reaction: White House, Dems signal willingness to resume stimulus talks

Kirk Hartman, Wells Fargo Asset Management President and Global CIO, joins Yahoo Finance's The First Trade with Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss what's moving the markets around Tuesday's opening bell.

Video Transcript

BRIAN SOZZI: Help us solve a debate that we were having internally here. What do you think's driving the market action today? Is it hope that maybe President Trump does, in fact, somehow cut the capital-gains tax, or is it hope that we get a fiscal stimulus in a week?

KIRK HARTMAN: Well, I think it's a little bit of both. Clearly a capital-gains cut would be very good for equities, and I think there's hope that there will be some kind of package. And also, I think the market's clearly looking to next year's earnings. And, you know, if you think about next year's earnings on the S&P could be $170. A 21 P/E would dictate an S&P that's probably, believe it or not, a hundred points higher than now. So so much of this is what happens next year to earnings.

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BRIAN SOZZI: Kirk, interesting to me that you mentioned that the market action could be driven by a potential capital-gains tax cut. Would that excite you? As someone putting money to work, would that make you put more money to work?

KIRK HARTMAN: Well, all things being equal, yes. I think the worry is that it will continue to increase the amount of debt, and one of the big overhangs here is not only the amount of debt at the federal level but the amount of debt at the corporate level and also at the local, state level. So a lot of faith that the economy will recover quickly and that GDP growth will surge, which will drive things like tax revenue. So all things being equal, yes.

ALEXIS CHRISTOFOROUS: Do you think that's all contingent though, Kirk, upon another stimulus package getting passed and getting passed quickly in Congress?

KIRK HARTMAN: I think that's part of it. I think the market will be disappointed if there's not another stimulus package, so all that factors in.

I think the big risk that I'm worried about is at the end of the year what I call the coronavirus winter, meaning I think we are all taking as a given that there will be a vaccine at the end of the year that will be rolling out and that it will be effective, and I think there are a lot of unknowns there.

Also, what I was thinking about the other day was you think about the virus happened when the weather was getting better. People were going outside, dining outside, exercising. And I think the worry is that if we don't have an effective vaccine at year end, and especially in the Northeast and the colder parts of the country, we could get a second wave in the winter. So there's still some big unknowns out there.

BRIAN SOZZI: Kirk, are you making changes to the portfolio in advance of that corona winter? The reality is 2020's almost over.

KIRK HARTMAN: Well, I think it depends on your time horizon. I mean, look, we're back to almost where we were at the beginning of the year. So I think as an individual investor, would it make sense to take some risk off the table, especially the big techs? Probably would. It looks like there's a value rotation going on to the larger industrials and the smaller-cap stocks, those kind of things. So that looks like it's catching up. So I think you want to make some adjustments.

The other one that I keep-- a lot of us keep wondering about are just the level of interest rates. And the thing that I think you have to watch is if there is continued growth in the market, if there is a capital-gains cut and the market keeps doing well, rates are going to go up, which then you've got to worry about your bond portfolio.

ALEXIS CHRISTOFOROUS: What about financials, though, in that environment? I mean, you were talking about this rotation out of possibly some of those big tech names. We're certainly seeing the pullback today, and that could just surely be people who have done really well in these stocks taking a little profit off the table. But do you see any money flowing into the financials, and is there reason to be putting money there right now?

KIRK HARTMAN: I think that's a function of the yield curve, and it was interesting this morning. The 10-year Treasury was backing up. So financials, in my mind, are very much a function of the shape of the yield curve. And if you're of the view that rates are going to back up, I think financials will do well in that environment.

BRIAN SOZZI: Kirk, what's your best guess-- why do you think this market is ignoring the upcoming presidential election? It's almost crunch time with that, and there's two outcomes. One, potentially four more years of chaos or a change in leadership and potentially higher taxes. Yet this market is trading at record highs.

KIRK HARTMAN: Well, that's a good question. I think the market, again, is just looking through the election to the earnings for next year, and I think there's the view that no matter who the eventual winner is that the vaccine will be here and that things will recover.

Clearly there are differences in the positions of the party, and on the margin one can argue that, you know, depending on your political view, one party may stimulate the economy more than the other.

I think right now the market is kind of discounting that and looking at the fact that the Fed is here. We've got the Fed put. There's a lot of stimulus in the market. The money supply is up 20%, and corporate earnings look pretty good next year. So right now I would say it's not really too focused on the election.