People's United Advisors CIO John Traynor joined Yahoo FInance Live to break down what investors can expect from the market in the first few months of Biden's presidency.

Video Transcript

SEANA SMITH: Great to talk to you. Let's just start with what the Biden administration needs for the markets because we had a record day yesterday. Stocks continuing to push higher today. What's your read on that and what we could expect here over the next, I guess, couple of months, or if we want to look out even further, next couple of years?

JOHN TRAYNOR: Yeah, really, over the last couple of months, we've seen the vaccine rally and the Biden rally. And I think they're both combining to really set ourselves-- set us up for a good year ahead. I mean, what you've seen really since the election is that cyclical stocks have done well. The financial stocks have done well. All those stocks that are tied to [INAUDIBLE] inflation have done well. And we think they're going to continue. I think Joe Biden is setting-- he's setting a good course for the economy. He's setting a good course for the market, going forward.

ADAM SHAPIRO: So, John, I'm curious. When you talk to clients, and a lot of investors always want to know where should I go, one of the things you mentioned are industrials. And that sector today-- and I realize one day does not the future make-- it's off by half a percent. But it's underperformed to other sectors over the last 52 weeks. It's only gained about 6%. So why do you think it has more room to grow at a better pace?

JOHN TRAYNOR: You know, that's a great question because we are talking to a lot of clients. I'm doing I don't know how many presentations on a weekly basis. And one of the things we're advising them is that, again, unfortunately, a lot of us invest through a rearview mirror. And if you take a look at all the great funds that did very well last year, they were very, very loaded up on technology, very, very loaded up on growth stocks.

And we really think we're seeing an inflection point now. So we're spending a lot of time talking with clients, thinking, you know, don't look at last year's winners. Now certainly, they were good stocks. And we hope you own them. But really, what you want to do is look forward and get yourself exposed to a cyclical recovery. I put together a chart for clients where I said, normally, if I was speaking to them just a year ago at this point, I'd be saying, you should have a late cycle portfolio-- lots of growth stocks, lots of large cap stocks, defensive stocks.

I said, right now, you should have an early cycle portfolio. Be exposed to beta. Smaller caps, we think, are going to do very, very well. Value stocks are doing very, very well. So you really need to, number one, we're spending a lot of time talking with people, but you really need to shift your thinking to that early cycle reflation type portfolio.

SEANA SMITH: And John, when you talk about shifting your thinking, I think the one thing that investors have been trying to wrap their heads around-- and this has been the case now for several months. And that's the disconnect that we're seeing between the market and the economy, right?

So today, we're at record highs once again, and we got another pretty dismal jobs report when we look at the jobless claims number coming in at 900,000. Yes, better than expected, but still extremely high. How is the market looking at this continued elevation of claims? And I guess, how do you think, or do you think, it will end up catching up to the market at some point?

JOHN TRAYNOR: Well, you're raising a good point. And again, that comes up in client conversations all the time. We raised our equity allocation from neutral to overweight equities in April last year. And a lot of people said, what are you doing? Aren't you reading the newspaper? Well, we were anticipating this reflation trade. What I believe the market is doing is, it's looking through and it's looking at two things.

Number one, the stimulus spending. And if we get even a half of what Joe Biden has proposed, that would be a great boost to the economy. And then, they're also looking at the Fed. The Fed has basically said, look, we are behind the financial markets. We're going to keep rates low. You get those two supports under the economy-- fiscal and monetary policy-- I think there's an awful lot of good news that is baked into the market already, and there is still a lot of good news to come.

Because you still have a lot of disbelievers, people looking at the headlines right now. And I don't want to minimize, I mean, you know, what's going on with the coronavirus. And I mean, it's a tragedy. But we really think once people start to get vaccinated and we start to get closer to that herd immunity-- maybe that's midyear this year-- you'll see the consumer come back out. You'll see confidence rise. And the economy should-- you should--

ADAM SHAPIRO: John.

JOHN TRAYNOR: You should see it in the economy.

ADAM SHAPIRO: John, very quickly, that reflation trade formula of yours, it's got to take into account rising interest rates. Is there a threshold where it would change your formula? I had a guest on yesterday who talked about when we get to 2%. No one's saying that will happen until, what, 2022. 2% on the 10-year, by the way.

JOHN TRAYNOR: Yeah, 2% on the 10-year, that would shock an awful lot of people. We don't see that happening for a while. What I am nervous about is some news this spring on inflation. We're going to be going year over year to some very, very low numbers last year. So you could see the market get a little spooked when we see some higher inflation numbers, let's say, in the spring, which could drive interest rates higher. So if there is a kink in the story right now, it is interest rates. But we don't think that rise would be sustainable.

SEANA SMITH: All right, John Traynor, great to have you back on this show. Chief investment officer of People's United Advisors, thanks so much for taking the time to join us.

JOHN TRAYNOR: Thank you.