Building a profitable portfolio in 2021

Jeff Mortimer, Director of Investment Strategy at BNY Mellon Wealth Management joins Yahoo Finance Live to break down the importance of trimming your stock portfolio in 2021 and weigh in on how markets are faring this Tuesday.

Video Transcript

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- All right, welcome back to Yahoo Finance Live on this Tuesday morning. We are about four minutes away from the opening bell. We see futures under pressure once again, though again, it's not an even distribution here across the major averages. The NASDAQ is off-- NASDAQ future is off just around 1.7%, this after a 2.4% decline in the tech index yesterday. So certainly some churn underneath the surface of the market here.

Joining us now to talk more about all of this is Jeff Mortimer. He's the director of investment strategy over at the BNY Mellon Wealth Management. Jeff, great to talk with you this morning. You know, you were just mentioning as we were coming in here a rotation within this market that you guys are kind of looking for. I'm curious how you're seeing things play out. And, you know, it's only day two of this sort of mini trend. But we're now seeing a pretty abrupt move, you know, away from some of these hot tech names.

But yesterday, airlines, banks, hotels, cruises, the reopening trade was red hot. How are you guys kind of seeing this environment?

JEFF MORTIMER: I think you've hit the nail on the head. We are watching it closely. It really started, if you look back into last year, September 2 was a turning point when many of the large cap, you know, famous FAANG names began to sort of move sideways for a few months. And a lot of the value names, small cap, emerging markets really made a lot of hay in that time period.

As we began 2021, the larger tech names and the momentum names kind of gained-- regained their strength. But you're seeing another rotation that transpired here. This time, I think the catalyst really is rising interest rates and what that may mean. And again, rising rates is a formula, potentially, for a stronger economic growth. And when all companies are growing, then the market looks towards, how can I buy cheaper growth when it's more ubiquitous?

And it can tend to shy away from those companies that are certainly growing on their own. But when growth is not as scarce anymore, it's not-- it doesn't get as high a multiple paid. And I think that's what you're really seeing, almost in slow motion. But in a few days, it can pile up and be quite obvious.

- Jeff, is it time for traders to go back into these momentum names and buy that dip? I'll just reference Tesla. Stock's down about-- just using the opening pre-market price right now, down about 15% in two days. To the average trader, I think that would be a lot of money.

JEFF MORTIMER: So I certainly can't-- I am a strategist. I won't discuss individual names, but we are telling our clients to really embrace diversification, and have been doing so for the past couple of quarters. Our industry is full of mean reversion. It is not full of trees grow to the sky. So it's always imperative to continue to weed your garden. Make sure that you trim some of those names that are doing well and put those into styles, sectors of the market, capitalizations that have lagged.

We have been repositioning client portfolios since last summer away from large cap into emerging markets, into US small. I would just-- I would continue that trend. Names like a high-momentum name can suffer significant corrections. They can regroup historically and then eventually move to new highs again. But the volatility within those names historically can be significant.

And I think 2021 is a year in which diversification-- old, boring diversification into small caps and mid caps and value-- will probably beat some of the large-cap growth. I think the S&P 500 has the potential to be one of the weakest performers when compared to most major asset classes for the calendar year of 2021.

- Right. As we were talking there, we saw the opening bell here on this Tuesday morning. See how things kind of shake out. But again, tech stocks under pressure. And this with the Dow basically barely in red figures. And, you know, Jeff, we've seen just such a nice run from the Russell and financials, you know, key among them, really. Since you mentioned September 2, I will mention November 9, or November 6, I think it was, the day we got that initial vaccine news.

Speaking of kind of the broad setup-- and you mentioned it briefly in the beginning-- interest rates and what the levels become where we start to get concerned about rates having a negative effect on financial conditions. And I know it's crazy to talk about that with the 10-year at 1.4%. But if you look at the 60-basis-point move we've seen in just a couple of months, that's a considerable move just on the, you know, actual yield that we're seeing on those instruments.

So I'm just curious how you guys are thinking about rates, especially considering all the actions happening at the long end. And the Fed is steadfast that they're not going anywhere, and we continue to see short-end, you know, rates basically at zero.

JEFF MORTIMER: I think the market right now might be overreacting a bit to rising rates. Certainly for us, we think 150 basis points on the 10-year we had in our formula for potential in 2021. It could go perhaps a bit higher than that. But if you look back historically at these yield levels, and even a 2-10 spread, or a T-bill 10-year spread, we're at very insignificant levels. Markets, before they top off, have traditionally-- you know, you can be in the 300 to 400 basis point spreads between some of these between the three-month and the 10-year. So we're nowhere near those levels.

That's not to say-- you know, I always remind investors it's a couple of things. It's sometimes not only the change in rates, but the rate of change, the pace in which it transpires. I think the market is paying particular attention right now to the pace of that change. You mentioned in a very short period of time, you've had an increase in yields, especially on the long end. And it's beginning to call into question, perhaps, the Fed's ability to remain down at that zero bound.

You know, the two-year certainly-- the two-year hasn't moved, right? You've got-- so the Fed still sort of locked in on its job. Certainly Yellen continues to be incredibly bullish in her views of a $1.9 trillion fiscal package. So I think those two together, you know, continue to preach a very good story of we need stimulant in order to continue to grow. I think what the market message is signaling, perhaps, back to them is, it might be too much, right? There might be too much growth.

It's something that we have worried about. I chair an investment strategy committee at BNY Mellon, and we talk about inflation in every meeting. And it is-- it's critical that, you know, the Fed keep an eye on inflation, that markets keep an eye on inflation. And while inflation may not even hurt earnings, what it historically has done is hurt multiples. And if it is going to go hurt multiples, you're seeing it, perhaps even in the last few days, begin to pick on some of those stocks which have multiples which, under a higher interest rate environment, you know, those multiples may struggle.

The companies may still be fine. And that's where a lot of investors, I think, run into trouble. You know, Tesla's not doing any worse with a little bit higher rates. And while that is true for the company, it may not be true for the multiple investors are willing to pay for the name. And again, I don't want to talk about individual names. I use Tesla as a broad, you know, sort of momentum. You know, I think that's what markets are doing. They're looking at high PE names, the group, the momentum group, and sort of discussing, what valuation should we attribute to them?

- All right, interesting conversation. We'll kind of see how it unfolds over the balance of the year. Jeff Mortimer, director of investment strategy at the BNY Mellon Wealth Management. Jeff, thanks for the time this morning.