Market Recap: Monday, December 28

Stocks jumped Monday to reach record levels after President Trump signed a virus relief package following a multi-day delay. Each of the three major indices hit record intraday and closing highs, adding to their year-to-date gains in the final week of 2020. Belpointe Chief Strategist David Nelson and Verdence Cap. Advisors Director of Portfolio Strategy Megan Horneman joined Yahoo Finance Live to break discuss.

Video Transcript

JARED BLIKRE: Let's go straight to the YFi Interactive so we can see the nice moves on the day. Small caps, which had been the early leaders, settling or about to settle in the red here. But other than that, a very constructive day. Dow is up more than 200 points here, about 3/4 of a percent. The S&P 500 is the leader. NASDAQ taking second place.

Let's go straight to the NASDAQ 100 and see some of those big names that have been boosting the indices today. Apple, Amazon, and Facebook each up more than 3 and 1/2%, so you know that's spelling some gains for the indices. But you look at the downside. We're seeing a lot of work-from-home and China names in there. Moderna is off nearly 10%. Peloton, DocuSign, and Zoom now off more than 6%. And then Pinduoduo, Okta, and Atlassian, those are off more than 4%.

But take that away, it's been a decent day of broad-based gains for the most part. Here's the closing though.

[BELL RINGING]

SEANA SMITH: Certainly has been a decent day of gains here. As you can see, all three of the major averages closing at a new record. The Dow up over 200 points. S&P up 32 points, and the NASDAQ up just around-- what is it, 3/4 of a percentage point, up 94 points right now.

Sector action-- consumer discretionary, communication services, and technology, those three sectors leading the way today.

We want to bring back in our guests. We have Megan Horneman. We're also joined by David Nelson. And, David, let me just kick it over to you first. Another day of a record close that we're seeing. A lot of the movement, at least for today, being attributed to that $900 billion relief bill that we got out of Washington. But, of course, the question is where do we head from here?

DAVID NELSON: I think you saw a lot of profit taking today. To Jared's point, you know, a lot of the big-cap names were up. Apple, Amazon, Google, they all made sense. They're up a lot this year, but it pales in comparison to a lot of the stay-at-home stocks.

I think what investors are likely doing right now, they're taking some profits in some of these names that have come so far in front of a Biden administration, and you could see an attack on the capital-gains structure early on, you know, some kind of package or legislation out there to change capital gains. So it makes sense in front of a Biden administration for some of the selling.

ADAM SHAPIRO: Megan, as we look at where we are, I mean, this is welcome news for a lot of investors. A lot of people, though, are not taking part in this rally. What's most on your mind as we head toward the end of this year's trading?

MEGAN HORNEMAN: So the end of the year, we think that this kind of Santa Claus rally, seasonal rally, taking some profit type of rally, getting into some of those names that might have really lagged this year, we think that could continue. But as we roll into 2021 and into the first quarter, we think that the market's likely priced in a lot of the good news, and we're a little concerned that it's not pricing in any of the risks in the first quarter, whether that being from the rise in COVID cases that we've seen-- we have seen the Thanksgiving cases roll over a little bit, but we are expecting to see that increase again. With over 8 million people traveling since December 20 alone via airlines, that is expected to see some increase in the COVID cases.

And then we're looking for a more broader vaccine distribution. We really need to see that. We've had roughly 2 million US citizens vaccinated with the COVID vaccine, but we're going to be looking for more of that vaccination in the first quarter.

And people are going to be looking at economic data and what that means in what we've seen with the rolling lockdowns and regional lockdowns we've had in the fourth quarter of this year and what that means for economic data.

SEANA SMITH: And speaking of the economic data, David, when you take a look at some of those consumer numbers that we've gone out recently-- the retail-sales number, consumer confidence dipping just a little bit. I'm curious just how big of a potential risk you think this could be to the market next year because I was reading through your notes, and you're saying that a double dip in 2021 is not out of the question.

DAVID NELSON: It's not out of the question for sure. You know, if you look at the estimates for Q1, back in July we were looking for as much as 6% in Q1. That's down to under 3% at this point, perhaps even lower.

And to some of the points just made, there are risks out there. Certainly any hiccup in the rollout of the vaccine is going to, you know likely force the market to retrench, and we've got to rethink some of the trades that we're so, you know, aggressively putting on right now.

I think the better trade for next year, despite my concerns about the economy, is I think the small cap and midcap trade still has legs for the following reasons. It's fundamental. If you look at the estimate revisions for the S&P 500, earnings could be up maybe 22% on the upside. But for small and midcap stocks, that could be as much as 60%. I think that's where the growth is, and I think that trade still has legs.

ADAM SHAPIRO: Megan, this isn't your first time at the rodeo, so to speak. I mean 12 years at Deutsche Bank as a senior investment strategist. You've lived through these kinds of ups and downs. What do you think about what David just said about the rotation? Would you buy into that?

MEGAN HORNEMAN: Absolutely. We've been a bit overweight some of those value-oriented sectors, that we added some in the bear market of this year, and we continue to like them for the long term. If you think about it, what's going to happen in the first half of the year is probably some absorption of this significant rally we've seen. I mean, the S&P is up 18% year to date as of today.

But we have to look at equity investors is looking beyond that, 9 to 12 months forward, and equity investors are going to look at what's going to happen in the second half of 2021 and early 2022. And one of the themes that we have for that period is this totally new side of pent-up demand.

When we came out of the pandemic, we saw pent-up demand from the consumer, but it was really related to those stay-at-home type of things-- fixing up your house, buying furniture, buying electronics. But as we get into the second half of 2021 and early 2022, we think that totally different pent-up demand is going to take place, and it's going to be in things like travel, hospitality, going to the movies, going to concerts, these types of things, and that should really benefit some of those sectors and stocks that have lagged in this rally this year.

JARED BLIKRE: This is a question for David. I just want to get your take on what's happening in China right now because we've seen, although Alibaba is up marginally today, it's lost about a quarter trillion dollars in market cap since its high a few months ago. And then you take a look at stocks like Pinduoduo which were benefiting from the potential gain in Baba's lost e-commerce share. That's down 5% today.

And then considering that emerging markets are so heavily weighted to these Asian tech names, for me I'm just wondering about what happens in January if this becomes even more priced in, maybe with a rising dollar. Is this for you a potential headwind in the early new year?

DAVID NELSON: Unknown at this Point. I think President Xi is sending a very clear message to large-cap names like Baba and to Jack Ma and other billionaires out there that they are not all powerful and they're not all as powerful as their wealth, you know, might suggest. And I think it's a very clear message and he's trying to get out in front of this at this point.

I actually think for the United States, China still represents an existential threat, and I think President Xi is going to test Biden very early on in the administration. It could be foreign policy, certainly economically, but it could even be militarily, Jared. And it's going to be something that we're going to have to deal with, and that's a subject that right now is embraced by both sides of the political aisle. If something's changed in the last four years, that's it. Everybody understands China to be an existential threat.

SEANA SMITH: Megan, real quick just as we wrap up here, I'm curious just how your conversations with clients have changed over the last couple months going back to the start of the pandemic and then what you're hearing from clients is just in terms of some of their biggest challenges or biggest headwinds here going into the new year. What are you hearing at this point?

MEGAN HORNEMAN: We've had both sides of it. We've had some investors that are worried about missing out on the rally that we've seen. We've had-- we've had some investors that might want to chase some of the momentum. But on the flip side, we've had some investors that are really worried about going into 2021 and the market, as I mentioned, sort of absorbing some of the disappointment we may see in economic data.

Our portfolios are positioned with a modest overweight to cash so that we can take advantage of opportunities, and all of our clients understand why we have that overweight and are actually very quite comfortable with it because we're going to continue to look for opportunities if we get any volatility or downside in the first half of the year, which we do think will happen. So we'll continue to look for opportunities there. But our clients are long-term investors, so they are comfortable with what we're doing as far as looking at the next 12 to 24 months forward.

ADAM SHAPIRO: David, real quick. I realize one day does not a trend make, but I'm trying to understand why we'd hit the record close on the three indices but on the Russell 2000 we actually closed negative given the fact that we do see this rotation to small cap. What gives?

DAVID NELSON: You know, it's a one-day event, and for me, it's just trader noise. I think there's a lot of profit taking. Look at Zoom, Peloton, and some of the other names you mentioned earlier in the show. These are smaller companies. They're up several hundred percent this year. Apple, Amazon, and Google, like I put out earlier, they're up, but they're not up anywhere near as that, and I think it's a capital-gains plan. I think they're just taking some money off the table.

I still think the small, mid-cap trade works out for next year. And to Megan's point, I think she made some great points. There's a lot of reasons why we want to move in that direction.