The economy is 'growing strongly' despite 2021’s violent rotations: strategist

Simeon Hyman, ProShares Global Investment Strategist, joins Yahoo Finance Live to break down the outlook for economic recovery and broader markets in the latter half of 2021.

Video Transcript

AKIKO FUJITA: Let's turn our attention to the market implications of this $2 trillion ambitious infrastructure bill. We've got Simeon Hyman, ProShares Global Investment Strategist. Simeon, this announcement was-- was anticipated for a long time here, but certainly it comes at a time when there are concerns about the inflationary pressures that are building. How do you look at this in that context?

SIMEON HYMAN: Sure. We've had rising rates since last summer since they-- they really bottomed out right in the midst of the worst part of the pandemic. What's notable, I think, is we had those little hiccups back in February, but the markets held up reasonably well in the face of those incessantly rising rates. And the big driver, overall, is the fact that the economy is growing really strongly.

If you're looking for a key driver of today's rally, ISM manufacturing this morning at a high not seen since 1983. So that is coming from, yes, the anticipation of some more fiscal spending, the-- the plan that was just enacted and, of course, very high savings rates. So at least for now, the equity market writ large is saying I think the growth is coming along with those rising rates, and therefore risk assets are in a decent place.

JARED BLIKRE: Yeah, I did a double take when I saw that ISM print this morning, especially with that headline, 1983, pretty incredible. I want to shift to the broader market here. S&P 500 tops 4,000 for the first time ever, record high. But we've seen some violent rotations under the market's hood since the COVID sell-off in this rally that we have. Where do you see the hot money flowing into the future, especially on the back of this infrastructure deal?

SIMEON HYMAN: Yeah, let's think a little bit less hot, because we like to think in quarters and years and not weeks. But you know, indeed there has been a little bit of a rotation towards value. But we think perhaps the more enduring rotation is to higher-quality alternatives like dividend-- consistent dividend growers. And I bring that up particularly in the context of a pretty good day for technology.

Because one of the perhaps not as well understood applications of focusing on dividend growers is in the technology sector that has begun to mature. In fact, technology is now the highest source of dividends in the S&P 500. So if you look at a-- at an index like the S&P Technology Dividend Aristocrats, it's actually done really well this year, substantially outperforming the broader tech sector, and QQQ, and the other pieces of what was really part of the 2020 story.

JARED BLIKRE: Yeah, it's interesting to think about Apple maybe becoming less of a growthy tech company and more of one of those stable dividend payers. But I want to talk about the dividend space and the value and cyclicals, because you mentioned finding these quality companies. Is it-- is it simply about the balance sheet at this stage? Or we've seen the GameStop, Reddit phenomenon, where hot money just chases these, what, you know, I'm not going to call it a garbage stock, but I'm going to say the fundamentals probably don't justify the values, how do you filter out the noise and find these companies?

SIMEON HYMAN: Yeah, look, there have-- there has definitely been some elements of a junky rally here. And even if you look at small caps as an example, forgetting the-- the eye-popping names that you're talking about, but even if you look more systematically, you would see that, for example, the lowest quality of the Russell 2000 have been the strongest performers of late. For a more enduring trade, yes, you look for quality. You could look-- you could chop apart balance sheets. You could chop apart income statements from margins and things like that.

Our perspective is if you find those companies that have grown their dividends consistently for many years, it's an elegant approach because it captures all of those elements. And if you look at the S&P 500 Dividend Aristocrats a little bit more broadly, what you would see this year is the achievement of almost all of the returns of that quick momentum shift to value, but we think perhaps a more enduring trade. Because not only are the balance sheets stronger, but it's the growth of the dividends that make them extra resistant to rising interest rates, because that's really important here.

The rates really are rising. And if you don't show up with some notable, not just nominal, but real growth, you could be left behind. And those S&P 500 Dividend Aristocrats actually grew their dividend 14% last year in the midst of the pandemic. So those are, we think, really important attributes.

AKIKO FUJITA: Simeon, you were talking about the data we've gotten so far that points to the economic activity picking up again. Jobs numbers coming out tomorrow. What are you going to be looking for in that data, especially given the number we got yesterday for private payrolls adding to the gains--

SIMEON HYMAN: Look, I--

AKIKO FUJITA: --for the first time or the strongest gains we've seen in six months?

SIMEON HYMAN: I think the-- the key over the next six months is going to be the increasing in-- in the participation rate. That's what's going to be really important. You know, one of the reasons why I think we would say we're not so worried about inflation is that you have low numbers in things like capacity utilization.

You have low numbers in things like labor force participation. So there's room there. As that participation rate increases, I think we'll start to keep more of an eye on that. So I'm looking at participation as much as the specific numbers of jobs that are created or the headline unemployment rate.

JARED BLIKRE: Well, let me follow up on that, because we got time for one more here. Thinking about that participation rate and what's happening with the jobs, how-- how should the-- let me put it this way, we're probably seeing some declining productivity figures, because we're throwing a bunch of money at the wall and seeing what sticks. Is that another headwind long term that people maybe should keep in the back of their minds along with the inflation concerns, again, down the line?

SIMEON HYMAN: The improvement in productivity has been such a durable secular trend for decades now, I'm not sure you really want to bet against it. And look, this is not a declaration of the new normal, but gee, I'd be pretty shocked if inflation went particularly meaningfully past the 2% Fed target. You know, not only are there likely to emerge-- is the Fed likely to become vigilant in that regard and other central banks around the world, but there's just so much evidence pointing towards the long-term trend for productivity growth to allow for both nominal and GDP growth and keep a reasonable lid on it-- on inflation over time.

Now look, we're still only at 1.70% on the 10-year. We could get to 3% with very low inflation and real rates below normal. But something kind of out of control, I don't think I would see it in the cards.

JARED BLIKRE: All right, Simeon Hyman, ProShares Global Investment Strategist, thank you for joining us.