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Lack of next stimulus deal could be 'disastrous' to markets: Expert

The number of individuals filing new unemployment insurance claims fell below the 1 million mark for the first time since March. KeyAdvisors Group Co-Owner and author of "Common Sense Bull" Eddie Ghabour joins Yahoo Finance’s Kristin Myers to discuss.

Video Transcript

KRISTIN MYERS: Now as I mentioned, those jobless claims much better than expected. First time, as I mentioned, that they've fallen below 1 million since mid-March. And that's a breaking a 20-week streak. So for more on this, we're joined now by Eddie Ghabour, KeyAdvisors Group and author of "Common Sense Bull."

Eddie, I was looking at your notes a little bit earlier. And you said that the labor market has been one of the biggest surprises. Obviously, coronavirus remains a risk to the improving labor market. But as you see it, do you think we're on the other side of this right now?

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EDDIE GHABOUR: I really do. And like I said, that has been the biggest surprise. Many economists predicted we would get to 20% unemployment during the shutdown and economic shock that we had. So I think the worst is behind us.

Now I don't think we're going to increase jobs at the same pace we had the last few months. But in my opinion, the good news is, I think, the worst is behind us. And we still have a lot of headwinds. But I think the trend line is going to be upwards here moving forward over the next 12 months.

KRISTIN MYERS: Right, and so you say that the markets are going to continue to surprise to the upside. What other catalysts do you see pushing the markets higher? Any other surprises out there other than the labor market?

EDDIE GHABOUR: One of the biggest things, and the reason for my opinion in regards to that, is a couple of things. Number one is the amount of cash in negativity out there right now. There's over $4 trillion of cash on the sidelines and a tremendous amount of negativity, because I don't think people believe in this market.

I think the biggest surprise going into next year's earnings per share number are going to surprise to the upside. Market is forward-looking. And so that's why I think these dips-- again, in my opinion, if you have the right risk tolerance-- should be bought.

So it's going to be choppy. But again, I strongly feel like we are-- the worst is behind us. And we're going to be heading upwards.

KRISTIN MYERS: So on that point of people on the sidelines, I want to ask you about this stock splitting that we saw out of Apple, and then, of course, out of Tesla. Do you see more stock splits coming this year? And what were your thoughts on that Tesla move?

EDDIE GHABOUR: So it's amazing, because as we know, it doesn't really change anything in regards to what the value of your stock is. But we have a new investor, the millennials, that are doing a lot of trading right now. And I think why you're seeing the markets react positively to these stock splits is it gives more people an opportunity to get in because the share price is actually lower. So if that trend continues, then I think some of these companies will probably continue and follow along that trend line. Because what we've seen with Apple and Tesla in just a short period of time with the stock reactions to that stock split, it's been very positive.

KRISTIN MYERS: Tesla right now, of course, is up 4 and 3/4 of a percentage point. So they're actually accelerating some of their gains. Eddie, if you were a new investor looking at Tesla, thinking that that $1,600 price tag was a little bit too rich for your taste, would you jump in on this stock split?

EDDIE GHABOUR: Look, obviously, everyone-- it depends on their personal situation. I own Tesla myself. I think Tesla needs to be looked at as a technology company. People too many times compare them to auto, to the auto industry.

I think long-term, if you own Tesla after the split, it's got some really good upside potential. Again, it depends on their situation on whether or not they buy it or not. All I can tell you is that I have it for myself personally and plan to hold it for a long time.

KRISTIN MYERS: So I want to keep this going on investment strategy. You say that you're liking the barbell approach right now. What are you liking? And how do you think folks should be considering their allocations going forward?

EDDIE GHABOUR: So the funny thing in this dynamic that's changed with our economy because of coronavirus is now your growth stocks have now become your defensive plays. And in regards to a barbell strategy, we think that still needs to be a core holding. You look at a day like today, where the market's been down to flat most of the day, yet the NASDAQ and growth stocks are having a very good day. And we've seen the opposite happen on up days.

So the barbell approach-- keep the technology as your core holding for defensive plays. But I think you need to start buying these cyclical recovery stocks, like the banks, like the travel and entertainment, like the industrials, and like housing. They have not had a great year like the technology stocks had. And so if you want to get some of that upside, you should buy it now before the news hits and the stock is already back to all-time highs.

KRISTIN MYERS: So on that point about tech, it seems as if tech was everything to a lot of folks, although they did so unenthusiastically. Do you see tech-- I don't want to say struggling. But, I mean, as investors do this rotation more towards value away from growth, do you think we're not going to see those big surges, or as much as we have?

EDDIE GHABOUR: If we are truly coming out of this and we are recovering as an economy, then I think looking forward, value should outperform growth. Growth is still going to be solid. But I think it's unrealistic to expect the same types of returns that they've had the last 12 months looking forward. The only way that'll happen is if we have a major hiccup backwards, if we do not recover the way that we anticipate.

KRISTIN MYERS: So I want to ask you about the S&P 500, right now just below 3380. What kind of target are you looking for the S&P 500? And how much more room do you think the S&P 500 has to run?

EDDIE GHABOUR: I think what you're going to find in regards to-- obviously, it's impossible to predict short-term what these indexes are gonna do. But if we get a stimulus package passed and we get a vaccine that is approved this year, I think you could easily see at least a 5% to 7% move, in my opinion, before the end of the year from these levels on the S&P 500, because you're going to see a lot of cash rotate into the market if we get those positive news this year.

KRISTIN MYERS: So I want to end on something that you just mentioned, stimulus. As I mentioned at the top of the show, it seems to be almost-- I don't want to say dead in the water, but they have completely stalled right now. The president said that a deal was not going to happen.

The markets seemed to assume that we would be getting a stimulus deal. I think most folks are assuming that we are going to be getting some sort of stimulus deal. What do you think the market reaction is going to be, either A, worst-case scenario, if we don't, or B, what is looking like to be the more likely scenario, the stimulus talks continue to drag out over the next couple of weeks?

EDDIE GHABOUR: If we do not get a stimulus plan in place and package passed soon, that's going to be disastrous short-term to the market, because we are recovering, but we are nowhere near where we need to be. And without stimulus, you're going to have millions of households suffering, as well as businesses. So they need to get off their tails and pass this thing and put all the political stuff aside, because there are businesses and families suffering. So without it, I would expect a short-- a quick double-digit drop.

The other thing, too, is if this stretches out to the end of August, beginning of September, you'll see the same type of reaction, in my opinion, because the market has fully priced in a stimulus package to pass. And if it doesn't, it's not going to be a fun ride for investors.

KRISTIN MYERS: All right, well, hopefully Congress is listening to get up off their tail, as you said, and get a deal done. KeyAdvisors Group Eddie Ghabour and author of "Common Sense Bull," thanks for joining us today.

EDDIE GHABOUR: Thank you.