'The momentum will be very strong the first half of the year': Strategist on market growth in 2021

BMO Capital Markets Chief Investment Strategist Brian Belski joined Yahoo Finance Live to break down why the markets are shrugging off the latest news from Washington, D.C.

Video Transcript

SEANA SMITH: We want to bring in Brian Belski. He's BMO Capital Markets chief investment strategist. Brian, great to have you back on the program. Broader market today, really shrugging off any concern coming out of DC. Why do you think that is?

BRIAN BELSKI: Good afternoon. Thanks for having us back on Yahoo Finance. I would say this, that we wrote a note that came out a couple of days ago talking about this defiant bull market, and it's really defying the rhetoric, which we think actually is very good and really focusing on what the possibilities are.

And so let's talk about that a little bit. We still think that last March was the reset for the bull market and the second half of the bull market is upon us. On a near-term basis, obviously, Seana, this is a momentum-driven market and hard to go against that momentum, quite frankly. But we don't think it's as easy as selling tech stocks or buying value stocks. I think you have to be much more disciplined.

But I think at near-term, we as an investment universe have to consider that more stimulus is coming. It is. And if that's the case, we're going to fall back into a March-type trading effect, meaning fool me once, shame on you, fool me twice, shame on me, meaning the market's going to really believe the stimulus this time. Many investors missed the move in March and April, and I don't think they're going to miss it again this time. So I think the momentum is going to be very strong the first half of the year versus the second half of the year, which is very different than what you're hearing probably from most people and consensus.

And I think the second half of the year, quite frankly, could actually be better fundamentally. It's kind of counterintuitive, Seana. But we can start to see better economic data and better fundamental data with respect to earnings, but that's when maybe interest rates start to tick a little bit higher and people are going to be worried about inflation. Although from an intrinsic standpoint, we don't see any kind of signs of inflation anytime soon.

ADAM SHAPIRO: Brian, it's Adam. Good to have you here. I want to break down what you just said to make sure I'm getting the key points here. So essentially what you said-- and I got your note here, and I'm glad that you are somewhat contrarian to the common wisdom because the common wisdom is often wrong.

But when you talk about everyone believes the first quarter is going to be stronger than people are imagining-- second half of the year, by the way, as you pointed out, may not be as strong as people are now expecting-- why wouldn't it? No one really expects the Fed to begin tapering until 2022. And this stimulus we will get at some point when the Biden administration is in play, it's going to juice stocks and earnings, is it not?

BRIAN BELSKI: Well the narrative is going to start changing, Adam, meaning that it doesn't mean that the Fed may change its stance because it's not going to. The Fed is going to be on hold for more than a couple of years, and our great economics department says nothing until 2024. And I think that call in itself is very consensus. But be that as it may, as the 10-year treasury yields start to tick higher, you're going to see some of the momentum players begin to worry. And you are going to see some some shifts in stock performance and more cyclicality. And it's not going to be as easy as shifting into cyclicals and shifting into value.

We've seen, since we put out our year ahead piece on November 19, we've seen growth and value actually be exactly flat. And we've started to see large cap stocks begin to gain on small cap stocks again. So I don't think it's as easy as what you may think. But at the end of the day, the train has left the station in terms of a recovering economy, and that's really the longer term thing you want to be looking at, Adam.

So I think, for right now, we want you to maintain positions in technology and communication services on days that the market's worried that they're going to break up big tech, which isn't going to happen. That's when you buy those names. And then when the market rallies during the stay-at-home phase, which I think is going to increase in the first quarter of 2021, you peel a little bit off and position for where we think the fundamental strength for the next couple of years is going to be. What's your, namely, financial stocks, industrials, consumer discretionary?

SEANA SMITH: Brian, I want to get your thoughts on what's going on in the bond market because I know you and I have talked about this in the past. But since we did talk here, we had the 10-year yield once again this week, hitting its highest level since March. I guess, how are you looking at this movement? Is there any level where it becomes a little bit worrisome for you, just in terms of what that could mean for stocks?

BRIAN BELSKI: Always dangerous to ask an equity person about fixed income, and I hope my fixed income brother would stop talking about equities. We put out that editorial. But I would say this on that-- part of our core assumptions, as long as the 10-year treasury stays below $150 and the yield curve continues to steepen, I think that's a good environment, at least in the 2022.

For stocks, I do think that, again, I think Mr. Biden is going to put out the, quote unquote, "mother of all stimulus packages." And that's going to drive rates lower, and it could potentially put a multi-year bottom in the dollar, and that's why we like gold and we like materials at this level, as well.

So it's probably something you haven't heard from me for a while, Seana, of all the years that you and I have been speaking. But I kind of like gold here because I think the dollar is going to weaken and rates are going to go lower. But from there, we're going to start to slowly step higher as the economic recovery continues and we start to see better earnings growth.

And this notion of inflation coming back in the second half of the year-- come on. We've been waiting for 39 years for inflation, and we have to go back to February of 2020, Seana. And remember, we had sub-4% unemployment and we had no wage inflation. We have a lot of work to do before we get wage inflation in this country.

SEANA SMITH: All right. Brian Belski, we're out of time. But gold-- we're going to see next time if you're still liking that trade when we talk. But Brian Belski, always great to have you on, of BMO Capital Markets. We'll talk to you soon.