Major indices higher in volatile session

Ed Clissold, Chief U.S. Strategist for Ned Davis Research, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss the latest market action.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, we've got Ed Clissold back with us now, Chief US Strategist for Ned Davis. Good morning, Ed. What do you make of this market activity? You know, Jared just saying, we're not out of the woods yet. We're getting bad news today-- McDonald's out with dismal sales numbers, not a great forecast going forward.

Why are we finding sort of pockets to rally in this market right now?

ED CLISSOLD: Well, the reaction was so strong on the downside, the fastest decline into a bear market on record. And so from there, you're going to get a massive rebound. And that's certainly what we have seen. And from here, the data is going to be a little bit more sobering. You're going to see companies come out with some pretty dire forecasts. And the market's going to have to adjust to that. And there's going to be some more winners and losers as we go, rather than just the entire market going down and the entire market going up at the same time.

BRIAN SOZZI: Ed, Brian Sozzi here. I liked your note-- and you made a very key point. The market is in a four-step bottoming process. What inning are we in, in that process?

ED CLISSOLD: Yeah, so the four steps are a waterfall decline to have being oversold. Then you get rallies, retests, and finally you get breath rest as the fourth step.

So we're in the second step. We're getting those rallies. Retests are very common. Of the 13 previous waterfall declines since 1929, all of them except for one had a retest. And nine of those 13 times, you actually went lower than the waterfall decline low on the retest. So a move lower as, again, this data comes in that's going to be pretty disappointing, wouldn't be terribly surprising.

So that's where we are in the bottoming process. We're really in stage two, the rallying phase.

ALEXIS CHRISTOFOROUS: Ed, what about earnings? Do we even have estimates for what we might be looking at here for Q2 for many companies? I mean, already the few that have come out-- Levi's had a really nice quarter, but saying, you know, we cannot give real guidance here for the rest of the year. Because there just is no clarity with this pandemic as a backdrop.

ED CLISSOLD: Yeah, any sort of earnings estimate is really sticking your finger in the air and guessing which way the wind's blowing. So to give you perspective, we looked at years when, you know, different segments of the economy like commodity sectors, globally-oriented sectors, banking , and also social distancing sectors were in pretty dire circumstances, like 2008 or 2015 for commodities.

You know, earnings were down about 25% in that. And if you look at it from that vantage point-- again, that's across the entire S&P 500-- but that's just one way to look at it. I think the challenge here is that the market is going to move before the earnings.

On average, the S&P 500 bottoms four months before the end of a recession. It may be a little bit more compressed this time because it's a unique cycle. But the important thing to keep in mind is by the time the earnings data comes through and tells you that was the bottom, the market's probably going to be up considerably from the lows.

BRIAN SOZZI: And bigger picture here, we have companies taking on debt, in some cases, for the first time ever. We just talked to Shake Shack CEO Randy Garutti the other day. They just took out $50 million in debt from their credit for the first time in company history. McDonald's, out this morning raising $6.5 billion. These are just two stories.

Do you think corporate America is being somewhat permanently damaged here? And if so, we can't get another sustained rally in these markets at least for another year or two.

ED CLISSOLD: Well, if these high quality companies can bar for very cheap interest rates, I think that it's quite possible the market can rally. Again, the market's going to move before the fundamentals. The question is, how long is this going to go on? Is this a one-time debt load to get through the next few months? I think the market will look past it. If this is something that lingers on for several quarters, another year and a half, then that's a totally different ballgame.

I think in terms of debt, my bigger concern is on the consumer side. You're going to have a lot of people who are going to have to climb out of not having much of any income for a few months. And that's going to hit consumer spending. And remember, that 70% of the US economy. So that's where, I think, the challenge is going to be on the debt side.

ALEXIS CHRISTOFOROUS: All right, Ed Clissold, Chief US Strategist for Ned Davis. Thanks for your time today.

ED CLISSOLD: Thanks for having me.