Wells Fargo Investment Institute Darrell Cronk joins The Final Round panel to break down how the election cycle and COVID-19 pandemic are playing into market volatility.
SEANA SMITH: We want to get to more on the markets action. We have the Dow and the S&P holding on to gains. It looks like the NASDAQ, though, closing in the red. And for that, we want to bring in Darrell Cronk. He's the Wells Fargo Investment Institute president.
And Darrell, when you take a-- we don't want to make too much of today's action. But I'm curious just to get your thought on what we saw play out this week and also what we saw play out today. Because it was a pretty volatile week here for the markets.
And then looking at today's action, we started the day very strong. The Dow was up over 200 points. We've come way off those highs of the day. We even had the NASDAQ closing in the red.
DARRELL CRONK: Yeah, that's a great point shot, Seana. I think the market's grappling with some realities. The reality is that fiscal stimulus probably doesn't come pre-election. And it may not come in the lame duck session, depending on negotiations.
It's grappling with the reality of what the elections mean. And if you kind of pull the covers back and look at where flow and dollars are going, they're starting to trend towards a Biden win. So if you look at things like ESG thematic, industrials, materials, even emerging markets are seeing positive flow, which would all be signs of a Biden win and be favorable trades or positioning relative to that.
And where you see outflows are in places like energy, financials, some of the health care sector, and utilities. Those, again, would be consistent with areas that would come under pressure under a Democratic administration.
I also think the markets are starting to grapple a little bit, too, with the path to a vaccine, which we've been talking about for some time. And certainly, I think there's some good news there, Seana, that we may get a vaccine by year end.
But the real important point is accessibility, right? When can we make it widespread in the population? Efficacy, right? How good is the vaccine? If the efficacy is only 60% effective, then that's not terribly good. And what about mutations on that?
So there's a lot of things that, here, the markets are finally starting to kind of grapple with and gain a reality on, as we move into some of those key events that it's been lamenting on for quite some time.
SEANA SMITH: Darrell, what about the state of the consumer, just how closely you're tracking that? Because we got those retail sales numbers out this morning. We also got consumer sentiment, which was better than expected. But of course, we have this big question now about when we would possibly get more stimulus.
DARRELL CRONK: Yeah, unfortunately, the world of the consumer is very bifurcated right now. So what you see is consumer spending at the upper income levels. So think retail sales. Blowout numbers we got today are quite strong. But then we know, with jobless claims rising again and more of your low end service sector having issues, that spending is going to tail off, particularly without a fiscal package.
The interesting thing is we're still seeing strong strength in the consumer sectors of the market. Technology continues to do well. Consumer discretionary does well overall, albeit it faded, to your good point, in the last hour of trade, but still is one of the top performing sectors, month to date, quarter to date, year to date.
So overall, the consumers remain really strong. I think the focus on the consumer will really start to shift here now at mid-October into what does the holiday season look like, and how robust is the consumer spending going to be for the holiday season, which I think is the next big wildcard around the consumer.
RICK NEWMAN: Hey, Darrell, Rick Newman here. Investors seem to have gotten accustomed to the idea that the Fed is basically putting some floor under stocks through QE to infinity and lower forever. Is there essentially no chance of a meaningful correction or a bear market over the next 12 months?
DARRELL CRONK: That's a good question, Rick. I don't think that's the case. You know, the Fed put is real and is there. I don't think the Fed does anything with interest rates. But what's built into the markets is the markets want to see the Fed not only continue to do more QE and purchases, but also, they want to see that fiscal help.
And the Fed speakers, presidents, governors, if you listen to them, have all been but begging for more fiscal help in any of the speeches they've given. So you could have a correction here. I don't think the Fed put precludes that from happening.
But the growth numbers, you know, have to hold up. And without a fiscal package, I think that's what we have to watch, is how much does economic growth really slow in the months of November and December without that fiscal support?
DAN HOWLEY: Darrell, I want to ask real quick. You were talking before about that we might get a vaccine by year's end, talking about the distribution, or the equitable distribution of it. But we just saw someone reinfected with the virus. I guess does that, you know, then bring up the question of, will the vaccine really be effective if people can be reinfected?
DARRELL CRONK: I think that's a really important point that doesn't get discussed enough, quite frankly. The reality is, so it's not just about discovering a vaccine and having the FDA pass the vaccine. And then, of course, we've known for some time we've got to ramp up production of the vaccine and get it out there into the public and widespread. There will certainly be groups that get it first, the most at-risk groups and the like.
But the real underappreciated point is the efficacy of the vaccine because we've sped it through FDA trials so we don't really know how effective it is. And then, to your exact point, the mutations of the virus. So it's not unusual at all for the mutations to happen, and then the vaccine becomes less effective, if not uneffective.
So we have to watch that considerably. And if you get sizable mutations that's going to delay this eventuality of finding kind of a COVID-19 cure, or at least a pathway to reopening, at some point here, we've either got to reopen the economy or reopen the fiscal checkbook, in our opinion, one of the two.
SEANA SMITH: Hey, Darrell, I want to ask you just about third quarter earnings because we've gotten some of the big banks' results this past week. And just overall, taking a step back, majority of the companies are beating expectations and beating by a pretty wide margin. How encouraged are you by this? And what are you expecting for the remainder of the third quarter earnings season?
DARRELL CRONK: Actually, I think third quarter earnings season is going to be strong. So it's interesting if you kind of backtrack a little bit. We walked into this with expectations of the quarter being down 26% year over year. We're starting the quarter this week at about 19% down. And we think you may finish as much as 14% down, which is closing the gap very materially, front end loaded with the financials this week.
What's interesting is we know the challenge on net interest margin spreads with where the interest rate curve is. We know the challenges on loan growth. But the sales and trading parts of the investment banking group are doing extraordinarily well.
The mortgage apps are doing extraordinarily well. The housing market's been really strong. Mortgage rates are down 200 basis points almost year over year, which is almost unheard of. In fact, I think we've set 10 new record lows year to date so far on the 30-year mortgage. So they continue to get driven into the ground, which is actually supporting some of that activity.
So you get pieces of the financial sector that are kind of the haves and have nots. More broadly, though, we think we're back on a path. We would look for 2021 earnings to be right back to about 165, 166, in line with 2019 prior highs. But it will take us till next year to recoup kind of the high watermark in 2019.
SEANA SMITH: Darrell, with so much uncertainty right now-- we have the stimulus talks. We have the election, also the coronavirus pandemic, obviously. Third quarter earnings season, although you expect it to be a pretty solid couple of weeks, how are you positioning yourself right now?
DARRELL CRONK: So we think you have to continue to be overweight technology. It's been our most favorable sector. We continue to like it. We like communication services. We do think there's value right now in health care. And we like some of the areas that are more cyclical, like industrials materials.
What would we fade? We would fade real estate and REITs. We still think there's more downside risk there. We would fade some of the utilities, some of the more defensive sectors of the economy. Keep in mind we've gotten about $3 and 1/2 trillion worth of total stimulus embedded in the economy this past year. If the Democrats win, it's very likely we may get another package. It may not come till Q1, but somewhere in the neighborhood of $2 trillion.
If you get that, you're talking about $5, $5 and 1/2 trillion of stimulus on a $22 trillion economy. That's 15%, 20% stimulus. That's unheard of. We've never seen anything like that. And that stimulus has a lag effect. It has a 6, 9, 12-month lag effect to work its way through the economy. So it still likely lies before us, as far as the impact of what all that's going to mean, which probably means some upside surprise opportunity into next year.