Market Recap: Tuesday November 24th

Optimism over the imminent deployment of a COVID-19 vaccine propelled the Dow Jones Industrial Average above 30,000 for the first time ever on Tuesday. Brian Levitt, Invesco Global Market Strategist and Jeff Powell, Polaris Wealth Advisory Group, joined Yahoo Finance's Jared Blikre, Seana Smith, and Adam Shapiro to break down today's market action on Yahoo Finance Live.

Video Transcript

SEANA SMITH: There's a couple of minutes here to the closing bell. We want to bring in our first two guests. We have Brian Levitt. He's Invesco global market strategist, and also Jeff Powell, Polaris Wealth Advisors. Brian, let me just go to you first. Dow above 30,000 here. It looks like we're going to hold on to that number. What's your thought just in terms of what that level signals to investors and how important it is?

BRIAN LEVITT: Yeah, I would say that only small minds are impressed by large numbers. That's what I tell people. I mean, there's nothing at all that significant about 30,000. I suppose it's psychological. I remember 10,000, we all gathered around the screen in March 1999. So we've seen this before. I would say that it's far more interesting to compare 30,000 to the fundamental characteristics of the companies within the index. So what are we trading at? What's the interest rate environment? What's the inflation environment? I don't think it's all that significant, but I do believe we are in a long run bull market. And I expect us to see ever higher highs from here.

ADAM SHAPIRO: Jeff, picking up on what Brian just said about looking at the companies because, you know, just a few companies can have an overweighted impact on the indexes. And we were setting up in 2020 at the end of 2019 for a potential pullback. Some people feared we would have a slowdown or recession. I mean, the pandemic blows it all out of the water. But that fact still remains clear that there are large companies that can skew these indexes. And if I'm a small-time investor, I can get burned.

JEFF POWELL: You know, absolutely. I mean, to Brian's point, though, we really want to be looking at the underlying investments within it. If you remember what happened this year, Apple splitting. Apple was the largest company within the Dow Jones, representing almost 12% of the index. And after it split, it represents about 2 and 1/2% of it. So really, what you're looking at is having companies like UnitedHealth now and Goldman Sachs, which are having rungs up in the right direction, that are the ones that are driving this Dow Jones up, not the FAANG stocks from days past.

SEANA SMITH: Jared, I want to bring you back in here as we head-- get closer and closer to this closing bell. What are some of the numbers in some of the movers that you're watching?

JARED BLIKRE: Well, let's go back to the S&P 500. And why don't we take the chart up? I'd just like to add that we do have some potential selling into the month-- end of the month since this is such a month that's been on fire. You can see S&P up 11% right now. But we had some very, very bullish headwinds. As we know, November and December being those Santa Claus rally months.

And here is the sentiment for November. Here we are right now or just about. This was published a day ago. Here's Thanksgiving. This is what we tend to do into the end of the month. And you take a look at the context of the entire year and December looking pretty good from this spot as well. Now can things differ from the seasonality projection? Of course.

But we got a lot of gas in the tank. We've been talking about this being a broad-based rally, as long as those big FAANG names aren't getting hammered and sold off as they were two weeks ago. And I think that kind of pain rotation is probably pretty much done, unless we get some kind of other big surprise. Given all that, we do have the fuel in the tank to have a nice rally into the end of the year, just watching out for that potential month and hiccup here.

But just looking at some of the other heat maps that we didn't get to cover a couple minutes ago, here's our travel stocks. Just take a look at these beaten down names, still flying high today.

[BELL]

SEANA SMITH: And that does it for the trading day today. Again, the Dow proving above 30,000. S&P and NASDAQ both up over 1%, with the S&P up just around 1.6%. Brian, let me go to you just on that reopening trade, some of the travel names that Jared ended on. We've seen these names kind of lead the way over the past couple of trading sessions, especially when we get any sort of good news on the vaccine front or anything related to COVID. Are you a buyer of some of these names, or is it still too early because there's so much uncertainty surrounding right now?

BRIAN LEVITT: Well, I would be a buyer of those names. I mean, there is uncertainty, but the reality is, the markets knew. The markets were well aware that there was going to be another wave of cases. We were talking about a second wave of coronavirus cases back when we first learned what the coronavirus was. So this is not an unknown.

Now to the extent that this gets worse relative to expectations, that could weigh on the broader travel sector. But what the market is focusing on is the improvements in economic activity as we move into 2021 and beyond. So for investors that are focusing on the next days or weeks, could you have some volatility in those names? Sure.

But if you're looking out over the next couple of years and what should be a recovery trade from depressed levels with some medical or scientific breakthroughs, then there's opportunities in those parts of the market.

ADAM SHAPIRO: Jeff, I don't know if you can talk individual stock, but I'll ask this in a broad question. It's about the airlines, and it's based on what we just heard. Because I'm looking at American Airlines up today. It's probably going to settle up above 9%. United Airlines, even with the new stock they're bringing to market, it's going to settle up above 9%.

Yet, we hear from the CEOs of these airlines that they're not going to stop their cash burn. They're not going to be cash burn neutral until at least March of next year. And none of them expect us to get back to anything near normal till 2023. And who knows if business travelers will ever come back after this pandemic? So how difficult is it to find value within travel and leisure right now?

JEFF POWELL: Well, I think that there is a lot of pent-up demand. I mean, you're talking United, you're talking American, obviously, other companies. Delta Airlines and Southwest are, to me, even better names within that space, better valuations, better run companies. Within that space, there's a lot of pent-up demand. I mean, I don't know about you if you've been on an airplane yet since the pandemic hit. I've not been.

I'm aching for a vacation like nobody's business. I'll certainly be on an airplane when I feel like it is something that's a lot more secure. Obviously, you've got a lot of people that are flying over Thanksgiving. Kids coming home from college, those types of things going on right now. A lot of this is really based on tomorrow, even next quarter, but really, again, going out a year, going out two years. I mean, if you were to go and buy an airline, you typically expect to double your money in a year or two's time period.

And to your point, maybe business doesn't ever get back to what it is, but there's continued demand within the airline industry for people to be traveling. And so I'm sure that there will be continued travel. Maybe it's not exactly what we did a year ago compared to what we might be doing a year out. But eventually, people are still going to want to meet in person. And as we continue to see that, demand will continue to go up.

So airlines are definitely an area. There's a lot of other spaces within the travel and leisure area that are really undervalued at this point with expectations of where they might be in a year's time. Some with a little bit more risk than others. So for example, an airline you're only on for three, four hours, versus you're going to spend a week or two weeks on a cruise line. I think that will be a little bit slower to recover than areas like hotels and what you're seeing within the airline industry.

SEANA SMITH: Jeff, I think a lot of people are a little bit hesitant here to jump on a cruise line, at least just yet. Brian, I want to go to you just in terms of what we've seen in small caps. The Russell 2000 today closing at a record. The outperformance that we had seen this month has really been remarkable, with the Russell up just around 20% in November alone. When you take a look at that sort of gauge, do you think small caps will continue with this-- on this upward trajectory? Or is it time that we see a pullback in some of those names?

BRIAN LEVITT: Now that's the classic recovery trade. And so, while you might not see the moves as big as 20% in a month, the classic recovery trade would take you to smaller capitalization parts of the market, more value-oriented parts of the market, the more cyclical parts of the market. You should expect the yield curve to steepen. I mean, all of these things are good for economically sensitive, more value-oriented, and smaller-sized parts of the market.

Again, it doesn't mean that it's going to be a straight line. And it doesn't mean that there won't be some fits and starts. But as this economy normalizes, those are the parts of the market that will perform well. Now, will it go on forever? No, it'll be a recovery stage. We'll see how long that takes, probably a lot of 2021.

And then that recovery will likely give way into a more modest expansion, similar to what we saw for years in the aftermath of the global financial crisis. And when we get back to that more modest expansion, investors will probably be back looking at structural growth companies, generally large cap, but also across market capitalization that could take advantage of being able to grow in a slow growth world. But for now, it's a recovery trade. And I believe investors should participate in it.

JARED BLIKRE: Well, I had a similar question. So I'm going to throw this one to Jeff, actually. You know, in February of this year, right before the highs, I remember seeing this Barron's cover with Dow 30,000 plastered over it. I'm just wondering what your take of is the current sentiment environment and also maybe the positioning. Sentiment seems to be getting towards that upper end of the greedy level. I'm just wondering, at what point do we say we've gone a little bit far too far too fast?

JEFF POWELL: Well, it's a great question, Jared. And I mean, I think that Brian kind of hit on a little bit of this, which is, no market goes straight up or straight down. And so, yes, we're breaking new highs. There is a lot of pent-up demand. You hear people talking just as simply as, are they going to spend more money on food for Thanksgiving this year? And the answer is overwhelmingly yes.

I think that you're going to see, you know, again, retail, which we were talking about-- there's a lot of pent-up demand. People are really looking at it and wanting-- they felt like they had sacrificed a lot this year. So they're going to get back by spending money or eating more or doing other things. Going into next year, as we start to see kind of the vaccines and they're released from their distribution, and as long as they are actually in the 90% range that we've heard about with money or even in the 70% range, which just came out recently with other drugs that are coming out and vaccines, there is a lot of pent-up demand.

I mean, if you think about it in the context-- and I'm not trying to draw a direct comparison to this, but the last pandemic we had was 1918 and 1919, and then we had the roaring 20s. You've got something that's kind of similar to what's going on here where you've had a real suppression of desire and spending and need and travel. And a lot of that is going to be done in the very beginning of 2021 and into 2022 as we see the ability to do it, actually.

BRIAN LEVITT: Jeff, I love that roaring 20s analogy. And, you know, maybe the Yankees can get a slugger like Babe Ruth. We'll see if that actually happens. But when you talk about sentiment, Jared, I mean, there may be some short-term indicators that suggest that things have gotten a little ahead of themselves.

But when you look at things like money market assets, when you've got $4.3 trillion sitting on the sidelines, or you look at mutual fund or ETF flows, far more going into fixed income than equities for years now. That doesn't feel like the euphoria that typically ends bull market. So if it says that these things begin in pessimism and grow in skepticism and mature in optimism, I would suggest we're probably growing in skepticism right now.

ADAM SHAPIRO: So, Brian, if we're not at euphoria and you talk about the Fed successfully getting rid of the deflation concerns and all that comes with that, we haven't seen the bankruptcies that one-- that we were expected because of the pandemic. And yes, it's tough for a lot of businesses, and yet the recovery has been really quite remarkable. Has the Fed hit in what should be cleaning out, the clearing out now? And is that going to come in the next quarter or two quarters? And if it does, that would have a negative impact, wouldn't it, on what we're watching with equity?

BRIAN LEVITT: What the Fed is there to do is provide liquidity and credit for those businesses that have viable long-term futures. And so the Federal Reserve stepping in as a liquidity provider and a credit provider of last resort is precisely what they're supposed to do. From there, obviously, businesses need sustainable models in order to pay down debt over the longer term. And corporate bond spreads blew out amid expectation of rising default rates.

And that doesn't go away. It's just that the bond market prices it in before it happens. You're likely to see some defaults now, but the question is whether it's worse relative to what the market had already priced in. Given the extent of the economic recovery, it is unlikely to be worse. And usually, the way these things play out is, you see spreads blow out, policy response, spreads tighten. You see some defaults, and the markets tend to fully tighten.

And you sit there for a long time, and investors are left to clip coupons and lament the fact that they didn't buy when spreads had blown out significantly further. So it seems like we're following a similar pattern. I don't think that the Fed prevented a clearing out of the market. What the Fed did was provide liquidity and credit to viable businesses who otherwise might not have been short-term viable.

SEANA SMITH: Jeff, when you take a look at the leadership that we've seen so far this month, that cyclical trade has clearly been in favor. You look at energy, financials, industrials, materials, materials sector up just around 14% in the month of November. Is this a permanent rotation? Are these names, are these sectors going to lead the way higher here, or do you think it's almost going to be a back and forth type of nature, similar to what we've seen over the past couple of months?

JEFF POWELL: Yeah, that's a great question, Seana. I mean, normally when you see a recovery coming out of a recession, you have an initial group or segments of the marketplace that are the leaders going into the very beginning phases of it. Almost never do you see those exact same leadership be what takes markets to ever higher highs. The growth side of the marketplace is severely outperformed value for a number of years now.

A reversion to the mean is something that I think would be a very normal thing. You have very undervalued areas of the market that are still in recovery mode that have not seen the same sort of money being put in that direction, which is why you're starting to see things like energy going up as much as it is. It's a reversion to the mean. Longer term, in energy play, you're not going to see energy be the next huge growth play in the marketplace, like you see with technology and other areas of the market.

But on the short-term, at least for the next 12 months, 18 months, you could very well see these be the leaders that take the markets to a new high. There's still great demand as we've talked about within retail. There's still going to be a strong demand within technology. But we do see a reversion coming up, at least over the next 12 months or so.

SEANA SMITH: All right, Jeff Powell, Polaris Wealth Advisors, Brian Levitt with Invesco, thanks so much for taking the time, guys. Great talking with you.

BOTH: Thank you.