'Anytime there are dislocations in the market, that’s when we have to take opportunities': Expert

Kathy Entwistle, Managing Director at Morgan Stanley, joins Yahoo Finance's Alexis Christoforous to break down the latest market action as stocks rise on COVID-19 vaccine hopes.

Video Transcript

ALEXIS CRISTOFOROUS: Joining me now to talk more on the markets is Cathy Entwistle, Managing Director at Morgan Stanley. Cathy, good to see you. So you say that market cycles are the key theme right now for this market. You say we need to trust the cycle. So how can history be our guide here when we're talking about unprecedented events?

CATHY ENTWISTLE: Well, every time we have an unprecedented event, it's unprecedented, and it seems that there are these cycles that continue to repeat and patterns that we can find in the markets and the economy. So what we're looking at is the fact that markets are coming into a recovery, and we know in the past when we're coming, you know, out of a economic recession and into recovery, we can see the small caps and dividend paying value, companies paying are the best place to place clients' money or to make that shift at this time.

So that's what we're basically looking at, just making that small shift, understanding that the NASDAQ is taking a pause, and Russell 2000 is starting to really ramp up. And I think that's to the earlier point that we are in this rotational cycle.

ALEXIS CRISTOFOROUS: Now, you see the risk of one more drawdown before the end of the year. How big of a drawdown are you expecting, and what might the catalyst be for that, Cathy?

CATHY ENTWISTLE: Alexis, that's a great question. Not necessarily sure how big the drawdown will be. We certainly had our largest drawdown, I would imagine, back in March. However, any time there are dislocations in the market, that's when we have to take opportunities, and that's where the money is to be, you know, to be made. So if we see 5% or 10%, even that is enough to say it's an opportunity to buy at a discount, get your money invested into the market, and take advantage of that, because we see next year as very favorable for the markets. We are 12 months looking forward bond to markets, and we think that this is the time to take advantage of it.

Now, what could cause it at this point-- we're getting so much great news out about vaccines and recoveries, and we see that the businesses and our economy can open up more broadly next year, so that's all positive. The only thing that I can see right now hanging out there that's a true negative that can bear down on the markets is increasing COVID cases and deaths. And if it just expands even greater than what we're seeing, we can see that pullback. And if that happens, take it as an opportunity to invest in those names and those areas of the markets that we like.

ALEXIS CRISTOFOROUS: What about outside of equities? I'd like your take on the bond market because the 10-year year treasury bond, you say it looks mispriced over the 12-month view. How so?

CATHY ENTWISTLE: Well, just the idea that, right now, in terms of-- we think-- we want to keep our clients short in the bond market right now. We don't want them to go out longer because we think that those prices are going to-- you know, the interest rates will go up, and fairly quickly. Usually, if you look at the past two, interest rates do move pretty quickly. What do we say? They go up on an elevator and come down-- or they, you know, come down on an escalator. But in any case, what we will say is be careful about that. Don't get caught in that. Don't have long bonds because if you're invested in long bonds, you're going to get hurt. When interest rates go up, bond prices go down. So that's what we're trying to avoid for clients.

ALEXIS CRISTOFOROUS: Back to equities now, and your forecast for the S&P 500. You're forecasting 10% upside-- that's pretty big-- over the next 12 months. With the backdrop still being this pandemic, what's gonna get us there?

CATHY ENTWISTLE: What's gonna get us there is the economy opening up, opportunity for people to go out and spend money, for businesses to, you know, to create business, and for some of those companies that we're looking at now-- the you know, back-to-work companies, the economy-is-opening companies, we're looking to see that accelerate. And that's where our clients are going to do well.

ALEXIS CRISTOFOROUS: What about hopes for a stimulus? Have investors just brushed that aside, and if we get stimulus, that's gonna be icing on the cake? Or do you think that they're really banking on something coming down the pike in the coming-- I want to say weeks, but maybe months after Biden takes office?

CATHY ENTWISTLE: Yeah, I think just because right now there's a little bit of miscommunica-- or lack of communication between old and new, there are some issues there. However, everybody's expecting a second stimulus package. We all know that it's coming eventually although it's sort of pulled away from the market a little bit. If there was any indication that it might not happen, the markets could drop again. That would be another reason. But I would anticipate that that would give a little boost, even if it's a short-term boost to the market, just from a positive standpoint. We're seeing a lot of quick reactions whether good or bad news is coming out.

ALEXIS CRISTOFOROUS: Certainly this is not a normal year by any stretch, so I'm wondering if you're expecting to see a Santa Claus rally. Are you expecting money that's been sitting on the sidelines to flood back into this market come January?

CATHY ENTWISTLE: I do think that we're gonna see people go back and spend again. You know, in terms of-- we haven't-- we've all been home for so long. We haven't been out and about as much as we usually are, and we're all interested in doing that. It's funny. Somebody was bringing-- you know, reminding me of, you know, a century ago with the Spanish flu and what came immediately following. It was the roaring '20s, right?

So after World War I, Spanish flu, everybody just couldn't wait to go back out and just celebrate and be together and enjoy each other. And I think we're gonna see that in some form as well after we're past this COVID-19 really challenging time.

ALEXIS CRISTOFOROUS: Yeah, from your mouth to God's ears, Cathy Entwistle, Managing Director at Morgan Stanley, thanks, and have a good Thanksgiving holiday.

CATHY ENTWISTLE: You too, Alexis. Thank you.