Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi discuss today’s market action and outlook with Morgan Stanley Investment Management Managing Director and Sr. Portfolio Manager Andrew Slimmon.

Video Transcript

JULIE HYMAN: Let's bring in Andrew Slimmon now. He is Morgan Stanley Investment Management Managing Director. He's a senior portfolio manager there as well. Andrew, good to see you.

ANDREW SLIMMON: Good to see you.

JULIE HYMAN: So you just heard Emily outlining some of the risks that people are looking for in 2021, or trying to be aware of. What are you most worried about going into next year?

ANDREW SLIMMON: Well, I think the third risk she listed is the liquidity by the Fed. Look, I mean, you know, it's a tragedy, what's going on in the economy in terms of small businesses. But for the stock market, which is more reflective of large businesses, I really think the market is looking past COVID. So I don't think hiccups and distribution will really impact the market, because the market's up six to nine months looking forward.

I think the biggest risk is really that the Fed has said they're going to be on hold for 2023. But what happens if we see really a big surge in spending and the economy actually surprises on the upside? And, you know, again, you start to see the yield curve steepen, rates to go up. I think the market is going to have problems with that.

The other thing that I also think is important to consider is, we all talk about the known risks, but what about the unknown risks? The things that people aren't talking about? You know, we had very little geopolitical issues this year, very little. We don't even seem to talk about it anymore. But they're out there.

You know, a tanker got blown up at a Saudi terminal a week ago and very little, you know, exposure on that. I think there are issues that always affect the market. It just seems like we were so consumed with other things this year, didn't get a lot of exposure. But I think, to me, geopolitics is something that we're very much not focused on.

So I think those are kind of the risks that I see. But the other-- the final thing is, look, we didn't have a lot of volatility this year, incredibly enough. Post the sell-off, the market really went straight up. Maybe we had a 10% correction in August, but that was about it. And I suspect that it will have a lot more volatility that next year.

And I hate to say that, because I-- that's such a standard predictor. But I do expect that. Because I think what this market has done is it sucked a lot of investors in, as the market has rallied, that probably aren't really committed. And I think we'll get volatility, unfortunately. We'll chase them out of the market next year.

So I do think next year will be a good year. I don't necessarily agree with Bank of America, because it would be very unusual for the second year of a bull market to have a down year. But I think it'll be with more volatility. Unfortunately, people will react poorly to that, as they historically do.

BRIAN SOZZI: Andrew, to your point, and it's a good point, that a lot of the gains for next year may have been at least pulled forward into the back half of this year. Is there anything you're seeing in the market right now that would suggest we might see an early January hangover, or in other words, a correction in those first two weeks of January?

ANDREW SLIMMON: Well, I think the Georgia Senate runoff is certainly, you know, that's a fair point, which is I do-- I agree completely that the market is expecting some type of divided Congress. And if that were not to occur, you could get a pullback.

But I'll tell you, so many people are predicting a pullback. I just, you know, I've kind of changed my tune, because I was kind of in that camp. And I just-- I wonder if that's really the case.

Now, you know, don't lose sight of the fact that the market is not as complicated as I think people make it out to be. The truth is the Fed got up last week and said, we're your friend, we're going to stay stimulative. So I'm not so sure that you're going to get a big pullback.

Look what happened yesterday-- the VIX opened big-time up and came roaring back. It tells me there's a lot of strength here. And I'll throw out a fascinating last statistic, and maybe I'm just a geek that loves statistics. But, look, in 2009, the market off the low rallied 65% by the end of the year. The unemployment rate was 10 and 1/2%. Today, the market off the low is up about 65%, but the unemployment rate is 6-- 6 and 1/2%.

So the economy is a lot further along than it was in '09, but the market isn't, you know, any further along. So it tells me that, as much as sentiment has improved-- and we know the sentiment numbers-- the economy is actually doing better than that. And so I question whether there's still more catch-up out there.

The last thing that I would say is, yes, as much as sentiment has improved, the reality is is that we started this year with 3 and 1/2 trillion dollars in the money markets and now we're at $5 trillion. So there's more money today than there was at the beginning of the year. And so I just wonder whether there's still more catch-up to go of people getting money to work.

Anecdotally, I get a lot of questions about how to get invested in the market. So it's making me question whether we truly get this January correction. One thing that I think is always-- you always have to be very careful of is, be wary of just because a calendar changes doesn't necessarily mean the direction of the market changes. And I think we-- I think, you know, the tougher times for 2021 are going to come later in the year, not necessarily early in the year.

MYLES UDLAND: So Andrew, I want to ask you about a couple of stocks that you flagged for us. They're an eclectic group, I guess we'll say. We have a couple financials in there, also some Asian-focused tech plays. And I guess this group kind of speaks to-- and you're talking about the rally that's out there, given the unemployment rate-- maybe the breadth of opportunity perhaps that you think is there for investors?

ANDREW SLIMMON: Sure. So first of all, I sent you that list before I knew what happened on Friday, so in fairness to-- But look what-- you know, I find it shocking, and it's a very-- you know, it's an important message to focus on. You know, I don't think the fact that the banks were going to buy back significant amount of stock-- I don't think that should have come as much of a surprise to the market as it did. I'm delighted, because I'm overweight financials. But I find it shocking that the stocks did so well on this news.

And what it tells me is that investors-- and maybe it's my competitors in the fund areas-- they're underweight financials. And there's a chase going on. And you can't tell me that all parts of the markets are expensive, because I don't think financials are.

So I think these [? marked ?] stocks have a lot to go on the upside. They are only breaking out. There's a great saying by technicians, the longer the base, the more in space. Which means, basically, if a stock hasn't gone anywhere for a long time, once it breaks out, it can go substantially higher. And I think the financials are ripe for that.

And, you know, a period of 10 years where they've underperformed, it leads a lot of investors to be underweight these stocks. And I think there a chase going on into these stocks. And if I'm right about next year in terms of the economy is going to come back stronger than expected-- and look, I mean, look what's going on in China. You've probably seen some US companies reporting very robust Chinese sales. I think that's the playbook that's going to happen here. And that, you know, if we have higher rates, steepening yield curve, that'll help the financials also.

JULIE HYMAN: We'll keep an eye on them. Andrew, thanks for your thoughts. Good to get your insight here. Andrew Slimmon is Morgan Stanley Investment Management Managing Director and Senior Portfolio Manager. Appreciate it.