Debt levels in the economy continue to rise, will become a bigger concern: CIO

Michael Sheldon, RDM Financial Group at Hightower CIO, joins Yahoo Finance's On the Move with his take on the markets and economy ahead of the 2020 election and beyond.

Video Transcript

ADAM SHAPIRO: Let's talk about, though, another kind of insight that we desperately need is the impact on the markets. We invite into the stream Michael Sheldon. He's RDM Financial Group at Hightower's CIO and executive director. It's good to have you here. And I-- there was something you wrote in your notes to us that really stuck out with me that has to do with where we're headed.

You said that the next one to two years, we believe the economic data, including GDP, corporate profits, as well as business and consumer spending are likely to improve from current levels. I'm going to assume that regardless of whomever wins this presidential election. But that says to me, as an investor, I may want to get into, say, equities right now. Guide me.

MICHAEL SHELDON: Yeah, that's, I think-- that was an important point. So stepping back, if you look at the economy right now, there are sectors and there are companies in the market that have actually gotten stronger and that are actually have benefited during the downturn. And there are also a lot of companies that have been left behind.

There are companies that-- and individuals that have lost their jobs, and we don't know if those jobs are coming back. But looking back even further, the economic recovery probably started during the summer of this past year. And we looked at GDP data looking back to the late 1940s, and what it showed is that economic recoveries typically last about six years or so, whereas economic contractions typically last about three months or so.

So I think an important question for investors is, is the economic recovery and is the economic expansion on track? And for us, we think the answer is yes. So looking ahead over the next 12 to 24 months, as you were just speaking about, we think, over time, it's not going to be a straight road, and there will be some bumps along the way. But we think key economic data, if you look at corporate profits, GDP, employment, should gradually improve from current levels.

JARED BLIKRE: Hi, Jared Blikre here. I want to get your take on the bond market and maybe even currencies. We've seen the dollar broadly lower. And also bond market-- excuse me, bond rates, especially the 10-year looking, at the 30-year, we're at four month highs tenure right now, it's 85 basis points. Where do you see these going, and how much is tied to the election and the results of it?

MICHAEL SHELDON: Yeah, there's some interesting changes going on in the financial markets. A couple of them you just pointed to, for the first time in a while, the yield on the 10-year as well as the yield on the 30-year have moved above their 200-day moving average. But we haven't seen that in quite a bit of time.

Another thing is that we've started to see some weakness in the US dollar after a multi-year rise in the dollar. And I think you could sort of tie that in with some of the signals we're seeing in the market overall. If you look at the broad market, we're seeing some improvement over the past few months in things like copper prices, inflation, breakeven spreads are rising.

The ratio of consumer discretionary stocks versus consumer staples stocks, transportation stocks are doing better. So I think what the message of the market-- it signaled that the market is at-- investors are looking ahead to 2021, and they think that things will gradually start to get better. And another thing is that no matter who the president is next time, we're likely to see further stimulus.

Although, it doesn't look like we'll see anything for the remainder of this year. You never know, of course. So with that further stimulus and the signal of the market, you're starting to see a little bit of a pickup in yields in the market. And that's definitely something we've-- that's a change for investors.

EMILY MCCORMICK: Michael, I know third quarter earnings results have really taken a backseat here to everything going on in Washington the past couple of weeks. But just taking a look at some individual names and sectors, I mean, we had Netflix, of course, really posting a slowdown in their subscriber growth, kind of pointing to a pull forward that they saw earlier on during the pandemic. We saw something similar with Kimberly-Clark and consumer staples yesterday.

And I'm wondering if this, to you, signals a broadening out that really needs to be happening for equity investors, turning away from some of those defensive plays from the beginning of the pandemic and into some of these underperforming sectors for the year to date so far.

MICHAEL SHELDON: Yeah, as you mentioned, we're in the thick of third quarter earnings season right now. And so far, a majority of companies are beating by an historically higher than average rate. So we know that earnings this year, for the full year, are expected to go down about maybe 21% or so. But then looking ahead to next year, the current forecast is for a rise of about 26% with all 11 sectors actually performing better.

One of the things we're looking at is much of the rally early-- in the early part of this year and the past several years was concentrated in a lot of these large technology stocks. And we are, as you just mentioned, we are starting to see some broadening in the participation in the market. And we think that's a healthy thing for the overall market going forward.