Markets mixed as Dow changes take effect; eyes on Tesla, Apple split

Yahoo Finance’s Brian Sozzi breaks down today’s market action with Invesco Global Market Strategist, Brian Levitt.

Video Transcript

BRIAN SOZZI: All right, let's get back on the markets here with Brian Levitt, global market strategist at Invesco. Brian, always good to speak with you here. Lots of record highs floating around out there. Are you still bullish?

BRIAN LEVITT: Yeah, I am still bullish. And I think investors that take a longer-term outlook on this should consider this as the next long secular bull market. I mean, we're in an environment where we're in a nascent recovery. There could be some fits and starts along the way, but it will be a recovery nonetheless.

Monetary policy is very accommodative. Interest rates are going to be low indefinitely. Real yields are negative. We've got a good demographic wave in this country. So I believe that this is the next elongated secular bull market.

BRIAN SOZZI: Brian, in a market where the Fed is essentially giving out money for free, what are you willing to pay for forward earnings? S&P is what, about 22 times earnings? What do you pay? 25 times? 30 times? How far does this go?

BRIAN LEVITT: The thing is, Brian, every time we come out of a recession, everybody knows that the markets lead. And so you see the numerator in the price earnings multiple go up faster than the denominator. And so in every one of these recessions, you end up coming out with multiples that look a bit extended. And then you need to see the recovery happen and for companies to grow into those multiples.

So I don't think that this is a straight shot to 30 times earnings. I think more what you're looking for is an improvement in economic activity and the denominator to start to improve, and for companies to grow into some of those multiples. But even to your point, when you consider a 0% interest rate world or even 70 something basis points on a 10-year treasury, stocks still look cheap compared to bonds on just about every metric.

I mean, the earnings yield on the S&P 500 is over 4%. The yield on the 10-year treasury is in the 70 basis point range. So stocks look cheap to bonds and then will pay up in a low-rate world.

JARED BLIKRE: Hey Brian, I wanted to ask you, you mentioned the 10-year T-note yield. It had a pretty big month for August, round trip about 25 basis points after getting all the way down to 50. Where do you see longer-term yields heading from here? And how much is influenced by this new Fed policy regarding forward guidance?

BRIAN LEVITT: Well, rates at 60 basis points, 70 basis points, Jared, is overbought. I mean, if you think of what the trend growth rate in this country is, it's somewhere around 2%. And so that's labor force growth plus productivity. Now, obviously, when you hit a significant period of demand destruction as we deal with this COVID outbreak, but over time, if you expect recovery in the economy and you expect rates to move closer to what the trend growth rate is in this country, then 75 basis points still looks overbought and rates should creep higher over time.

It doesn't mean that it's going to be unruly. It doesn't mean that we're going to have this significant shock in the bond market. Over time, as the recovery plays out, you'd expect rates up over one and trending higher.

And the Federal Reserve keeping rates low at the short end, what that's designed to do is to support the recovery. And so if the Fed had raised rates on the short end, who knows where the 10-year would be, probably at 0%. So the Fed is doing the right thing. They're supporting the recovery. They're trying to promote inflation expectations. And that, over time, should support the 10-year rate trending higher.

BRIAN SOZZI: Brian, what are you telling clients about these Dow changes? Three companies going in, three generally, I would say, high-growth companies, maybe Honeywell growing a little bit slower than a Salesforce, of course. What do you tell clients?

BRIAN LEVITT: Yeah, it's just a shift. I mean, the economy changes. And the broad indices change as a result of it. It's reflective of it.

I mean, it's-- some of these indices were constructed more for what had been a different growth trajectory and a different growth environment in the global economy. And we're more in a slower growth world. In slower growth world, the leadership looks different. And the composition of the indices changes as a result of that.

I mean, my biggest advice to investors-- in the near term, there's going to be a recovery. And the more economically sensitive parts of the markets will outperform. But over time, these growthier companies that are on the structural changes that are taking place in society, that are disrupting industry, are going to be the long-term winners. And the changes in the indices will reflect that over time.

JARED BLIKRE: I want to ask you about the tech space. The FAANGs, at least those FAANGs that are in the tech space, get a lot of-- get a lot of recognition. But what about some of the smaller names? We had a lot of earnings this month. And just looking at the August performance for a lot of these software names, pretty much doing a good job of holding up the NASDAQ 100, in addition to some other strength-- to the strength that we see in Apple and Microsoft, for instance.

BRIAN LEVITT: Yeah, it makes good headlines to focus on those big FAANG names. And, obviously, they are a large percentage of the indices. But it is not-- it is not-- to your point, Jared, it is not just those larger names. In every one of these significant recessions that we have, you see great, innovative companies emerge from it.

And many of these larger cap names, the FAANG stocks emerged out of recessionary environments. And, obviously, that's going to happen now in the small and mid-cap space. And even in some of the smaller names within the NASDAQ index, is that this is-- these types of periods are ripe for destruct-- for disruption. And those companies are going to continue to be the long-term winners.

BRIAN SOZZI: Brian, last time you were on, you told us that investors should ignore the elections. And I got a lot of feedback on that. Why is that the case? Why should investors ignore the election?

BRIAN LEVITT: Well, I don't know if they should ignore-- they shouldn't make rash decisions in their portfolios as a result of the elections. Ignore might be too strong of a word. But Brian, the way I look at it is I'm alive 44 years. And when I was born, Gerald Ford was president, and I take that all the way through Donald Trump.

And every single one of those presidents, with the exception of George W. Bush, not only produced positive annualized returns, they produced positive double-digit annualized returns. Every single one of them, whether it was Jimmy Carter and Barack Obama or Ronald Reagan and Donald Trump, every single one of them produced double-digit annualized returns, with the exception of George W. Bush, whose term ended in a financial crisis and weeks before the recovery took place.

So my point is to say that investors put far too much emphasis on-- is if you just study history, you realize that markets make a new high every 16 days back to 1957 irrespective of who the president is. So my argument is that we work so hard and financial advisors work so hard to build plans for investors, goals-based, mission-based plans. And to break from them simply because of an election to me seems like a bad mistake and has never worked.

BRIAN SOZZI: But Brian, do those plans change if a Joe Biden wins the White House?

BRIAN LEVITT: I don't think they necessarily change. And the way I think of it is-- I mean, remember, Biden was VP of an administration for eight years. And we had a shift from Biden to Trump in early 2017. The idea at that time was that a more pro-growth, business-friendly administration would lead to a better growth environment, a higher interest rate environment, a higher inflation environment, a change in market leadership, financials and energy outperforming the growthier parts of the market. And none of that really happened.

So we've had that transition from an administration that Biden was in to Trump. And if we were to transition back to an administration that Biden is in, I would just say study the history of the last 11 and 1/2 years. Nothing meaningful changed in the broad macro economy, at least prior to COVID. It was still at very slow growth world, rates in the 2% range, and investors favoring growth over value.

So, no I don't think that-- to me, what investors should be focusing on is how is this recovery-- what's the pace of this recovery? And how accommodative is monetary policy? To me, those are the most important issues. And who is occupying the Executive Branch come November 4 or January 20 is not nearly as important to me.

BRIAN SOZZI: Well said, as always. Brian Levitt, global market strategist at Invesco, we'll talk to you soon.

BRIAN LEVITT: Thank you.