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Election outcome will bring 'clarity' for investors: State Street Strategist

US SPDR Business at State Street Global Advisors Chief Investment Strategist Michael Arone joins the On the Move panel to discuss the latest market action.

Video Transcript

- Thank you.

JULIE HYMAN: Let's [INAUDIBLE] it out and talk about earnings and generally for the markets here. Michael Arone is joining us now. He is US SPDR-- he is head of the US SPDR Business and chief investment strategist there at State Street Global Advisors.

Michael, it's always good to talk to you. Let's talk about earnings more broadly here because going into the beginning of this season, we had seen expectations coming up. JPMorgan and Citigroup both beat today. Both stocks are down. Can we extrapolate anything from that for the remainder of the season and kind of where expectations are versus where action is going to be?

MICHAEL ARONE: It's still early, but I do think that there is a notable shift here in earnings expectations with the JPMorgan and some of the earlier announcements today. So I think-- if you look at the second quarter, I think expectations were really depressed, and companies easily stepped over them and investors celebrated-- you know, a sigh of relief that the worst didn't happen.

I think this quarter what's really interesting is that back in June, earnings for this quarter were expected to decline by more than 25% year over year. That number is now 20%-- still ugly numbers, but a much bigger improvement. And typically earnings are being [INAUDIBLE] into earnings seasons, you know, bracing for the worst to allow companies for step over them. This time expectations-- that bar has been raised. And I think early on today you're seeing that maybe investors are going to require more from companies in terms of beating those expectations this time around.

ADAM SHAPIRO: Michael, picking up on what you just said about expecting more, and something that Marty just said about deposit growth at the banks-- there's a huge amount of cash that's doing nothing right now. I think one figure is $2 trillion since the pandemic locked down. Americans have started saving. Are investors seeing enough to release that money to come back into equities, or is it going to be into next year before we start to see that flow?

MICHAEL ARONE: Well, I think that investors are a bit on the sidelines given the kind of uncertainty about the US election. So I think there's a number of risks that have been well known, so they're not coming out of left field. They're not big surprises. They're not going to be black swans. They've been well known for a while.

But I think the outcomes have started to tilt maybe a little bit more negatively, a little bit more uncertain, and maybe some of the kind of probabilities here are a bit wider than we thought. You folks are just doing the J&J news in terms of the vaccine, and this very public debate about when it's going to be ready, you know, what's the timing? What's the broad spread availability?

And I would put the election uncertainty in this mix. You know, we have the Supreme Court kind of nomination hearings going on in the Senate, the fiscal cliff, the ebb and flow there. So I think what's happened is that a number of these risks have been well-known, but they're starting to become a little less uncertain. And I think we'll get clarity once we get an election outcome, but we're not going to have that for at least a few weeks from that standpoint.

JARED BLIKRE: Jared Blikre here. I want to ask you, as part of your job I would think you have a pretty unique view of the equities markets. You have-- you oversee some of the biggest ETFs on earth like SPY for the S&P 500 in the various sectors, XLF, actually what have you. Have you noticed anything in terms of the fund flows or maybe some kind of within-sight into investment strategies that you can share some of that with us-- some of the trends that are going on?

MICHAEL ARONE: So I do think that given Biden's lead in the national polls, given President Trump's positive COVID test, and, you know, again, whether we're going to debate or not, whether the Rose Garden ceremony was a super-spreader or not-- just the fact that the pandemic became more the conversation about the election and not kind of a choice between two candidates-- meaning it was much more a referendum on the Trump administration's handling of the pandemic and much less about the policy differences between the two candidates.

I think that combined with Biden's lead increasing in national polls has resulted in folks beginning to pivot towards things that might benefit from a greater-- from a Biden administration. So, for example, you're seeing clean energy stocks-- in particular, those that are from a climate perspective-- you're really seeing the performance and the flows alongside of those pretty strongly from that perspective. You're also seeing kind of industrials, materials, as anticipation of a much larger government spending package and a much softer kind of tone on trade, greater globalization trends, and kind of multilateralism. So I think there's a feeling that industrials, materials, those types of areas will perform well under that scenario alongside of kind of clean energy, for example.

JULIE HYMAN: Interesting. Michael, thank you. Michael Arone is chief investment strategist at State Street Global Advisors US SPDR business. Thank you. Appreciate it.