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Chief Investment Strategist on primary drivers for market volatility

Chris Konstantinos, RiverFront Investment Group's Chief Investment Strategist, joins The Final Round to discuss the week's market volatility and what to expect during election week.

Video Transcript

SEANA SMITH: I want to bring in Chris Konstantinos. He's the chief investment strategist at RiverFront Investment Group. And Chris, when you take a look at what Jared was just saying, just in terms of a lot of the pressure, the selling pressure that we've seen over the past couple of trading days, the Dow having its worst week and worst month since March. We're just four days from the election. What's your take on the selling pressure that we've been seeing in the market recently?

CHRIS KONSTANTINOS: Sure, and I always really appreciate Jarrett's take on the market. Let me add a couple of technical things onto what he just said. If you take a step back-- which an armchair technician like me, this is what I like to do. If you take a step back and look at the selloff, it's basically, right now, you're around a garden variety minimum retracement selloff.

And, you know, he mentioned a couple levels. I'll throw a couple extra ones out there. Obviously, you know, 3240 is a really important one. We think 3050 would be another retracement level you need to watch. But again, you know, markets sold off about, let's call it-- you know, let's squint and call it 10% peak to trough from the early September highs. This is exactly what you'd expect in a garden variety selloff. Could it get worse? Absolutely. We watch a lot of market internals, too. And, you know, the new highs and new lows number recently has been somewhat concerning. We're watching that closely.

But we think it's a little bit too early to panic purely on a technical read. The primary trend of the market, you know, the 200-day moving average is still moving higher. And generally speaking, you know, the technical backdrop, at least in the US, is still relatively favorable.

SEANA SMITH: So Chris, it's interesting because I read a couple of places today, just in terms of the drop and the size of the drop that we're seeing in some of these big tech names, that it highlights the fact that, one, there's little room for disappointment, but then also just the fact that maybe there is this deeper sense of negativity in the market right now. But it doesn't sound like you're in that camp at all at this point.

CHRIS KONSTANTINOS: Well, to be really clear, you know, over the past three months, we have been net sellers of equity here at RiverFront. We went from a pretty pro-equity positioning in our asset allocation portfolios to now something approximating neutral. But that's not because we share that deeply pessimistic view that you're expressing. It's simply out of prudent money management, in our opinion.

You know, it doesn't take a market expert to recognize that we're heading into a pretty volatile period, right? You've got a couple of major unknowns. COVID, of course, as you've highlighted, is unfortunately now, you know-- has reasserted itself, particularly in Europe, but also here in the States. And, you know, I don't think it's escaped anyone's notice we've got an election next week that's going to be full of intrigue.

So anyway, you know, long story short, the fundamental backdrop-- and we're as guilty as anyone of talking politics here, you know, or thinking about politics because that's what our clients have been asking us about. But again, from an intermediate term perspective, fiscal and monetary policy and interest rates, like you were talking about earlier on this program, that's, in our opinion, a much more powerful driver of intermediate returns for the stock market than politics.

So if you take a step back and you look at, well, where are we on the fiscal and monetary front, unprecedented stimulus regardless of who is going to be in office. You know, come January, we're still going to have unprecedented stimulus. M2, which I track very closely, is growing at over 20% year over year change here in the States, which is also unprecedented. So there's a lot of liquidity sloshing around in the system.

The NASDAQ's up 20% this year. You know, that's almost 20 percentage points more than the S&P. So profit taking in these tech names, you know, makes a lot of sense to me. It doesn't necessarily mean that the tech runs over, in my opinion.

AKIKO FUJITA: Chris, some interesting notes here about your positioning internationally. And you talk about having a position in Germany and Japan, which is not something that I've heard of from a lot of our guests. But also looking at what markets are likely to provide some big opportunities in the case of a blue wave because of the currency swings. Can you speak a little to that?

CHRIS KONSTANTINOS: Yeah, I'm happy to. I think this is an important and maybe somewhat nuanced point about all the political talk. In our view, the most likely outcome for a blue wave, you'd see in the currency markets and probably with dollar weakness. This could be a positive thing in, obviously, in US dollar space for any US investors investing in international.

It should be said that we're still-- we still like US over international for a whole host of fundamental reasons. But we are watching it pretty closely because, you know, particularly let's say for Asia, for emerging markets, and Japan, since you brought up Japan, Asia has clearly in a different part of the COVID cycle than the Western world, which is a good thing for them.

They're also one of those places that a blue wave could benefit most acutely because, you know, it's our belief that a Democratic blue wave, not that we would necessarily be tougher on China in a Democratic blue wave situation, but rather, the trade talks would take on a different tenor. Our guess is that a Biden presidency would try to not be as unilateral in terms of its trade talks and try to draw our allies into that conversation as well. It might be a little bit less traumatic or volatile from a trade perspective.

And again, that could be positive for some of these foreign currency. So we're not ready to call the all clear on international. Again, I want to be really clear we are overweighting US at the expense of international in our portfolios. But it is something that we're watching very closely. And that probably is one of those places where politics will have an acute near-term effect.