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Investors 'can get whipsawed by the daily, weekly, monthly volatility': Market Expert

Lori Heinel, State Street Global Advisors Deputy Global CIO, joins Yahoo Finance's The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets on Thursday morning.

Video Transcript

BRIAN SOZZI: All right, let's step back in the markets here with Lori Heinel, deputy global CIO at State Street Global Advisors. Lori, last time I think we talked to you, you were trimming your positions a little bit. What have you been up to since and why?

LORI HEINEL: Yes, as you mentioned, we had started to pare back our overweight to equities, part, actually, because the strong rally that we had had from the bottom, but also concerns about where we were heading into the fall. And we've continued to do that. We've selectively trimmed back positions in commodities, positions in REITs, and positions in equities globally.

ALEXIS CHRISTOFOROUS: And you say that you're overweight credit right now. Explain that to us.

LORI HEINEL: We are. Again, you have to put the money somewhere. And, of course, cash doesn't give you any kind of return. So we have been selectively looking at credit, including high-yield. We think there's good support there, as the Fed has been buying in many sectors of the credit markets. We also think that spreads have a bit more room to tighten.

And we think that the companies are largely in good shape. A lot of them have heavy cash balances. They're in relatively good position in terms of their kind of cash flow prospects. So we actually think that credit is a pretty good spot to put a little bit of capital against this kind of a backdrop.

BRIAN SOZZI: Lori, bring us into your-- I would say, I would guess Zoom calls, your planning meetings on Zoom calls ahead of the election. What do those discussions look like? How are you planning to manage your portfolios into the presidential election? We're only about 75 days away.

LORI HEINEL: That's right. And I think the word of the day is volatility, right? We've already had a lot of volatility associated with the pandemic and the sort of stops and starts as we look to reopen the economies globally. And this is going to add yet another dimension to that.

And when you look at the underlying policy imperatives of the two parties, they're quite different-- taxation policy, health care policy, energy policy. There are a variety of things that could be impacted depending upon the election outcome. So we're encouraging our investors to kind of buckle in, recognize this is going to be a pretty volatile time, and use things like buffers in their portfolio, look for diversifiers, look for ways to kind of insulate against some of the volatility that we're likely to see in the fall.

BRIAN SOZZI: Have you started to put any money to work in green sectors? We have have started to see some of those green-sector trades begin to percolate a bit.

LORI HEINEL: So it's less a focus on green sectors or impact investing writ large. But we have had this ongoing exploration about what ESG, or environmental social governance issues, mean for companies, and what material impacts some of these factors might have. So, certainly, part of that is looking at whether there are areas of the economy that could be beneficiaries as societies sort of look at their climate or their green footprint.

And some of it may be companies that might be vulnerable in that space because they've got stranded assets or other things going on. So it's less a thematic around green industries and more a better understanding about how those impacts might ultimately influence company performance.

ALEXIS CHRISTOFOROUS: Lori, I'm putting this to all of our markets guests this morning. How, if at all, are you hedging against a rise in volatility as we head into and then through out the other side of this election, especially with all of the uncertainty swirling around it, the fact that we may have a contested election? We may not know who the winner is the night of November 3. How are you hedging against that volatility?

LORI HEINEL: Yeah. Well, look, the first thing we're trying to convince all of our investors to do is to kind of think through this cycle, because you could easily get whipsawed by the daily, weekly, monthly trading activity. So don't just think in terms of the next three months, but try to think in terms of the next 18 months to two years. But having said that, certainly, there are some investors that are much more susceptible to some of the gyrations in the market.

So first and foremost, look at your allocation. So, as I mentioned earlier, we think there's better value in credit. That'll be more resilient than equities. So that's one thing to think about.

Within equities, look at those sectors that perhaps have a little bit more asymmetric payoff profile. Look at quality companies, those that aren't as leveraged, those that potentially do have some growth tailwinds at their back, irrespective of what we might see coming out of the election. Look at lower volatility kinds of equities as a way to participate in the markets, but also dampen that downside. So again, depending upon the client's current allocation position, there are a variety of things that you can do to try to manage some of those extreme tail risks.

BRIAN SOZZI: Lori, why are you still upbeat on US large caps?

LORI HEINEL: Well, look, that's where a lot of the gross is-- growth is coming from. And it's been, actually until the last day or so, it's been encouraging to see a little bit of a broadening of the market. But the bottom line is that the US is still favored by a lot of technology and being in the sweet spot in some of those industries that do have tailwinds of growth.

We also do think that we're starting to see a little bit more earnings visibility. Again, the pandemic throws a shadow across pretty much all investing at this stage in time. But relative to other regions across the world, we think that there's a bit more-- there's less earnings vulnerability within the US.

And then lastly, just again, this ongoing support, whether it be monetary or fiscal-- and again, we just talked a little bit ago about some of the bit of deadlock there in Washington. But we do think that, ultimately, both parties will be looking for some sort of a stimulus going to the election cycle.

ALEXIS CHRISTOFOROUS: And Lori, just what are your thoughts on Apple becoming now the new $2 trillion US company? Some are actually saying that that valuation is warranted.

LORI HEINEL: Well, look, it's been incredible. I can remember when we all thought that there would never be a $1 trillion company, let alone a $2 trillion company. So it's been just absolutely incredible to see some of these tech firms continue to get cash and have investors be interested in them. And certainly, the sentiment trade is a very, very strong one, so momentum is certainly on their side.

We have largely been underweight some of those higher-flying FAANG names across many of our active portfolios, in part because we did see better opportunities elsewhere. But you can't really stand in the way. They used to say "don't fight the Fed." Maybe now the tagline is "don't fight the FAANGs."

BRIAN SOZZI: Lori, I got 30 seconds left. I do want to ask you, one of Warren Buffett's favorite indicators, the Wilshire 5000, divided by US GDP is at a record high-- in fact, so high, it's at the same level as just before the internet bubble. Are you putting any stock in valuations in this environment that is really effectively awash with liquidity? And valuations continue to expand.

LORI HEINEL: Yeah, look, that's part of the reason why we have pared back modestly some of our positions in equities because of concerns about valuations here. But I would also say this is a different market than what we saw during the dot-com bubble. And these are companies that are actually making earnings and increasing their earnings. And we just talked a minute ago about Apple as one example of that. So while it may be a bit frothy in some sense, we're not in the same kind of extended valuations scenario that we were back in the dot.com bubble.

BRIAN SOZZI: All right, let's leave it there. Lori Heinel, deputy global CIO at State Street Global Advisors, always good to speak with you.