Mark Hackett, Chief of Investment Research at Nationwide joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Let's bring in our first guest for the hour. We've got Mark Hackett, chief of investment research at Nationwide. And Mark, we haven't really seen significant pullback on the back of the data. We hear over and over from our guests that, look, the market is forward-looking. And yet this number certainly has to be a bit of a reason to pause because we are seeing the impact on the labor market. Does that change your outlook at all?

MARK HACKETT: Well certainly in the near term we have seen a pretty serious disconnect between the economic data, which, as you mentioned, through December and the early part of January has been relatively disappointing, particularly on the labor side of things. But market really has chosen to look forward beyond that. We have a fairly healthy move in the market, certainly, since the election. We're up about 16% for the S&P 500. That's much more in the intermediate to longer term view of things, particularly in terms of stimulus actions and some other things.

So obviously, we did have a hiccup economically in the last month or so. We expect that to continue as this reopening process is certainly not a straight line. But again, while we're encouraged by the fact that the market has been less reactive to some of the near-term challenges and much more focused on the intermediate-term recovery.

ZAK GUZMAN: I mean, we've discussed kind of this K-shaped recovery across the income spectrum for Americans. It's been a similar story when you look at the market and factor out the small caps and what you see in the russle and the rally there. Talk to me about maybe how it's reflecting some expectations moving forward in 2021 for some of these companies reopening and really seeing that underlying economic recovery gain steam.

MARK HACKETT: Certainly, lost in the focus on some of these IPOs and SPACs and high-profile technology companies has been this remarkable broadening of market strength. We've seen a 33% outperformance of small caps versus large caps just since last March. And actually, over the last five years, small caps have now eclipsed the return of large caps. So we view that as encouraging. We're seeing it in the small caps, we're also seeing it in a lot of the global markets, particularly emerging markets. So we can't be solely reliant on a very small number of large, high-profile technology names.

So clearly the broadening of the market participation has been encouraging. Now clearly, the pro-cyclical nature of traditionally small caps in emerging markets shows where investors' minds have been over the past several months. But again, we're much more encouraged by broader participation in the market strength rather than what we saw the last several years, which is much more narrow strength.

AKIKO FUJITA: And to that point, one of the sectors where we're going to be watching closely are financials. They have seen a big turnaround. And as we look to the big bank earnings, it feels like the worst case scenario never really did materialize, and we have seen some of these banks turnaround over the last six months or so. Not as many loan defaults as we were expecting, the trading activity certainly helping some of these banks as well. What's the number that you're going to be watching as you look to-- this is potentially an indicator of where things are headed?

MARK HACKETT: Clearly a lot of the strength you see in the banks has been much more along the interest rate side of things. Considering where the yield curve has gone, banks obviously get some support from that. Which, clearly, the most important thing to focus on for the banks, though, is losses, particularly on the consumer side of things.

Has the more permanent nature of job losses caused any severe reaction in consumer's ability and willingness to pay? We haven't really seen much of that yet. And particularly if you follow high yield spreads, investment grade spreads, and even the TED spread, there's remarkable optimism among investors on the direction of credit sensitivity, both on the consumer side of things and the corporate side.

ZAK GUZMAN: And we've seen the Fed really talking about keeping rates low, at least through 2023, right? So if that's going to change, it would be a benefit to some of these financial names we're discussing. But in terms of the expectations for changes, the trajectory of their bond buying program, how do you see that playing out as they continue to signal a steady course here?

MARK HACKETT: Yeah. We've seen a couple of trial balloons over the past couple of weeks, where some Fed official have hinted at the prospect of adjusting the purchasing decisions. That seems unlikely at this point. The Fed's very committed to keeping the foot on the gas, both in terms of low rates but also in terms of the bond buying program. So we really don't see that adjusting in the near-term.

What's really interesting, though, is the dichotomy between very tame inflation rates, which does support a continued aggressive Fed, and inflation expectations, which are now in the 2.1% for the 10-year break-even. So clearly, investors are betting that inflation is coming back. But we just haven't seen it yet in the data.

ZAK GUZMAN: All right. Mark Hackett, chief of investment research at Nationwide. Appreciate you coming on here to chat with us today.