Stocks near session highs as Dow jumps 550+ points

Yahoo Finance’s Alexis Christoforous and Brian Levitt, Invesco Global Market Strategist, discuss the latest market moves as stocks near session highs.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's stay with the markets now and bring in Brian Levitt, Invesco's global market strategist. Brian, good to see you as always.

BRIAN LEVITT: Thank you.

ALEXIS CHRISTOFOROUS: There's been talk for the past few weeks now, right, that valuations are too high. There's too much froth in this market. What do you make of the action that we're seeing this week?

BRIAN LEVITT: Yeah, I think that the whole concept of valuations being too high or too much froth in the market, investors should really think of their horizon. I mean, valuations are not timing tools. And I think that what you're finding is that, in many ways, stock market looks overvalued until you get an economic and earnings recovery. That tends to happen after recessions. And so, we're reporting a good earnings season. And so, as an economic recovery unfolds, valuations start to look a bit better.

With regards to some of these names, the Reddit names, look, the reality is, these are companies that are $10, $20, $30 billion in market cap compared to a US market capitalization of $50 trillion. So it's a small component of it. It makes for great headlines. It's certainly been fascinating to watch. But I think investors should be cautious about conflating that to mean that the entire market is frothy.

ALEXIS CHRISTOFOROUS: Do you think, though, that we are primed for a pullback? A lot of the market strategists I've been talking to have been predicting a sizable pullback, somewhere in the 8% to 10% range, in Q1. Do you think that, though, we're still in for that?

BRIAN LEVITT: Well, you just got, what, 4%? So you got half of that. I mean, there's always the likelihood of a pullback. You have to ask what drives it. It's usually policy uncertainty. It usually doesn't emerge out of nowhere. And so, I don't think we're going to have significant policy uncertainty here, specifically on the mone-- particularly on the monetary side, as well as likely on the fiscal side.

So what could drive that is perhaps greater concern around new variants of COVID strains. I mean, it could be something that we're not even thinking about. But, you know, it's always possible. And the reality is, you had a lot of the names trading above their 200-day moving average. That tends to be a perhaps correction zone, but very rarely consistent with a market tap. So the important thing is, even if you get some type of pullback here, our larger narrative is that would be a pullback in what's likely to be a longer term advance for markets.

ALEXIS CHRISTOFOROUS: Brian, what are you hearing from your clients right now? Is their appetite for risk growing here as we move into the year? I mean, earnings have been looking pretty good, and so are the outlooks.

BRIAN LEVITT: Yeah, there tends to be a lot of skepticism. And I think that there's been skepticism in these markets for years, coming out of the global financial crisis. And so, I think a lot of investors really did not want to be back in from '08 through 2013 and 2014 and beyond. We called it a very unloved bull market. We saw that a lot of investors bailed over a trillion dollars into money market strategies last March. A lot of concern then about the election and I think, now, concern that these markets have just gotten too frothy, and there's parts of the market that investors don't understand.

The reality is that tends to be a good contrarian indicator. I mean, by the time investors love markets and are euphoric about markets, that tends to be the end of the market cycle. So I would suggest, based on the conversations I'm having, that we are not there yet, and we're a long ways away from being there.

ALEXIS CHRISTOFOROUS: From being, what, at the top of a bull market, you mean?

BRIAN LEVITT: Yeah, we're a long ways away from being euphoric. Investors are still very skeptical.

ALEXIS CHRISTOFOROUS: So what area of the market are you showing a little love to right now?

BRIAN LEVITT: You know, I personally think it's a recovery trade. And so, what that means to me is, you want to own stocks over bonds and credit over treasuries. Within stocks, you want to be more exposed to the cyclical parts of the market, and dare we say the more value-oriented parts of the market.

That doesn't mean that we go and we sell our growth stocks. I think this is a value and growth type of environment. You want to be more small and mid-cap, and you want to look outside the United States, in particular the emerging markets. So if you're asking within the United States, it's cyclical names. And it's likely to be cyclical names through this recovery phase of the cycle.

ALEXIS CHRISTOFOROUS: When you look at what the phenomenon we saw with GameStop and those other heavily shorted stocks in the past week and how social media and Reddit drove those euphoric games, do you think that more regulation is the answer? And if so, what form should it take, Brian?

BRIAN LEVITT: Yeah, I don't know precisely what form it will take. I suspect the regulators will be looking at this closely. But I also think, as is often the case, the private sector will get ahead of it beforehand. And by that, I mean the hedge funds or any entity that has short positions will do a far better job of trying to not make as clear what that position looks like, or more importantly, use things like AI or natural language processing to better understand what is going on within the chat rooms and to better understand what the retail folks are doing with their money. So we may see some regulation, but I suspect by the time you get there, the private sector will be far ahead of it.

ALEXIS CHRISTOFOROUS: All right, and lastly, outside of US equities, where are you seeing opportunities? Because I'll tell you what. The international markets came out of the gate gangbusters for the beginning of 2021, especially when you look at what's happening in the Asian markets and the China market in particular.

BRIAN LEVITT: Yeah, and that is a good story. And that should be a story that persists going forward. You find these cycles of US versus international outperformance tend to last a long time. We just came through a very long one with US outperformance, and the dollar got quite strong. And valuations in the United States became extended relative to valuations outside the United States. So the emerging markets come into this on a price to sales basis, still one standard deviation cheap to the United States. And so there's opportunity. You just need a catalyst. And that catalyst comes in the form of improving economic activity.

China, certainly, and other parts of Asia, have come out of this COVID environment better than the developed world. You have their currencies that were largely undervalued. And now you have a dollar, which, of course, in recent days, has gotten a little bit of a bid, but a dollar that is likely to either be stable to somewhat weak or as a result of the amount of stimulus coming into the United States.

ALEXIS CHRISTOFOROUS: All right, yeah. Certainly the weak dollar helping the emerging markets there. Brian Levitt, global market strategist at Invesco, always good to see you.

BRIAN LEVITT: You, too. Good to see you.