Keith Lerner, Truist / SunTrust Advisory Services Chief Market Strategist, joins The Final Round to discuss Wednesday's sell-off ahead of next week's election.
MYLES UDLAND: For more on today's market action and how to think about what we've seen in the last few weeks, how to think about the election, we're joined now by Keith Lerner. He is the Chief Market Strategist over at Truist SunTrust Advisory Services. Keith, always great to have you on the show. Let's just start with how you're thinking about this week. The decline so far this week, as Seana mentioned, pretty much unprecedented for the S&P ahead of an election. Is it about the election to you, or do you think this is more about what we're seeing on the COVID front, particularly over in Europe?
Keith, you're muted. You have to unmute.
KEITH LERNER: Sorry about that. But great to be with you. And I think as you were rattling off some of the stats and how it's something that I walked back indifferently. The first thing I was thinking about is, that's so 2020. The script is obviously a bit different this year. But in our perspective, if you take a step back, we've been in a tug of war since September. We actually peaked in the market in early September. And, you know, early on when we had that rebound in mid-September it was more about investors gaining confidence that the election-- as far as-- it was pulling towards Biden and there was more certainty that there wouldn't be a contested election.
The recent sell-off I think is a combination of the COVID numbers going higher and the-- the race somewhat tight in, at least short term. And I would say if there's maybe potentially a silver lining as we get into the actual election next week, is that you're finally starting to see some fear into the market. The VIX-- as you mentioned earlier-- is at a multi-month high in of 40. That's really high. So if-- if the actually election outcome is a little bit clearer than people suspect, you could have a nice relief rally. But I suspect over the next week into that election you'll remain somewhat choppy. But our overall position from a longer term standpoint is intact. We still think we're in an early stage of the economic recovery. But not having a near-term stimulus is going to make things sloppy here in mid term.
DAN ROBERTS: Keith, Dan Roberts here. We had a bunch of guests roll through our live shows in the last few weeks who were trying to say that the idea of a contested election or the idea that we would have a number of days after election day-- maybe even a week or more where we didn't have a clear winner-- was baked into the markets and that everyone was expecting that now and that that wouldn't cause turmoil. It's interesting to hear you say that right now you think the tightening race is what's leading to, kind of, the turmoil with stocks.
And then of course I would think right now it's more about the virus cases. And so I guess I'd ask, looking forward, you know, regardless of whether there's a relief rally-- as you say-- after the election if there's a clear result, it seems to me that virus cases and the direction things are going in the US is really the unknown, and that that has the potential to really roil stocks. I mean, is there anything else that might happen that you're looking at in terms of the big, you know, headwinds we could see? There's really just post-election and COVID right now.
KEITH LERNER: Yeah. I think you talked about it. I would say, you know, when the market was selling off in early September, it was starting to price in that elongated election cycle uncertainty. But after we had that rally, the market became a little bit complacent. So I think we're pricing that back into it a certain extent. And so the upside's being capped by the COVID uncertainty, the election uncertainty, the unevenness of the economy. But on the bottom side-- and right now we're going towards the lower end of that S&P range, closer to 3,200-- I think that should still be supported by-- we will see some headlines over the next weeks and months about progress on COVID. Remember, markets look ahead. So if they can get some belief or have more confidence that there is a vaccine or therapeutic coming closer, that should help blunt the downside as a whole, I think is one of the most important things.
That other side is, you know, the Fed's going to continue to stay very stimulated. And look at today. Even on a big down day, look at the 10 Year Treasury. It's relatively flat. It's not really providing much of a ballast as a whole. So I think the relative valuations still support stocks. And we would say, as again-- towards the low end of this range-- we would be leaning in, averaging in, into that uncertainty because our big picture is we're in a multi-year bull market. And what we've been trying to tell our clients recently is, don't worry so much about the next 5% or 10%. Think about the next 50% or 60%. If we are truly in a bull market, bull markets tend to last or have an average gain of well over 100%. So that means there's still some upside. But the admission price to this market is this uncertainty and the carousel of concerns that we're seeing is likely to continue near term.
MYLES UDLAND: And so then, Keith, as you think about-- and you know, the 10 year is a very interesting part of this conversation because over the last couple of weeks we saw such a steepening of the yield curve. And when we see big moves in the bond market, there's always a, well what do bonds know that stocks don't? And so to maybe reframe that through what we're seeing today and just this week with the 10 year coming in a little-- but still 77 basis points-- is high for where the 10 year's been. What do you think maybe the bond market is suggesting about the economic cycle now that-- that stocks maybe aren't as convinced of-- at least in the last couple sessions.
KEITH LERNER: Well I think the bond market is still pricing in a potential of a Democratic sweep and therefore more supply either way. But I do think it's something. You know, on days like today, I always look market to market and say, well, OK. What are some things that are acting differently? What are some areas that are showing some relative leadership? And what you noticed today, financials are acting not-- not great necessarily, but the regional banks are acting much better. So we're not overweight there, but I would say that's the area that's trying to act better in our work.
You'd see today-- after some weakness recently-- the home builders are relatively flat. That's-- you know, that's a good sign because those are very economically sensitive. And then looking overseas. You know, we're making new relative lows in developed international, so we still would be underweight on that part. What also standing out to us more recently is-- is Asia-- and China, specifically, is acting very well. In fact, China just made new relative highs to the S&P and relative to the Emerging Markets Index. So, I guess you use these points to see, where's the leadership likely to be on the other side of this? And those are some positives that are starting to look more interesting to us.
MYLES UDLAND: And then Keith, real quick before we let you go. Obviously we've got a huge earnings day coming up tomorrow after the bell. We saw that pretty good number from Microsoft last night, but didn't really do a lot for the market overall. Do you expect that that kind of theme-- and we've seen it a lot this quarter where companies are doing better than expected-- even raising guidance-- and the stocks are just not getting rewarded. You expect that's going to continue as we get through third quarter earnings here?
KEITH LERNER: Yeah, as you mentioned, we have had a great earnings season as far as the numbers but the reaction's been less so. And I think because the COVID numbers, the uncertainty about the election, it's being overlooked. But I think what's underappreciated and why we're still positive on the other side of this is we think the earning powers for the S&P as a whole is stronger than-- than the market anticipates. But to your point, I think that main thing is, we'll be looking closely tomorrow-- not just at the numbers tomorrow-- but how they act. It was disappointing the way Microsoft acted but that was just one stock. And now these stocks actually have lower expectations, now, going into that. So I think in some ways you might see some positive surprises there.
MYLES UDLAND: All right, Keith Lerner, Chief Market Strategist with Truist SunTrust Advisory Services. Keith, always great to get your thoughts. We'll talk to you soon.
KEITH LERNER: Great to be with you. Thanks so much.