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'We definitely have a tailwind with inflation': Strategist

Frances Newton Stacy, Optimal Capital Director of Strategy, joined Yahoo Finance to discuss her biggest concerns regarding the market in the coming weeks and how the election will impact the market.

Video Transcript

ADAM SHAPIRO: Frances Newton Stacy, Optimal Capital Director of Strategy. It's good to have you here, Frances. And the big picture here, you know a lot of people freaking out as we were heading to this, but it seems as if we're going to have a victor eventually. So what should the average investor do as we go forward, whether we get an outcome tonight or not?

FRANCES NEWTON STACY: Well, I think it's really interesting that the markets were going a bit crazy. We did have an 8% correction in the S&P 500 ahead of this. And then yesterday's rally was notably about 14% off of the average volume for the last month. And so that's kind of interesting.

And I like to think of markets as rubber bands. So you pull them and pull them and pull them, and then you have a percentage of snap back, if you will. And you have a bit of an overcorrection and a play. We're also seeing that in oil today. Because, you know, the Biden and blue wave thing was pretty well priced into the energy markets, with all of the solar companies being bid up and then also the oil companies going down. And we're seeing a little bit of an uptick in oil. There's some OPEC news, but you see these things as kind of a rubber band reaction.

Moving forward, though, we have a couple of things. We definitely have a tailwind with inflation, which is really interesting. And we know that because we are sort of de facto in modern monetary theory at the moment, where we have had a record amount of stimulus, we have a record amount of money in the M2 money supply, and we are counting on fiscal stimulus coming forward. And that's going to be very deflationary for the dollar. So as the longer term plays out, some of the policies may be different between the two administrations, and particularly, which way the Senate goes. But this inflationary play looks to be the trend moving forward, just because of where we are in a noose with stimulus.

SEANA SMITH: And Frances, going off that, I know you closely watch a lot of those technical levels. And in your notes, you said that despite that election volatility, markets are holding some of those key technical support levels. What are you watching specifically, just into the close today, and then also as we look out for the remainder of the trading week?

FRANCES NEWTON STACY: Well, what I'd like to see is that sort of September 23 low. We have a higher low off of that. And if that holds, a higher low is quintessentially bullish, and that would sort of indicate that a lot of the volatility was priced in. I also, relatively speaking, volatility is still enormously elevated. So there is risk, there is chop. The news cycle is going to play out over the next week about the election. But I think that if that low holds, from the technical perspective, then, you know, we're probably off to the races again with fiscal stimulus.

However, if you take that low out, there's a lot of air underneath there. Because we've had, you know, we had such a precipitous rise from the bottom in March that that angle is very steep. So anytime you're looking, from a technical perspective, at a reversion to the mean, which means kind of smoothing that angle back into a more sustainable place, there's a big air pocket under those lows. So that's really what I'm watching.

On the top end, when we get there, you know, the all-time high on the 2nd of September, there was a large catalyst in the options market. You had a lot of sort of artificial demand where you had, you know, guys, you know, the dealers were selling those calls. So they were covering their calls by buying the underlying stock. So then you have to have a catalyst that competes with that in order to match that price level. Anyway, we're a ways off, so we don't have to worry about that. But that's what I will be looking at if it continues to go up, as far as testing those highs.

ADAM SHAPIRO: You know, Frances, one way or another, we do get stimulus. But there's something that investors who like to have an individual stock, for instance, may be playing here. And you know, Robert Lighthizer, the trade representative, talked about 400,000 manufacturing jobs being created during the Trump administration. But the majority of those actually came in the first year, before the first tranche of tariffs were put in. We still have those tariffs. We still have all of that after this election.

So looking at that, what does, you know, what does an investor do who's looking perhaps at some individual stocks, looking at essentially a slump in manufacturing growth that goes back before the pandemic, back to 2018?

FRANCES NEWTON STACY: Yeah, you make such an excellent point. Because really, when you look at the business cycle, which for me is the determining factor of how policy is going to affect markets, it's beneath the backdrop of that business cycle. You know, China topped out, China and Europe actually topped out in the third quarter of 2017. We topped out with CapEx and manufacturing in the third quarter of 2018. And that CapEx and that manufacturing has been on the decline since. And it's interesting because that was right around the tax cut era, and then we did see manufacturing slump off.

Now COVID has sort of put an anomaly into the whole scenario with, you know, obviously you had, you know, some anomaly in the jobs market. But for the year of 2020, we're still looking at a negative print of 4% on GDP, which is the most negative print since World War II. So to think that we're out of the woods or that they're not going to be any effects going forward, particularly in manufacturing and job creation, obviously we would be naive.

When you think about the tech stocks, a lot of that was the stay-at-home play, right? So let's see who wins the presidency. But even if Biden wins the presidency, and he's for, you know, lockdowns if the COVID cases remain elevated, et cetera, he's not going to have the authority to implement that until January. So for right now, it looks like the tech bubble has kind of burst. So even though you have these different ideologies, you know, some of these things, whether an administration affects things like manufacturing, it's just not going to happen until January. That's not to say markets won't price it in very early.

But I can tell you a recovery in all of these things, there's a little bit of a thing lurking in the background that I haven't heard anyone on TV talk about that I think is very important. And while you have a record in the M2 money supply, meaning we have a record amount of money in circulation from the dual stimulus efforts, from monetary and fiscal policy thus far. The velocity of money has fallen off of a cliff, as far as the ratio goes. We're actually lower than we've ever been since the '60s, going back to the '60s.

And so what that really means is that even though all this money is being pumped into circulation, it's not moving. That is going to be something that the administration going forward into the end of the year, and also the next administration, whether it be Trump or Biden, is going to really have to contend with. Because that is sort of depression-like statistics. And the thing is is that there's a fallacy about the velocity of money. But money has to move. You can't just pump it in circulation.