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Betting against the markets is betting against recovery: Strategist

Invesco Global Market Strategist Brian Levitt joins Yahoo Finance’s Kristin Myers to break down his outlook on the markets as stocks seesaw in a shortened trading week.

Video Transcript

KRISTIN MYERS: I was reading your note a little bit earlier. And it seemed to try to inject, I guess, a bit of calm, perhaps, or pragmatism out there, especially given the market swings that we've seen last week. So I'm wondering if you could explain for us some of the market uncertainties, or rather what uncertainties the market is dealing with right now.

BRIAN LEVITT: Yes, so we had a very big move in the markets. And if you got to a point where you were short term overbought and you start to deal with some seasonal issues, and September tends not to be a great month for stocks, but more important than that is you've got some policy uncertainty. Usually that policy uncertainty comes from the Federal Reserve, not this time. To your point, Kristin, it's on the fiscal side and, obviously, the uncertainty around the election. So it's no surprise that you're starting to see some volatility in markets.

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KRISTIN MYERS: So you also noted in your note that September, while it's my favorite month, not a great month for stocks. And that, quote-- and you had noted another strategist saying this, that occasionally you eat some sand, especially since the run-up that we had been seeing in some of these stocks over the last couple of months. So I have to ask, especially since we have another day in the red, we had a couple-day selloff, three-day selloff, how much sand do you think that investors are going to be eating?

And I really have to ask. Everyone's been noting that, look, this pullback is healthy. I'm wondering if you think that perhaps we actually need to pull back a little bit more.

BRIAN LEVITT: Yeah, the pullback is healthy. If you look at short-term indicators, we're still a little bit short-term overbought. So perhaps there's a little bit more to go. But I don't want investors to become overly panicked by this.

Personally, I think that we are in a new market and economic cycle. The economy is recovering. It'll happen with some fits and starts. But you also have a Federal Reserve that's very accommodative.

You have stocks that are cheap to bonds. Real yields are negative. We've got a pretty good demographic wave in this country. So I'm of the mind that we are still in a long-term bull market for equities.

We're dealing with some uncertainty and some volatility right now, as we go through an election season and we look for some fiscal stimulus. We have some concerns about reopening policies. And that is to be expected.

But over the next year and more, I think betting against markets here is betting against the recovery. And betting against the recovery is betting against medicine, science, human ingenuity, policymakers. And I'm not willing to make that bet.

KRISTIN MYERS: So how much of a bull case are you making for the markets? I've been talking to folks over the last couple of days, just to throw out some numbers-- 4,000 level for the S&P 500. I mean, how much-- how strong is this bull case that you're making?

BRIAN LEVITT: Yeah, I'm making the case that we're going to see multiple years of market gains here. I mean, I'm making the case that this looks similar to what we saw coming out of the 2008 financial crisis. And if you remember, coming out of the financial crisis, nothing in the world was good. And it took a lot of years for things to get to a point where maybe we assess them as good. But throughout all that period, with overly supportive monetary policy, things were increasingly getting better.

And so that's the way I would advise investors to look at this, not whether things are good or bad, but whether they're likely to get better in the coming months and coming quarters and coming years. And we are coming at this from a very depressed level of economic activity, with very accommodative monetary policy. And we're likely to see a recovery play out over multiple years without any hints of inflation, without having the Fed having to raise interest rates. And that should play out over multiple years and should be supportive for risk assets.

KRISTIN MYERS: So I'm going to ask this question anyway. I have a feeling I know you're going to say. And you, as you've been talking about the Fed being very accomodative, they've made their policy stance very clear. But again, we did get the CPI out today. Wondering if at all, even in the smallest bit, inflation worries are back on the table?

BRIAN LEVITT: No, and I wouldn't say inflation worries. I mean, you had even pointed out which parts of the market are outperforming today-- financials, materials, industrials. I mean, that's a good sign of some healthy signs of inflation and an improving economic backdrop.

Remember, it wasn't that many months ago, it was March where inflation expectations were below one and plunging. That's a terrible outcome, because when prices are falling, nobody shops or invests. So the Federal Reserve did everything in their power to respond to that.

And we are now thankfully at a place where inflation is rising. Inflation expectations are up near 1.8%. That's all very healthy.

But there are cyclical forces against a meaningful rise in inflation. That's the high unemployment that we have in this country. And there's structural forces against a meaningful rise in inflation. And that's the aging population globally.

Now, if there were to be some outsized reports of inflation, of course, the Federal Reserve could tighten policy if they needed to. So I view inflation as a we-hope-so scenario. I view it as a high-quality problem. It would suggest that demand is improving and the recovery is taking hold. And so I view the consumer Price Index Report as a positive sign.

KRISTIN MYERS: Before I let you go, Brian, I want to ask about two things that are happening out of DC. So let's start first with the stimulus. As I mentioned before, we've got no news. The stimulus negotiations essentially are at a standstill weeks ago.

The markets have pretty much baked in that we would be getting a stimulus deal. And that seems to be fading, that we will be getting a deal with every passing week. Now, whether we get one right before the election, perhaps Republicans are waiting for that. Perhaps that's the October surprise. If it's not a vaccine, perhaps it's a stimulus deal.

But let's just say we do not get any deal in the next month, two month. Where do you think the markets are going to go after that?

BRIAN LEVITT: Yeah, so the market clearly doesn't like the uncertainty of not knowing what this could look like. And clearly, it is not a good outcome, given where we are in the state of the economy, to not have additional stimulus. If you don't get that, I think that the market reacts to it.

But I would advise investors just to think more longer term. Not getting stimulus here means an even more prolonged period of weak economic activity, and I would argue even more support from the Federal Reserve. So I don't believe that it means that the markets can't go higher without a stimulus plan. It probably means that different parts of the market would outperform.

If you have a stimulus plan come forward that provides support to the economy, then you're likely to see a shift to the more economically-sensitive parts of the market that would be the beneficiaries. If you don't have that plan and were mired in a weak-growth, benign-inflation, low-interest-rate world, then a lot of the names that are selling off right now that had been the big winners up until now will likely reemerge. As the winners call it, investors looking for growth in a slow-growth world.

But I'd also argue once let's see what happens on November 3. And let's see if there is single-party rule on either side, if they could come forward within the first 100 days with a recovery act similar to what the Obama administration did in 2009.

KRISTIN MYERS: Well, Brian, you brought me right to the next thing that I wanted to ask you about coming out of DC. How much of a risk do you view the 2020 elections to the markets?

BRIAN LEVITT: I don't view it as a big risk. I mean, we-- Kristin, I've been alive 44 years. I was born with Gerald Ford as the president and I've lived through Donald Trump. And every single one of those presidents, with the exception of George W. Bush, not only posted positive returns during their term, they posted double-digit positive annualized returns over their term.

So I think investors put far too much emphasis over who is going to occupy the Executive Branch of government. We heard in '09 from some pundits that Obama was going to be terrible for the markets. The markets went up significantly. We heard in 2016 from different pundits that Donald Trump wasn't going to be good for the markets, and the markets, as of last Wednesday, were at all-time highs.

So I don't view it that way. I think starting points matter far more for the president than what their policy agenda is. The starting point for whether it's Joe Biden or Donald Trump is likely to be recovering from a deep recession, very accommodative monetary policy, stocks cheap to bonds, and a good demographic wave in the country. All of that should be supportive for equities, irrespective of who wins the election.