What the newly discovered COVID-19 variants means for investors: Stifel chief equity strategist

Stifel Chief Equity Strategist Barry Bannister joins Yahoo Finance Live to discuss the investor implications of a newly discovered COVID-19 variant as we enter the second winter of the pandemic.

Video transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Barry Bannister Stifel chief equity strategist. He's joining us on the phone. And Barry, what do you make of the declines we saw today? To what extent is this just really exacerbated on what is typically a light trading day?

BARRY BANNISTER: It is typically a light trading day. But keep in mind that sometimes, the more volatile days are the light trading days around holidays. If you think back to the fourth quarter of 2018 when we had that 20%, roughly, selloff, the low was put in on December 24, Christmas Eve. So I've seen these before, light trading days, less market depth. And you get the volatility.

KARINA CONTRERAS: So what do investors need to do now, take a deep breath, step back? These market swings are not something new to us. We've seen big swings before. What happens to the markets next week? And how reactive do investors need to be at this point?

BARRY BANNISTER: Well, I think we all have to have a little bit of humility in terms of understanding the virus. I remember the spike in the VIX volatility index when the virus was first coming out. And the VIX foresaw the shutdowns and the economic activity.

And it's not just mandated shutdowns. People choose to do less. So even in countries like Sweden, where they did not actually tell people to shut down, they did it voluntarily.

And this virus, granted it's in Southern Africa, but it does have enormous mutations, potentially, in the spike proteins. It could spread quite easily. There are other fundamental concerns that I've had in terms of the market. In fact, I can list them if you'd like.

AKIKO FUJITA: Yeah, I mean, I'd love to talk about that. Just to pull back here a bit, I mean, we're now looking at the worst single-day drop for the Dow, down about 900 points. And then we're also getting this report from the World Health Organization assigning the Greek letter omicron to this COVID variant out of Southern Africa.

Of course, we're still waiting to learn a bit more about the science behind this, how the current vaccines on the market hold up against this new strain. How big of a risk can you say it is to the markets right now, given all of the uncertainty around this new strain?

BARRY BANNISTER: We've had many variants, of course alpha, delta, beta, mu, lambda. Lambda was in Peru. It came to Houston. But then it seemed to be nipped in the bud. Beta preceded this one in South Africa. So it doesn't alarm me that much. The Fed has also said that the reaction to the virus, as we learn to live with it, it is a seasonal, mutating, endemic coronavirus. As we learn to live with it, the reactions are getting less.

So there's little to no way that this has hit the bid, the strike price on the Fed put. So I think that's one thing to consider, that this is just minor volatility in the Fed's eyes in my estimation.

KARINA CONTRERAS: So then how are you reassessing your own sort of portfolio versus growth and equities valuation at this point?

BARRY BANNISTER: There's really just two trades. There's growth versus value. And then there's cyclical versus defensive. Those are the four sides of the quadrant. When you think about it, the Fed, after Powell's reappointment, which is an empowering event when you think about it, the Fed really has an incentive, I think, not just to fight inflation, which was mostly energy, durable and non durable goods in 2021. Wages, rents will be big issues in 2022. So we'll see.

But not just inflation. The Fed has an incentive to prevent bubbles, OK? So the zero interest rate policy and the negative 10-year real yield forces you into growth stocks and actually forces you straight up on growth stocks in terms of the PE multiple you'll pay. It's a concept in bonds called convexity, long duration assets, which growth stocks are.

And that is really a risk because, by our work, where we are now is late 1998, which was about 18 months before the NASDAQ bubble topped, or late 1928. We've done a lot of quantitative work on this. So the last thing I think the Fed really needs is the systemic risk of a bubble building and bursting. So getting off the 0% interest rate and possibly moving towards a rate increase, ending this QE perhaps earlier than June, July would make sense.

AKIKO FUJITA: Barry, we should point out the S&P 500 closing down about 2.3%. That is the biggest drop that we've seen since February. Bottom line here, from a strategy standpoint, do you treat this as a one-day drop with a little more assessment needed and moving forward? Or is the time for people to start looking at their portfolios, maybe shaking things up a bit in the anticipation that things could get a bit bumpier with the fears around this latest drain and potential restrictions?

BARRY BANNISTER: Yeah. Well, keep in mind that there are other risks. I mean, tightening of global dollar-based liquidity. This is all the world's money translated into dollars. If the dollar strengthens, that global liquidity tightens up. And that's been going on really since March. And it's been a concern of ours as it keeps decelerating. So a strong dollar, while often good for growth stocks, is a negative in the sense that it does tighten liquidity.

We also think there's going to be cyclical growth slowing in the first quarter of '22 because that's a lagged effect of the substantial tightening that China's already done. It takes about six months to take effect.

We also look at the stock to bond ratio. Those are your two choices, stocks and bonds. Stock to bond ratio is very elevated on a year over year change basis and versus other variables. So either stocks go down or bond prices go up, which means yields go down, or some combination. So people have given up bonds for dead. But bonds are returning pretty good today.

And then last but not least, there's not enough attention being paid to the geopolitical risk. Putin didn't put 100,000 soldiers on the southeastern border of Ukraine unless he wants a land bridge to Crimea. By the late winter into the spring, I would not be surprised to see some hostilities there.

So everybody has gotten too complacent. And I have been in the defensives, staples, health care, utilities, telecoms, and real estate. And I think I'll stay there.

KARINA CONTRERAS: And what about people who are seeing this rise in stay-at-home stocks today? Is that something that they should pile into? Is this going to be short-lived, or is it something that endures?

BARRY BANNISTER: No, no. I mean, the stay-at-home trade versus the get out and have fun trade, you can do that through bonds. If you follow the bond market, the bond yields on, for instance, the Treasuries, the 10-year and beyond, those yields drop, and you make money on that bond without as much volatility if you don't want to play the stay, go, stay, go trade.

AKIKO FUJITA: Barry Bannister, really good context here as we try to make sense of the selloff today. Stifel chief equity strategist. Appreciate you joining us. Have a good weekend.

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