Normalcy may be sooner than we expect: Tom Lee

Fundstrat Global Advisors Managing Partner & Head of Research Tom Lee joins Yahoo Finance’s Zack Guzman to break down the latest market action as stocks rise on amid a slew of M&A developments and coronavirus vaccine optimism.

Video Transcript

ZACK GUZMAN: A big trend today is a strength in the tech space. It's something we've been talking about, as a rotation back into cyclicals have been discussed here over the last couple of weeks, especially after that meltdown we saw last week. But where do things go from here? Is today just a head fake from some of these tech names? Or is it a reversal of that trend?

And I want to get into that with our next market guest here. It'll be Fundstrat's Tom Lee joins us right now. And Tom, I always love having you on, because you kind of called that bottom that we saw back in March. But how do you assess what's going on here now, with tech again coming off of that brutal week last week?

TOM LEE: Yeah, it's-- and last week was rough. I think markets are at a crossroads, because we've gained so much since March and the economic data has been better. I think the health data has been encouraging, because cases are falling. But from a market's perspective, nothing is really decisive. So I think investors are still torn. And I think that's why they're still sticking with these tech stocks.

But I don't think tech needs to roll over for cyclicals to work. I think for cyclicals to work, it really just means investors need to be confident that this-- the good news on the economy is continuing. And then the cash comes off the sidelines. And the sentiment, which is really bearish, turns positive. And I think that's what fuels the rallying to year end.

ZACK GUZMAN: And that's kind of the thing that you've been highlighting here, too. I mean, a lot of market watchers have been highlighting that the market moves that we saw earlier in this year had generally gone in the direction of coronavirus cases. And we've seen that constantly improving over the last few weeks. I'd be curious to know maybe if some of that profit taking in tech might not have been caused by just the run up that we've seen, but maybe some investors hedging against the potential risks of cases going in the opposite direction over the next couple months, since we've seen that precedent of a triggering-- selling way before. How much weight would you put on maybe that playing out here?

TOM LEE: I mean, I think there's a lot of uncertainty, because one of the models that I think is really quite good is the IHME model, healthdata.org. And they're projecting in the fall to have this massive resurgence in cases. Part of it's the flu season and part of it's back to school.

I don't know the future. But if that's the path, then I'd agree, Zack, the market should be kind of nervous, because we don't know how people are going to react. But if France and Spain are any template, they've had cases go to all-time highs. But because deaths have been really muted, the policy makers there haven't really done anything.

So I think there's-- I guess it depends. I mean, cases are cases. And that's important. But it's really the severity that matters the most.

ZACK GUZMAN: Yeah, on that front, I mean, we did see Israel reinitiate lockdowns again. So that did happen. And there's precedent there that it could happen again here in the US. We've seen states reverse positions, certainly, too.

But when we think about the risk-reward, since that really does seem to get at the heart of where investors should be positioning themselves here now, I would suspect that cyclicals would take a harder hit if you do see cases rise again, because some of those epicenter stocks, as you call them, the hardest hit when cases did start to spike here before in 2020, you've been advocating for getting back into those. But if we did see cases rise up again, I feel like they would get hit even harder. So talk to me about the risk-reward in those names versus some of the other tech names out there.

TOM LEE: Well, yeah, the most sensitive to what happens not only in accounting, but health, is going to be the epicenter stocks, because they're so sensitive to directions. And also, they're also sensitive to a cure or a vaccine. I think what we've already seen, that states that have had a lot of cases already, like New York, tri-state, or even Florida now and Arizona, even when you get super-spreader events, like back to school happening, it's not triggering a new wave of cases. So I think that in 95% of the country, it's not looking so bad right now. And I think the key now to watch is whether the schools can stay open.

And then back to work-- especially in New York, because New York is so important to sort of how the national landscape looks. And New York is opening for indoor dining. And I think there's more people going back to work. So normalcy might be sooner than we expect.

ZACK GUZMAN: The other question too, here, and I want to get into some specific names when we think about individual story lines playing out, too. Because, obviously, people getting back to work might be a positive for some tech companies, a Microsoft or a Facebook, what have you, versus a Zoom and the run-up that we've seen there. But also, there seem to be story lines that are playing out completely untied to what happens on the health front.

And I guess maybe some of those story lines would be tied back to some of these high-fliers in 2020, whether you look at-- I guess we'll start with the sports gaming space, too, here, because we're seeing those spikes play out today when DraftKings teamed up with ESPN to be their co-exclusive partner. And ESPN is going to be throwing a lot of traffic to DraftKings. I mean, I guess that's tied to the pandemic, too, though. Every story line is tied to the pandemic, because we got sports back now.

And we saw that over this weekend. But that does seem to be one of those opportunities that's going to exist for years to come, since it seems like that was something sports leagues, cable providers did not want to touch in sports gaming. But now, as those attitudes change, I mean, talk to me about maybe that being an attractive or unattractive thing for investors to watch.

TOM LEE: Well, I think it's-- I think what we're seeing with DraftKings really speaks to a generation, the millennials, and even Gen Z, because those are native digital cohorts, right? I mean, they grew up with a digital life. And now in this pandemic, we're seeing that sort of notion of [INAUDIBLE].

You're right. It's huge deal when the networks or cable sort of get on board with that. And I think that really tells you why you've got to bet with millennials and what they're going to do. And not only are they living a digital life, they're moving to the suburbs now. So housing and housing related is going to be a really important story for many years.

And actually, it's still investable today, and then all the infrastructure that goes around building a home. So there's a lot of things millennials do that are-- that you're seeing. And I think DraftKings is an example.

ZACK GUZMAN: The other name out there, too, I guess on the same theme here, would be the EV space. And we've seen that with Tesla. I can't tell you how many millennials I know out there that can afford one. They've been all about getting an electric car, and Tesla the main proponent of that that's discussed here. And they've recovered about half those losses that we saw in the tech selloff since the end of August here. So I guess, that being another one of those names, what do you think about when you look at a Tesla and maybe the same idea, that it would be something to stick with here, especially when we think about the price that it's trading out now, north of $405?

TOM LEE: Yeah, I mean, Tesla, I think, has completely turned the head of auto business model around. I mean, I think it is a lot more like Apple with its iPhone and how it really disrupted the handset carrier ecosystem in wireless. And I think Tesla is a car his fanatical loyalty from its owners. And it's in their faces so different. And it's electric.

And I think people are going to make a mistake trying to put it into a box as a low-multiple automaker. But I don't know what the upside is. Cost to capital is low right now. So valuation can be quite elevated for a lot of things.

ZACK GUZMAN: Yeah, that seems to be the thought across the board, perhaps, some of that playing out last week. We'll see what happens this week, though, things kicking off in the green as the NASDAQ still holds its gains. But Tom Lee, Fundstrat Global Advisors managing partner and head of research, always appreciate chatting with you.

TOM LEE: Yeah, thanks for having me.