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ETFs to watch amid election uncertainty

Yahoo Finance’s Alexis Christoforous and Cinthia Murphy, Managing Editor of ETF.com, discuss ETFs to watch amid election uncertainty.

Video Transcript

ALEXIS CHRISTOFOROUS: Cinthia, good to have you here. Just when you look at this really breathtaking market rally right now, are you to conclude that investors are banking on gridlock in Washington? And could investors maybe just maybe be getting a little ahead of themselves right here?

CINTHIA MURPHY: Hi, Alexis. It's been a fascinating day, however you slice it. A couple things that I think are interesting that stand out here if you look at how the ETFs have performed, is that you are seeing really a lot of strength in stocks. You're also seeing strength in bonds.

So there's a little bit of a mixed messaging here on one side, where the stock market likes gridlock, as we've heard plenty of today. But on the other side is there's some concern about the future, economic growth specifically. Because, you know, that end of the yield curve is flattening a little bit. That suggests concerns about economic growth going forward.

So there's a little bit of a double play going on today, where you're seeing risk on back with stocks, particularly tech stocks leading sharply. But you're also seeing that caution as you look farther down the line on what this all means, how this all shakes up, and what comes next. I think at the end of the day, you know, there's a lot of historical evidence that rule actions in the White House means less for the stock market than how the types of regulation, things that are on the plate.

And this year specifically has all been about COVID. I think there's a lot of concern about, you know, is there going to be another shutdown? Is there going to be a slowdown in this reopening trade that was taking hold in October? And that's, I think, coming more to the forefront, now that we got past the Election Day.

The outcome is still uncertain. But it's leaning in certain ways. So there's a little bit of a calm there that we may not know what's coming. And I think we're seeing that play out in the markets.

ALEXIS CHRISTOFOROUS: You just touched on large cap tech stocks. They are going through the roof today-- Facebook, Amazon, Apple, Twitter. Are these stocks rallying mostly because of the failure of a Democratic sweep in the House and the Senate, meaning that there may be less regulation in whatever administration is in the White House?

CINTHIA MURPHY: Yeah, these stocks and the ETFs that own them have really had a phenomenal year up until October. And then in October, they lost all that steam. And it became this whole conversation about, you know what? It's time to go away from growth. Let's go value. Let's go small caps because these are the cyclical trades of a reopening economy, beginning of cycle type of trade.

And now, you know, we move forward a month. These stocks are basically on sale. They're down 10% or so from a month ago. So it's a good buying opportunity. You no longer have as many concerns about antitrust regulation and higher corporate taxes, things that would really impact the tech sector dramatically. Now that's a little bit off the table because of this gridlock in the government.

And they are considered, actually, safety plays. As much as they're super risk on because they're growth stocks, they're high quality companies that have a lot of cash on their books. And so people are actually turning to them as kind of growth right now. It's kind of a safe play at the moment.

Whereas small cap value are actually underperforming today significantly because, again, you know, at least in Illinois-- I'm in Chicago-- we're back shutting down everything beginning this weekend. It's the opposite of the economy reopening trade. So I think investors are moving back to what has worked up to now, which has been growth in tech.

ALEXIS CHRISTOFOROUS: Cinthia, lost in the sauce here is the Federal Reserve meeting, which kicked off today. The decision comes out tomorrow at 2 o'clock. We're going to have that live on this show, followed by Chairman Jay Powell's press conference. But do you think that regardless of who wins the White House, Powell remains head of the Federal Reserve? And what are you expecting from tomorrow's meeting?

CINTHIA MURPHY: You know, who remains at the head is anyone's guess. I think if we've learned anything through this election cycle, is the business of guessing outcomes does not pay off. We're in the business of being surprised, more often than not. I do think all eyes are on the Fed. I think Fed action will be way more important than this election at the moment.

Everyone wants to know, will there be a stimulus? Is it going to be big? I think market action today suggests people are more optimistic about more stimulus ahead, which would really help things move forward. And I think the outcome will be really important to where we go from here tomorrow, even if the election stays-- remains contested for now.