Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss today’s market action with Victoria Fernandez, Chief Market Strategist at Crossmark Global Investments.
ALEXIS CHRISTOFORUS: Let's get back to the markets now and welcome in Victoria Fernandez, Crossmark Global's Investment Chief Market Strategist. Victoria, always good to see you. So what are your thoughts? Let me just get your thoughts on earnings so far today from the big banks. Were you surprised they were able to beat, and beat by as much as they did, given all of the headwinds facing the sector right now?
VICTORIA FERNANDEZ: Alexis, it was a pretty substantial beat by both JPMorgan and Citi. I wasn't surprised that they were better than expectations, but it was a pretty wide spread there. And so I think that's pretty positive to kick off the earnings season. I did think we'd see more of a positive move in the markets based on those and adding in J&J that beat expectations as well. So I'm a little surprised that here at the opening bell that we're down as much as we are in the Dow and the S&P.
However, I do think it sets a nice bar going into earnings season. I think it shows us that even though we've gone through all of these struggles and the pandemic over the last six months that some of these companies that we were most concerned about, including banks, along with the fact that we have rates on the short end tied to 0 with the Federal Reserve, that they're still able to come out and have positive earnings. So I think it's a good thing for the trend in the market to continue moving higher after we had this pullback over the last couple of weeks.
BRIAN SOZZI: Victoria, Delta's quarter really disturbs me for numerous reasons, outside the fact that their loss was really eye-popping. One, that they're going to delay $5 billion worth of purchases through 2025. They're retiring 400 planes. You take a step back, that has real-world economic effects. And then you have a stock market continuing to rally. Somewhere, there's a disconnect. Who's right and who's wrong?
VICTORIA FERNANDEZ: Well, I think when you're looking at a sector like the airlines that we know have just been pummeled through this pandemic, and when you look at cruise lines-- when you look at some of these areas that have been the hardest hit, I think people give them a little bit of a pass in the sense that that is not going to drive the entire market. They know that they're in a special situation.
I traveled this past week, and I can tell you, I was shocked at how many people were actually on my flights. We didn't have a lot of empty middle seats. People were on there. They were all wearing their masks. But I think there's a little bit more comfort level that we're starting to see. So hopefully, over the next couple quarters, we're going to see Delta, American, United start to put up better numbers.
But I do think that at this point in time, there's still that tremendous drag that they have. They're losing so much money every day, just in their general working environment that they have. So I think that's a special situation we have to look at. The rest of the market is a different story, and I think that's probably where we should be looking for the underlying fundamentals.
BRIAN SOZZI: Victoria, staying on Delta, the CFO mentioned, on the press release, they see at least two years until some form normalized environment returns to travel. Whatever that environment is, it's anybody's guess. But does that trade-- do the airlines, do the cruise lines-- can they survive another two years at these types of demand levels?
VICTORIA FERNANDEZ: I'm not sure they can at these levels that we're seeing right now. However, I do think that we're starting to see-- when you look at TSA checkpoint levels, we're starting to see that traffic build ever so slightly. If we can continue that progress, if we can continue to not have any kind of massive breakouts that happen, especially in travel-related industries, on planes or on cruise ships-- which cruise ships aren't working right now-- but on planes at least, then they're going to continue to do a little bit better.
I would look for consolidations coming in these spaces because, obviously, they're not going to-- everyone's not going to be able to survive this. They're going to have to have some kind of consolidation going forward if this last another two years.
We don't own any airlines or cruise lines in our large cap equity portfolio. It's an area that we just don't feel comfortable in. So I would be cautious. But if it's-- if you're a person that likes to go in and kind of buy at the absolute lowest, then do your homework, find the ones that have the best balance sheets, and pull those into your portfolio if you so desire.
ALEXIS CHRISTOFORUS: All right, so you don't have any of the cruise lines, don't have any of the airlines. What are you doing with your holdings right now, inside of three weeks of this election, with so many question marks hanging over our heads?
VICTORIA FERNANDEZ: We've had a conference with our clients over the last couple of months about the election and how we're positioning our portfolio with that. Normally, in an election year, we would be looking at the different administrations, determining what their policies are, and trying to figure out the best place to position based on that.
This year, as we know, none of the typical things really reflect what's going on in the market. It's all being COVID-driven. We think the highest upside and downside risks belong to COVID. A vaccine is going to be your upside. Continued outbreaks is going to be on your downside.
So we're trying to actually do a barbell portfolio. We're taking, still, some of those tech names. We have Apple. We have Amazon. We have Microsoft. Even though we've trimmed some of these names because they had become such a large percentage of the portfolio, they're in our portfolio still as holdings. But we've added other names. We've added Visa. We like that part of the financial world. Obviously, more and more credit card issuance is happening and more credit card transactions are happening.
We like Broadcom. It's part of that secular growth space, part of that communication space that's going to go along with 5G and data infrastructure. But we also like names like Walmart and names like McCormick. We've talked about those before, too. So I think you can build a barbell portfolio, where you've got some secular growth, some higher tech names, but you also have more of those value, kind of staple names in there to help balance it out.
BRIAN SOZZI: Victoria, it sounds as if you're building a more defensive portfolio into the election. I mean, do you expect a big spike in volatility come November 4?
VICTORIA FERNANDEZ: I think that volatility is going to be from now until November 4. When you look at the futures, you see that they're really spiking right now. We're not seeing it so much in the fixed income markets. The MOVE Index has been pretty stable, and we've seen 10-year yields stay really stable as well, a little pop out over the last week. I think you have that knee-jerk reaction after the election. We saw it in 2016.
But after, that things start to calm down. Again, I don't think which administration comes in in January is going to be a huge driver of the market at this point in time until our COVID issues have been resolved. So I think volatility from now until the election peaks, and then we start to level off a little bit after that
JARED BLIKRE: Hi, there. Good to see you again. I want to expand on something you just said. You mentioned the MOVE Index, and that's been brought down heavily correlated with the increase in the Fed's balance sheet. So their QE4 really brought down volatility in the Treasury market-- arguably, other markets as well.
But we've had some rumblings that the Fed stands ready to increase asset purchases, maybe apply some yield curve control, cap the longer and the rate curve here. What does this portend for the various sectors? I mean, we've got bank earnings this week. You could say maybe that's going to cap their profitability as well. How do you see that playing out?
VICTORIA FERNANDEZ: Yeah, Jared. You're right. When you look at the money supply, there's been quite a bit of growth there. And you have people concerned that maybe we're going to see inflation coming from that, which I don't think is the case. I think we're actually going to see a steeper yield curve. The 10-year, the longer part of the curve, has gone up a few basis points over the last week and a half or so. I think we'll continue to see a little bit of that, but we know the short end is going to be held at the low end of the curve.
And that's going to help banks. That steeper yield curve should help them going forward. JPMorgan is actually a name we added in our portfolio over the last quarter. We're not huge fans of the banks, but we feel that they're probably the best positioned for that. But I think your bond market and the credit market in general, because we've seen spreads widen out a little bit, maybe about 10 basis points over the last couple of weeks.
But I think they're telling you that the underlying fundamentals are still good, that the Fed is going to be there and provide that support that they said they're going to have. And so that fixed income market is pretty steady. It's more of the headline news that we see moving the equity markets right now.
ALEXIS CHRISTOFORUS: Victoria, you mentioned a moment ago, you do hold Walmart. What are you doing with retail stocks as we head into the holiday shopping season? And you know what? It might have just kicked off today with Amazon Prime.
VICTORIA FERNANDEZ: You're right. And those are probably our two largest retail names would be Amazon and Walmart right now. We see them as the two largest players in this space. It's going to be kind of like a MasterCard and Visa or a Home Depot/Lowe's relationship going there. Home Depot, we have a little bit of exposure to which we would consider retail, in relation to the housing market, which has been extremely strong.
But we know e-commerce is going to be big. We know this is typically a really strong seasonal time for retail. And we think it's going to continue to be on that e-commerce side. Who's got the strength in e-commerce? It's Walmart and it's Amazon. You've got Prime Day for Amazon. Walmart just put in Walmart Plus. And they've really been growing that order-online-and-pick-up-at-the-store, so we think that's going to be tremendous for them in the holiday season. Those are the two players we think have the best advantage.
BRIAN SOZZI: Victoria, on Walmart-- but ultimately, don't you think Prime Day is going to suck sales out of Walmart? And also, with Walmart, doesn't that mean Target could lose here, too?
VICTORIA FERNANDEZ: Yeah, I think Target is going to be your area where you're going to see people pulled away, and they'll move more to the Walmart and to the Amazon. We kind of look at Target-- I was talking to our equity analyst. He sees Target is kind of the Nordstrom, in the clothing, department store space, where they have really good items. They have good customer service. But they just can't seem to catch up with some of the bigger players. And I think that's the situation they're going to be in going into the holiday season.
I don't think you're going to see too much being pulled from Walmart for Amazon Prime. Obviously, Prime Days, they're going to have huge amounts of sales. But Walmart always tends to come out and put out some advertisements, to put specials as well on their website, and you have a huge growth in the people that are going into Walmart Plus coming from Amazon Prime. I think I saw numbers that close to 19% of their sign-ons are coming from Amazon Prime. So there is some potential there to take a little bit of their consumer base.
ALEXIS CHRISTOFORUS: All right. Victoria Fernandez, Chief Market Strategist at Crossmark, good to see you. Thanks so much.
VICTORIA FERNANDEZ: Likewise.