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Retail investors buying into the market as institutional investors step away: Managing Director

Kathy Entwistle, Managing Director at Morgan Stanley, joins Yahoo Finance Live to discuss the outlook on the overall market.

Video transcript

KARINA MITCHELL: We will stay on the markets, and we will bring in Kathy Entwistle, managing director at Morgan Stanley. Thank you so much for your time today and for being here. So bulls are definitely out. Earnings keep on delivering strong growth. That's what we're seeing. That's despite challenges related to labor. And supply investors seem to shake them off as being temporary. But you have a contrarian view to that. Explain that, if you will.

KATHY ENTWISTLE: Sure, thanks for having me. And yes, I think what's happening here is we're seeing the retail investor continuing to go in and buying the dips and have certain, I guess, anomalies that are working in the favor of the markets right now. One is like the whole FOMO concept, right? The Fear Of Missing Out. So the retail investor is actually buying into the market where we're seeing more of the institutional investor stepping away a little bit more. So the new cash coming in is the retail investor. So we have that.

Another issue is, they're calling it TINA, right? There's nowhere else to go, or there's no alternative. Fixed income is still not paying very much right now. So people are going to stocks and looking there for also the dividend play, which is the income play as well.

And then the whole concept that there is a lot of cash sitting on the sidelines, and yes, that has been true, but we're starting to see that that cash is starting to dissipate and may not be there to carry the market for much longer. So there's a few things playing out right now. And those are just a few of the pieces that I would say the retail investor is contributing to.

ALEXIS CHRISTOFOROUS: So are you bullish on us ending much higher for the year here in the fourth quarter, or what are some of your concerns as we move closer to 2022, Kathy?

KATHY ENTWISTLE: Sure. Thanks, Alexis. Yeah, I would say that it's hard to predict this market, right? Because there is this momentum that keeps driving the markets higher. But the fundamentals are in place for this, like we've been talking about, this mid-cycle recovery.

And just like everything else, the key word of the day is acceleration. Everything's been accelerated by COVID-- digital transformation, the market recovery. And now we're in this mid-market cycle. And we think that that is also being compressed into a very quick and short time period. And that's why we're seeing some of the areas of the market like cyclicals and financials and things like that, areas that we want to be invested in.

Before the end of the year, we've been calling for a 15% pullback for the last three months. And that hasn't necessarily played out yet. But again, I think the rationale is because of the retail investor that keeps continuing to come in and support the markets.

Whether or not that's going to be a good long-term play, I would think if we have some of these other external factors happening and occurring, such as the Fed starting to loosen up a little bit on their support and then also perhaps some changes in the tax laws, all of these things and rising interest rates, all of this can hurt some of the more growth type investments. And I think that the investors who are putting their new money there might be a little bit surprised come the end of the year.

KARINA MITCHELL: And so then, where are you telling investors to position themselves if they need to sort of get out of growth or hedge their bets, if you will?

KATHY ENTWISTLE: Yeah, sure. So some of the things we're saying right now is when we do have those pullbacks, instead of thinking about, like, oh, now's the time to add more cash, really, it might be now's the time to try to do a little tax loss harvesting. Like, are there any losses that you can take off to wash off any gains? So we're thinking about that.

We're thinking about putting them, again, into cyclicals that we've been talking about throughout the summer, which would include some of the financials. We like the health care, consumer staples. And some of those areas might be better. Anything that is dividend play as well, I think would be-- bode well for our clients.

ALEXIS CHRISTOFOROUS: And do you think that we're going to continue to see this rotation kind of scrape one more, this rotation out of bonds and into stocks, Kathy, in the 30 seconds we have left?

KATHY ENTWISTLE: Yeah, we're looking at is, like, the great rotation in this sense. We're seeing this happen. Now, if we start to see some of the transition into rates starting to creep up higher, then we might see people start dipping their toe back into bonds. But for right now, it's still a very tough area to be in and to-- when you're seeing stocks go up so much and dividends paying more than interest rates are on bonds, it's hard to make that argument for clients. But we are trying very hard to still have that balance in the accounts.