Yahoo Finance’s Akiko Fujita and Zack Guzman discuss a broader view of the market action with Megan Horneman, Verdence Capital Advisors Director of Portfolio Strategy.
AKIKO FUJITA: Let's turn our attention to the broader markets now with Megan Horneman. She is Verdence Capital Advisors' director of portfolio strategy. And Megan, you've been listening to this conversation play out. But you're looking at this from a broader view. How big of a concern are these trades in terms of their impact to destabilize the market as a whole?
MEGAN HORNEMAN: Well, for our investors, our investors pay us to grow and preserve their money, not speculate on their money. So we aren't participating in some of these speculative trades that we've seen here in recent weeks. And this brings you to even what you saw with what happened with Bitcoin. Bitcoin was being sought after by investors thinking it could be a store of value when, in fact, it cannot.
This is just going to show you that when you look at markets that are near or at record highs, investors are reaching. This happens in the credit market where you see investors reaching for yield, so they're getting into junkier bonds. This is just an environment where you have to be very cautious, very disciplined. And remember that even though we are looking at markets that are near record highs, there still are good, solid stocks that have really lagged in some of this rally in the energy, in the financials, in the industrials. These traditional stocks are much more valuable to us than looking at some of these speculative types of positions.
ZACK GUZMAN: And Megan, you just heard that as well when we're talking about the short interest that may have fueled some of this. It started with GameStop, but it quickly spilled over in other names, AMC and some of the other ones we've been talking about. But what do you say about the systemic things that Anthony was just raising there, about maybe capping shorts and the interest we've seen on that side? I mean, obviously, there's going to be two sides of the trade here, but it seems like the ones hurting today overwhelmingly are the retail investors that were long some of these names.
MEGAN HORNEMAN: And this is-- again, if you look at some of these retail traders that have gotten involved in this market in the past couple of years, there's not a significant amount of knowledge in what they're investing in. Anybody that has an iPhone now can invest in the stock market. And this is dangerous.
This environment-- and we've said this repeatedly to our clients. When you're looking at markets, the valuation is expensive. You're looking at five stocks, really, making up the entire return of one index. And I'm referring to the S&P 500. Having a good, due-diligence investment manager that you can rely on to really delve into individual stocks-- this is extremely important at this time of the bull market.
AKIKO FUJITA: And of course, before all of this discussion started, there was a lot of concern about the increased liquidity that was coming from the Fed that was fueling the market gains. We heard yesterday Fed Chair Powell saying that it's really the vaccine hope as well as the fiscal policy that's actually been fueling the gains in the market. How do you see that dynamic playing out?
MEGAN HORNEMAN: Well, absolutely. I think a lot of it has to do with what the Federal Reserve has done. I mean, let's be honest. Their balance sheet is well over $7 trillion and likely on its way to $10 trillion this calendar year. So the Federal Reserve is pushing people into the stock market, especially with bond yields at record lows. So they are pushing people to take on risk. That is another reason why it's extremely important to be very disciplined in this market.
But at the end of the day, we're still positive about the overall equity market. We're not going to speculate on some of these individual names for our clients and get in the middle of this, any kind of this infighting and regulatory risk that you may have in some of these things. But we're going to look long term. And at the end of the day, the Federal Reserve's support and the fiscal stimulus that we've gotten-- and we're likely to get additional fiscal stimulus-- this should support equities for the long run.
There's really not many factors that are going to, for the long term, disrupt this rally. I think short term, there's a lot of reasons for near-term volatility. I think that we could see additional downside in the first quarter of this year. But long term, we have very low inflation, very low interest rates, very accommodative fiscal and monetary policy. This is a very good environment for equities for the long Term
ZACK GUZMAN: Megan, let me just push back on one of those points there too. Because I think you're right in that if you have more people-- and this is something-- we've been having the discussions with the CEO of Webull and Robinhood. If you have more people coming on to invest, learning about stocks, getting involved in the market, that's generally a positive.
But when you think about specifically younger investors, who we know overwhelmingly are Robinhood investors, who are now coming to the market in the wake of the housing crisis and seeing what played out there, now perhaps trading for the first time ever-- seeing what's playing out here, getting locked out, and maybe seeing this bubble sparked by what we were talking about in the last one where potentially you see friendly takes towards Wall Street-- what do you think that does to the long-term, I guess, comfortability with younger investors out there thinking that, look, this is stacked against us?
MEGAN HORNEMAN: I think it's education. It's educating the young investors on how to invest. And investing from your phone in day trading is not the best way for long-term investment. That's not going to work for you for the long term. And education is the most important thing for the young investors.
And I do agree with you. There's a lot of young investors that, when they came out of the housing crisis, they looked at the wealth destruction that happened to their parents, and they touched the equity markets. But nowadays, there's this transition of wealth that's more important than ever for firms like-- registered investment advisors like ourselves-- to educate these young investors on what is right, what is dangerous, and what you can do to really preserve and grow your wealth for the long term.