Second quarter GDP reportedly contracted approximately 32% from last quarter. Chief Investment Strategist and Managing Director at Oppenheimer Asset Management, John Stoltzfus, joins The Final Round panel to break down why the Q2 GDP report isn’t as bad as it appears.
- John, let's just start with the two big stories-- or two of the big stories, I guess I can say, in the markets this week because we had earnings led by those strong results that we got from the tech companies last night. Then on the other side of the coin, we have some economic data that's been a little bit troubling when you talk about that GDP report even though it's backward looking.
It's still something that investors are taking into account. So how do you think-- how is the market looking at these numbers, and how are you strategizing where to go from here?
JOHN STOLTZFUS: Well, thanks for having me on the show, by the way. I very much appreciate it. It's good to speak with you again. I've got to say this-- that when you look at it, it's COVID-- it still holds the market hostage to a certain extent of any given day. And I think it's why we've seen as much rotation and rebalancing throughout the last few months.
The market is in between moving higher, and it's had periods of significant churn. And I think as the other person said just before this, when you look at the sector performance on the most recent month, tech is not in the leadership, curiously enough. But it's rather-- arguably either utilities or consumer discretionary, but with the two top sectors being-- one being defensive, and the other being cyclical.
We really have to think the market is looking essentially beyond COVID. It lights the news on almost on a day to day basis. We're hearing that there is more progress being made by a number of companies related to finding a vaccine, as well as drugs of greater efficacy and development. I think that's positive. It's an offset to the resurgence that we've seen, not only across the country, but around the world.
But it's a governor restraining the market to a certain extent on any given day. I think the reason why the market probably took off-- went back today to at least close to it near highs of the day from earlier this morning is probably because-- I saw it, moving across the tape was news that the Democrats and the Republicans will be meeting tomorrow.
So I guess no-- people look at it and they got to figure it's an election year. Neither Democrats or the Republicans can't afford not to come up with another "Bridge Over Troubled Water" emergency program here to-- to upset their constituencies.
So I think people are-- are thinking they don't want to be short the market headed into the weekend. And I think that helped out a lot beyond the fact that technology did what I think most of us in the bullish camp have expected for tech, which is highly resilient.
SEANA SMITH: Yeah, John. That's interesting what you were saying just about the debate that's going on down in Washington, because we've been talking about the importance of that, obviously for the economy, but also from the market's perspective as well. But if we don't get a deal this weekend or if we do get a deal and it's not enough, it doesn't satisfy what investors were hoping to hear, how big of a sell-off do you think we could potentially see on Monday?
JOHN STOLTZFUS: I'd think we-- we could probably have some kind of a tantrum that might be a 4% to 6% decline. But behind-- but I think that would be-- that would be a dramatic kind of expectation. I-- I think the odds are that they'll come up with closer to a deal, if not a deal on Saturday, and then come up with something on Monday.
I think the pressure is on. It's a big election year. This is, you know, it-- it-- it-- it-- and we're headed into the conventions now, even though I guess they're going to be essentially virtual conventions. But there-- there's a lot of-- politics is moving to the forefront for the next few weeks here. And then beyond that, once we get into the fall, get ready.
RICK NEWMAN: Hey, John. Rick Newman here. You said-- is an election outcome priced in? Does the market even care about the outcome of the 2020 election with the-- you know, the Fed basically there to prop up asset prices and tech doing so well?
JOHN STOLTZFUS: I-- I think the market does care about the-- the outcome of the election. I think a lot of-- a lot of that will be better defined once Biden selects his vice president, and any just provides any clues that would be attached to who might be members of the cabinet.
I think if it's-- if-- if his selections are perennial enemies of business or people who really want to-- to crimp business and raise regulations significantly, I think the market won't like it. On the other hand, from a perspective of history, the Democrat-- a Democratic administration has not been a deterrent-- a deterrent for stocks to go higher.
In fact, historically, I'd have to check from-- from after the Trump administration. But historically, the Democrats have been known to-- their administrations have been better for stocks, not necessarily, by the way, because of policy. But very possible because the Democrats tend to get in after the Republicans have been unfortunate enough to run into a recession. Whether they orchestrated it or not is not the issue.
SEANA SMITH: Hey, John. So then how do you-- how do you suggest investors-- or how are you, I should say, positioning your portfolio right now? Because if the market is looking beyond COVID, there's still a lot of uncertainty, though. You were just talking about the election. What are you favoring at this point?
JOHN STOLTZFUS: Well, at this point, we look-- we look out three to five years out, generally speaking, in the portfolios that we manage. They're for longer-term objectives, so we like cyclicals here. Our-- our-- our favorite sectors are technology, consumer discretionary, industrials, which we think will get popular once we get an infrastructure program likely next year.
So we think why not accumulate it now while nobody's looking, so to speak, or it's not as favored as one would hope? And then we-- our contrarian pick his financials, which just seems to be really, really abused by the market on fears that the situation will get a heck of a lot worse, and they'll have to increase reserves to an-- to an extremely high level.
So far, the financial sector has shown that the big banks know how to-- for the most part, know how to manage this type of an environment remarkably well. So that-- that's basically it. We're also market weight, by the way, a variety of-- of cyclicals like communication services within the defensive consumer staples, health care.
Our-- our-- our underweights happen to be utilities and energy. The energy call has been particularly good. The-- the utility call, it depends upon the given day that you're looking at the market. Because with interest rates so low, yields on utilities look very attractive, especially regulated utilities that are-- that despite the slowing of the economy are overall doing OK.