Jim Bruderman on the stimulus package: ‘it will give the markets a boost in the short term’

Jim Bruderman, 1879 Advisors Vice Chairman, joins Yahoo Finance’s Seana Smith to discuss his thoughts on the markets, the latest on the stimulus deal, and other events that could have a major impact on investments.

Video Transcript

SEANA SMITH: Well, we want to zoom out here and take a broader look at today's market action. Again, all three of the major averages holding onto gains with under two hours to go in the trading day. Dow up over 100 points as of right now. For more on this, we wanted to bring in Jim Bruderman. He's a Vise Chairman of 1879 Advisors. And Jim, great to have you on the program. Let's start with the gains today. Stocks not far from those all time highs that we saw earlier this week. What do you think of the levels that we're seeing right now as we get ready to close out the year?

JIM BRUDERMAN: Well, I'd certainly have to say that markets are priced for perfection, at least to some extent. We've seen some great gains this year, thanks a lot to the liquidity provided by the Fed and central governments in general. But today's action with cyclicals and small caps being up could very well be the song we're singing through 2021. As we continue to see the recovery, we would expect to see maybe a little bit broader, a little bit more investor comfort with some of the macro issues that are out there, and politics behind us at least after early next week when we get a much more clear understanding of what the Senate is going to look like and what those government policies are going to look like. But cyclicals and small caps as we continue to recover should continue to be the benefactors of some of that recovery, especially in this interest rate environment.

SEANA SMITH: Jim, I want to bring up the Georgia runoffs because you just mentioned that briefly. I guess what does it mean for the market and what result would be best for investors?

JIM BRUDERMAN: Well, there's a lot of concern about the market. And markets in general love gridlock. I think gridlock would be the best for investors, that's what I'm voting for. If Democrats do take control, I think some of the fears that are being floated up are maybe a little overstated because even the Democratic party is got some pretty good divisions within it in terms of how far left people go.

But I would say that the biggest concern more than anything else is from a tax standpoint. Obviously, we'll see a lot of spending, that spending has to be paid for somewhere. And unfortunately, trickle down economics works the same way that trickle up does.

SEANA SMITH: Jim, as we look ahead to 2021 and as we got a little bit more resolution on the political front, how should investors be positioned? I know you mentioned that rotation that we've seen into some of the cyclical sectors, also small caps. But within those names, what do you like?

JIM BRUDERMAN: Well, that's a very good question. And at our very core, we're a conviction house. We like quality more than anything else. We like companies that can compound growth. Companies with strong fundamentals, good management, a growing market share, critically important, a growing profit margins. It's a trickle down effect that leads to growing EBITA. And so we're looking for companies that are long term quality players, number one, number two in their industry. Companies like Microsoft, for example. Or S&P Global is another great example. Lululemon certainly through the holidays did a fantastic job.

Now arguably, on some of these the valuations have maybe gotten a little bit ahead of themselves. But over the long term, owning great companies, owning companies that can deliver compound returns, that can increase their dividends, that's the kind of companies our investors want to hold.

SEANA SMITH: Jim, in your note that you sent over, you said that the trend may be changing in retail and apparel. And also you mentioned that the trend may be changing in entertainment and in hospitality. What are you looking for when you're deciding when is a good time to enter into this space? Is it once we get a little bit more clarity on the vaccines? Because I think that there has been a little bit of hesitation here amongst investors just about when to jump in, especially when it comes to some of those travel names.

JIM BRUDERMAN: Yeah. I think if you look at advanced bookings, a lot of those travel names are already, looking like once we get through this, they'll have a very attractive 2021. The big thing that we want to be concerned with I think more than anything else is leverage because a lot of these companies, as great as they are, as great as their brands have been running negative cash flow for almost a whole year now and have been taking on debt to finance that. And making sure they're the same companies that they were or more importantly looking at companies that are going to make the turn, that aren't going to be zombies, that are going to be able to make their debt payments and return to profitability. That's really the key here.

SEANA SMITH: Jim, we have a chart up right now showing some of the sectors that you're watching as we enter into the new year. Tech is on the top of that list. And tech has been an outperformer here in 2020. When you're looking for investment opportunities next year, you sticking with some of those big cap names that led the way here over the last nine or 10 months? Or are you diversifying a little bit into maybe some of the underperformers within the tech sector?

JIM BRUDERMAN: Well, I would say this there's got to be an opportunity in some of the smaller names. But really, those big cap names that have come back to the means still offer a lot of the same fundamentals. Now arguably over Facebook and Alphabet, there are some challenges from a regulatory standpoint. And I don't see those going away anytime soon. But we do take a little bit of solace in some of those bigger names that have come down off their highs. At the same time, keeping in mind that they still represent a huge portion of the market. Obviously, diversification is important.

SEANA SMITH: Jim, one thing that investors are focusing on, at least today, is being attributed to some of the gains that we're seeing across the board. Is that debate down in Washington? We have the better than expected-- or I guess progress we can say on the vaccine front. But they're also closely watching that debate when it comes to $2,000 in stimulus checks. It's still up in the air. We don't know what the outcome is going to be. If we do get that $2,000 in direct payment to Americans, how big of a boost or will it give the markets a boost here, at least in the short term?

JIM BRUDERMAN: It'll definitely give markets a boost in the short term. I think the markets, as we've seen throughout the course of the pandemic, love the idea of consumers having money in their pocket, money to spend. And certainly, it goes back to the trickle down economics. If money spent, it's going to have a multiplying effect and ripple throughout the economy. So more money in consumers' hands, money that's going to get spent certainly can't not help GDP.

SEANA SMITH: Jim, do you think we're going to need more fiscal help next year? We know that the Biden administration will likely be pushing for that. But how critical is that for the market?

JIM BRUDERMAN: I think we have to really take a wait and see opportunity on that. I think there's a risk of overdoing it. I do think that this current bill helps fill in the gap. And arguably, I wish it had come a little bit sooner given the expiration of benefits that we've seen and given the resurgence of the pandemic we've seen. I'd say it really has to do more than anything else to the extent we see further lockdown's. If we do see considerable further lockdowns, then obviously we're going to have to fill that hole. But if we can make it through the winter, arguably we're sitting in a pretty good place as it is today. That's not to say that there won't be opportunities for very targeted support. And I think small businesses may be one of the areas that are really going to be needing that type of help.

SEANA SMITH: Jim, quickly I want to get your thoughts on what we're seeing play out in the bond market specifically with the 10 year yields. We've seen this huge jump off the lows, a bit of consolidation recently with the 10 year right around 93 basis points today. If we do push above that 1% threshold, is that a risk to the market or at what level do you start to become a little bit concerned?

JIM BRUDERMAN: You know, I think just pushing over 1% isn't going to create a risk. But we do have to keep in mind that a lot of valuation models are built on what the alternative is. There's certainly a little bit of elasticity in terms of the relationship of interest rates to equity valuations. So a steepening yield curve in general I think is healthy for the economy. I think it's healthy for certain sectors of the economy, especially financials. But I don't think that on the longer term it risks disrupting the valuations. But I think it's important to say I don't think interest rates are going to push that high for it to be a problem. I think there's enough dynamic to keep interest rates low for a while.

SEANA SMITH: Jim, I want to get your thoughts just on energy because it has been a sector that has really had to come back here in the fourth quarter, although clearly from extremely depressed levels. Are you seeing any investment opportunity there? Or do you think that this pot that we've seen within the sector might be short lived?

JIM BRUDERMAN: I would have to agree with you on that. We're not especially keen on energy simply because of its very high capital structure. Energy companies in general can suck up a lot of cash. So I would have to agree. I think it's a short term pop. I don't think the long term dynamics, especially from a regulatory standpoint and certainly from an environmental standpoint really favor energy, especially on the domestic front at this juncture.

SEANA SMITH: All right, Jim Bruderman, Vise Chairman of 1879 Advisors. Great to have you back on the program. Thanks for taking the time.

JIM BRUDERMAN: Thanks Seana. Always great to be here.