Availability of a COVID-19 vaccine 'could be faster than what the market is currently pricing in': Strategist

Brian Jacobsen, Wells Fargo Asset Management Multi-Asset Strategist joins Yahoo Finance's Kristin Myers to break down the latest market action, as stock react to hopes of a COVID-19 vaccine.

Video Transcript

KRISTIN MYERS: So we keep seeing this slight bump in the markets every time we get a bit of some vaccine news, and then we get a pause again. We've seen this over the last two weeks, this kind of push and pull in the markets. Are you anticipating this to continue all the way through until these vaccines are rolled out to the general population?

BRIAN JACOBSEN: Yeah, you know, we saw a really nice, big move and a rotation, first on the Pfizer news and then obviously markets being forward looking, anticipating well, what are all these other vaccine candidates going to really look like? So it sort of gets impounded into the price early, and then it really is a matter of what's the next surprise?

And perhaps what is the next surprise is how quickly the first doses are actually going to be distributed and then how quickly the broader population will have access to the vaccine. So from my team's perspective, that's really what we're sort of watching. We're anticipating that right now there's still a lot of skepticism about when the vaccine will be first available and then when it will be widely utilized. We think that could be faster than what the market is currently pricing in, so we actually remain optimistic about the outlook and are favoring areas like small cap, value, industrials, emerging markets, the trades that we would think could benefit from that type of positive vaccine surprise.

KRISTIN MYERS: So I want to dig into that with you in just a moment, but I know that you're talking about some upsides to the market. I kind of want to ask you a little bit about the downsides because that's all we've been talking about. It seems like there's just so many headwinds out there. Coronavirus, of course, being the largest. But it almost feels like that seems to be lessening every single time we get this positive news of yet another vaccine or another treatment that might be available. I'm wondering if you think there's any downside risks that are out there right now that perhaps might catch the markets off guard.

BRIAN JACOBSEN: Yeah, you know, we are nervous about what the economic data is going to tell us. I think a lot of people understood that with the rise in cases and you have renewed restrictions on activity, lockdown light going on in Europe, that there was going to be a slowdown in economic growth from the very rapid pace of recovery that we saw in the third quarter. So to us, the big surprise, if there is a downside risk, is that that deceleration happens faster or at greater magnitude than what the market is currently pricing in.

It doesn't seem like people have gotten too enthusiastic about the near-term outlook. Maybe they've gotten more enthusiastic about 2021, 2022. But the problem is we have to make it through winter, all right? And we know that it's going to probably be a winter of discontent, but the market is looking forward to spring.

However, if we get some big negative number in the United States-- let's say around about December 1 when we start getting the Institute for Supply Management manufacturing survey, then their nonmanufacturing, then the employment situation report. So with sort of that early December with those economic-data releases, if those offer some big disappointment that winter is going to be more bleak than what people originally thought, to us, that's probably the biggest downside risk right now.

KRISTIN MYERS: So I want to ask you now about the tech sector. I know you mentioned some areas that you're really liking right now for portfolios. I want to ask you about tech. The sector fairly flat right now. Actually just flipped into the green but just barely.

And this is the sector we've been talking about a lot. We've seen a lot of rotation out of this sector, especially as we get more and more positive vaccine news. I'm wondering how you think investors should be approaching tech in their portfolios in both the near term with some of the volatility that we might be having into the end of the year but also in the long term? Especially, as you mentioned, we're going to be getting that rollout of a vaccine, which, of course, everyone is looking forward to as positive news not just for markets but also for the economy.

BRIAN JACOBSEN: Yeah, so if you look back at the last year, large-cap growth-- so mainly-- which is dominated by technology-- has outperformed small-cap value by probably close to about 20% or so. Looking back over the last five years, it's outperformed by closer to 50%.

And so I think a lot of the sort of gains that we've seen in tech have been driven by those are companies that just, they tend to do well as far as their ability to generate cash flows and actually demonstrate growth. It's not just hopes of growth. They're actually able to show it. That's one of the things that has helped propel them higher.

However, when you get to these sort of inflection points in the economy where people are beginning to anticipate a broader base of growth and aggressive growth, that more sort of early stages of an economic recovery, that's where actually we think that those more cyclical parts like small cap and value can really begin to shine. So, in a way, it's interesting watching the intraday dynamics where you can have the NASDAQ negative-- so in the red a little bit-- but yet the Russell 2000, the small-cap index, up. Today it's about 1.7% or so.

So, you know, there has been this rotation, and it's been a rather aggressive rotation, but we think it's really on the back of this just sort of improved view that the growth that we're likely to see is sustainable growth. And it's likely to last not just 2021 but also, you know, for a few years.