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Investment has put ‘far too much focus’ on the election: Strategist

Invesco Global Market Strategist Brian Levitt joins Yahoo Finance’s Kristin Myers to break down the latest market action, as stocks react on new stimulus negotiations.

Video Transcript

KRISTIN MYERS: But first, let's talk about the markets. We're joined now by Brian Levitt, Invesco Global market strategist. Brian, always great to talk with you. I want to start with the news on stimulus. It seems to be what everyone's been talking about lately, especially this week with all the back and forth between the White House, the Republicans, and the Democrats.

So I want to start there. Wondering if when we finally get a deal done, because it seems to be fairly positive the president now encouraging these negotiations after walking back. So how much of a boost do you think to the markets there will be to the upside when that deal finally comes through?

BRIAN LEVITT: Well, I like to hear that we're seeing it finally comes through. I mean, you know, Churchill used to say that Americans always do the right thing, but only after exhausting all other options. So let's hope that we've exhausted those options, and we will see more fiscal support come through.

And we know how markets behave. Markets tend to get out in front of these things. So there's always a little bit of a buy the rumor, sell the news type of mentality to market. So the markets are pricing in a better outcome on the fiscal side.

I think what's more important for investors, though, is over the next couple of years, what does it mean for markets, not over the next days or weeks. Over the next couple of years, we would expect the recovery to play out maybe with some fits and starts and some uncertain days along the way. But recovery is going to play out. And I expect over the next couple of years, the markets will be higher than where they are today.

KRISTIN MYERS: I know you're talking and thinking long term, but I want to ask you more about the immediate term. In your note, you had written that markets are poised to go higher in the immediate term. Wondering if you see the election perhaps as a date that would end that upside.

BRIAN LEVITT: I mean, look, you know, historically, elections don't have anywhere near the consequence for markets that many people suspect that they do. Over time, you find that markets have done just fine under most presidents across both political parties. So I think investors put far too much focus on it.

The risk with the election, of course, is that you may have a contested election for a while. And it could end up in the courts without us knowing the outcome for some weeks. And, you know, we know that policy uncertainty could create some market volatility. So it's not to say that there might not be some volatility in the near term. I think the markets are expecting it. A lot of investor participants are expecting it.

But I always remind investors, again, going back to that intermediate to longer term time horizon, does that type of event change your view on what the trajectory of the economy is going to be or what the trajectory of monetary policy is going to be? And in both instances, I would suggest that a contested election or not knowing the election for some time is unlikely to change the trajectory of this economy.

KRISTIN MYERS: So you're not necessarily expecting markets to become too volatile around the elections then?

BRIAN LEVITT: Well, we have some precedent for this. We saw in 2000 then when we didn't know the outcome of Al Gore versus George W. Bush, the market fell about 5% between November 7th through December 13th. And it was also a little bit of a different environment. The tech bubble had just broke, and the Fed had just raised rates multiple times. We were in the early stages of a recession.

But nonetheless, you know, volatility did arise in markets. So I don't want to sugarcoat anything. For the longer, there's policy uncertainty the more volatility you may have in markets. The question for investors is, does that volatility represent the end of what is the early stages of an economic recovery? Or does that volatility represent a potential buying opportunity in what is likely to be a prolonged, protracted economic recovery?

KRISTIN MYERS: So, Brian, I want to talk to you about your note because it does mention some of this. You, of course, saying that you shouldn't bake too much of politics into the market moves. But a lot of folks are thinking that if Biden wins-- and right now, he is-- he does have a considerable and sizable lead in the polls right now.

A lot of investors, of course, are thinking about that tax increase, specifically on Americans earning more than $400,000. We were chatting about this just yesterday. So how do you think the markets would react to a Biden victory, particularly around those tax increases?

BRIAN LEVITT: I suspect that, you know, first, we've got-- Biden has to win, then needs single party rule, then needs to decide what the mandate is within that single party rule and what they want to press forward with. And this would be the first time that the Democrats would have single party rule, should the outcome go that way, in a decade.

And they would need to decide if they want to use that political mandate, which might be fleeting, use that political mandate to raise taxes. Or would they instead do what the Obama administration did, which, of course, Joe Biden was a prominent part of, which was to stimulate economic activity, or at least, attempt to and extend the Bush era tax cuts for multiple years.

In fact, we didn't see the capital gains rate go up until 2013 under the Obama administration. So I think investors thinking that tax rates are going to go up automatically, I suspect that those are talking points in a campaign trail.

But if, and still a big if, Biden wins with single party rule, I don't imagine that's what they use the political mandate to. I think they instead use it to try and stimulate the economy, which the markets would view as promising.

KRISTIN MYERS: And as I had mentioned, Brian, we were talking about this just yesterday. So as a reminder for everyone at home, we actually did go through an analysis of Biden's tax proposal. And only 1.9% of Americans will actually be facing some sort of increase. So it will affect, I think, far fewer Americans than some folks had originally thought.

One last question for you here, Brian. We've got earnings season kicking off next week. Last time, it seemed as if analysts were so downbeat that a lot of companies were actually able to report beats, and even in the midst of a pandemic. What are you expecting come next week?

BRIAN LEVITT: Yeah, I feel like that happens almost every quarter. Every quarter, we assess it, and we find that most businesses tend to outpace what the analysts had expected for earnings. We know it's going to be a mixed bag. I mean, obviously, the more cyclical businesses are going to continue to report pretty poor earnings.

We know that if you're in the entertainment or the arts business and some of these other things that require Americans to engage in the economy, that we're going to see some pressure. But you're going to find also that the technology companies, the non-cyclicals, the stay-at-home type of stocks still had a very good third quarter. So it's a mixed bag.

I think what's more important for investors, rather than trying to parse earnings in what is a pretty disastrous couple of quarters, is to instead assess what we think about the recover-- what we think the recovery is going to look like.

How can we either, once again, compress COVID cases? How can we re-engage in the economy in ways that we keep ourselves safe? And at what point does medicine science, human ingenuity start to get out in front of this?

So, earnings, you'll see the usual probably percentage of beats. It'll be split between the cyclicals and the non-cyclicals. But what's far more important for investors is what the next quarters look like, not what happened in the quarter behind us.

KRISTIN MYERS: All right, well, always good to chat with you, Brian Levitt--

BRIAN LEVITT: You, too.

KRISTIN MYERS: --Invesco global market strategist, thanks for joining.

BRIAN LEVITT: Thank you.