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Chief Market Strategist on what investors need to remember ahead of the election

Chief Market Strategist at Truist/Suntrust Keith Lerner joins The Final Round to highlight the day's market action as markets closed at session lows after Jerome Powell's press conference.

Video Transcript

SEANA SMITH: All right, well, sticking with stocks here, with stocks closing mostly lower after the Fed held rates at zero, we want to bring in our next guest. We have Keith Lerner. He's the chief market strategist at SunTrust. And, Keith, we just heard Jared going through some of today's market news.

But I'm curious just to get your reaction to the Fed statement and also to Fed Chair Jay Powell's press conference, because it initially seemed like the market was satisfied when we got the-- when we got the statement from the Fed. But some of his comments about the economy and-- and some of the risks to the recovery, I think, is what really got investors' attention and what spooked the markets a little bit.

KEITH LERNER: Yeah, well, I think-- I don't think there was anything that was dramatically different. I think on these Fed days, markets tend to have some moves that really are unexplainable. Of course, there's incentive for him to let the markets and the economy know that there's still full force ahead as far as providing monetary stimulus, and there's also probably they want put some pressure on Congress to go ahead and-- and put through a fiscal bill.

But more importantly, from my perspective, is not what he said, it's what happened in the market today. Transportation stocks, new all-time high. You know, that-- you don't have that happen during a very bad economy. You have autos near an all-time high. You have a lot of the retailers near all-time highs. And then you just mentioned materials are really becoming market leadership. We upgraded that group last month.

And industrials as a whole is coming on really strong. So I think part of what you also saw is, you know, tech-- technology and some of the quasi-technology is still acting a bit heavy, and you're still seeing that rotation. But I would say the underlying tone in this market, despite what Chairman Powell said, is one of-- one of recovery for the overall economy still.

MYLES UDLAND: And-- and so I guess, Keith, to that point, and-- and you know, I think when you look through even just today's, you know, winners, hotels, airlines reopening, all that kind of stuff, is-- is this starting to more clearly outline an idea that I-- that I think had been-- had been swirling for a last couple of months, which is that a real big bet on a reopening economy might be market negative because of the weighting of some of the tech names and that rotation just on a mathematical compositional basis would necessarily bring the level of the index lower, but would broaden out the-- the individual, you know, sector and name gains?

KEITH LERNER: I think that's exactly right. I mean, you know, don't forget, I mean, the-- the growth trends in technology, the earning trends, this is the only sector where forward earnings estimates are above the old highs. So there's still positive, but things don't go up in a straight line. They've outperformed so much, they're going through a reset right now.

It may take some time, maybe the next earnings season, for them to reestablish some leadership. And then, you know, in the interim, which-- which you see during a bull market, is rotation, kind of a [INAUDIBLE] market rotation. So you're right. Maybe the-- the money isn't being, you know, made at the-- the headline index right now, but there's plenty of opportunities below the surface, and we're seeing that on a day like today.

INES FERRE: Keith, Ines here. I'm wondering what you're seeing for the markets as far as volatility as we get even closer to the elections, especially if we don't see who the clear winner is on election night?

KEITH LERNER: Well, you know, historically in-- in September, the market, whether the incumbent party wins or the incumbent party loses, you tend to have at best a sideways market to maybe a little bit of a-- a move down. As you get in October, that's typically-- historically in every election since 1992, you've seen the volatility index move up. So, you know, listen, I think they-- they will-- we'll likely see a pick up in volatility towards the election.

If there was a sell-off based on the election outcome, to us, based on the underlying economic trends and the relative value, we would look at that as an opportunity. And we really want to stay focused on the primary trend over the next 12 to 18 months, and we still look-- the weight of the evidence in our work still suggests that's higher. So the other thing is, you know, that's the number one question coming up from our investors.

And you have to remember, too, if you make a drastic change before the elections, you know, what's going to get you back in? And you have to get two trades exactly right. And I think the-- the overall direction of the economy and the vaccines, which you just spoke about on the prior segment, will be more important for the-- for the-- the stock market, and sectors for that matter as well.

ANDY SERWER: Keith, I want to get back to this little interchange you had with Myles because, I mean, that's some crazy stuff. So basically what you guys are saying is that the markets, which is to say "the index," could go down while most stocks could go up.

I mean, I saw this thing that the five biggest, you know, stocks, the FAANGs, of course, [INAUDIBLE] with the FAANGs. So the FAANGs give back, but the other 400 and, you know, 90 stocks in the S&P are up. And so you could have a situation where your investors' portfolios are really kicking the benchmark's butt or something like that. Are they? I mean, has that even-- has that happened before? Is that possible?

KEITH LERNER: Oh-- oh, yes. You know, people look back at the technology bubble. And yeah, we don't think this is a technology bubble, and we don't-- we don't know that technology's run is over. I think it's taking a rest. Going back to your question specifically, in 2000 when the technology bubble burst, over the next year, the-- the average stock was actually up, but most people just remember the headline index, which was down quite a bit. So yes, it's definitely happened before.

And I would think at a minimum, even in our strategy, we've-- we've been really much more overweight growth and quasi-growth. We took a step towards upgrading materials last month, and I will say industrials are coming on strong. So yes, you want to have some things outside of just the-- the S&P and the sector opportunities. And near term, it looks like that-- those trends are set to continue.

SEANA SMITH: All right, Keith Lerner, Chief Market Strategist at SunTrust, always great to have you on the show. We'll see you again soon.

KEITH LERNER: Great, thanks so much.