Fundstrat Global Advisors Managing Partner & Head of Research Tom Lee joins Yahoo Finance’s Zack Guzman and Akiko Fujita to discuss how markets are faring as U.S. citizens await the election results.
ZACK GUZMAN: I want to dig into the market reaction. As I said, stocks continue to jump, despite that uncertainty. Joining us now to break down why that might be is Tom Lee, Fundstrat Global Advisors Managing Partner and Head of Research.
And Tom, I mean, heading into this, we were talking about how we might not know the results for quite some time. Investors largely hoping to get some clarity by Friday heading into this. But if I were to tell you that NASDAQ would be up 4% today after we don't have any clarity, what would your reaction be, and just what's your general takeaway from what we saw last night?
TOM LEE: Well, let's see. You know, one of the things I've learned in my 25 years doing research is I can never tell the stock market what to do. So you know, it's always going to surprise me.
And I think this rally kind of speaks to-- I mean, if I were to guess, I think it's telling us there's probably more certainty on the outcome than is implied by either the state of the electoral college or by the headlines. So I think part of this is the market already seeing a path to who's in the White House.
But then the other piece is, you know, we have to remember, there hasn't been a buy or a strike for like the past three weeks. I mean, that's why we were down almost 10%. The NASDAQ got obliterated because of the fears of a capital gains tax increase. So that's kind of off the table with the Senate staying Republican. And as you know, Joe Biden and Mitch McConnell are quite friendly. So I think that there's potentially quite a spirit of cooperation that could develop, even though it is not a Blue Wave.
So I think overall, stocks have proven once again the ability to rally. That's one thing we've been talking about-- that, you know, even in the three scenarios, even a contested undecided outcome, we thought the market could rally. But it's obviously better than we expected.
ZACK GUZMAN: Well, I mean, when you say that you think the market has determined where this is going to go, it's a little surprising, since we still haven't seen definitive results, I guess. Obviously, there's going to be some key-- maybe perhaps even we're hearing recounts in some key swing states here. So talk to me about where you think the market is judging this is going to go.
TOM LEE: Uh, yes. I mean, you know, again-- I don't have the-- I haven't cracked the secret code for what the market's true language is. But you know, if I took a look, I'd say that two groups that would have been the most positively correlated to a Trump win would have been mortgage REITs-- which, according to our data scientist, [INAUDIBLE], that was the number one most correlated sector. And then energy.
And those are posting tepid rallies. So part of my sort of guess is that if people were using a color by numbers-- you know, like how are markets influenced by movements in poll strength for either Biden or Trump-- it's saying that Biden is-- is the likely next president. And that's what I think the market is telling us today.
AKIKO FUJITA: I mean, having said that, you know, going back to the point our previous guest, Neil Ferguson, made, look, we could be in for a very protracted fight here, even if ultimately Joe Biden does win. And I'm curious, from a market perspective, what does that mean for positioning? Should investors be prepared to just ride out this volatility, or are there opportunities? Potentially investors should be looking to take money off the table.
TOM LEE: Yeah. Well, I mean, there's uncertainty, right? Because it's one thing to maybe dispute the election outcome so we have a protracted period where the final decision isn't legally made. But there is a time when the markets will view it merely as a formality and just going through the motions.
I think the clue you can say is, see what the VIX is doing. And today, the VIX is down almost 20%. I mean, it's below-- it's at 28. I mean, I just-- I guess, again, this is a period of uncertainty. So I'm not trying to speak with certainty. But if the VIX falls to like 25, it's saying that it doesn't really matter if there's a legal fight.
Again, I'm not-- I'm not saying it's going to 25. But if it moves at this pace and it goes to 25, I mean, it's pretty much saying that there's a clear winner.
ZACK GUZMAN: Yeah. And I mean, we're not trying to say this is what's going on or this is what's going to happen. You're just looking at the indicators and saying, look, these levels would seem to indicate a relative risk-on, or at least, you know, investors being calm with the way things are going.
When it comes to portfolio rebalancing, though, you also broke out what sectors and stocks might benefit from either this going Biden's or Trump's way. And looking at the list, it's interesting to see kind of some overlap in a lot of the cyclical stocks you've been talking about for quite some time. So talk to me about what you're seeing play out there, regardless of which way this goes.
TOM LEE: Yeah. I mean, I think one of the positives of this outcome is, under this scenario with Republicans controlling the Senate, I think the chances of stimulus before year-end have actually gone up, because you're not having a lame duck session where all three chambers are changing. And so I think there's a good possibility of some sort of stimulus.
And at the end the day, the market doesn't need a massive stimulus bill. It actually needs to put a lifeline to those millions of Americans that are suffering. You know, we're still just coming out of a depression. And there's a lot of people that need checks and a financial bridge. And you know, it's unfortunate that this election kind of short-circuited that process. But people desperately need that money.
So I think there's also good news there. And I think that's why some of these cyclicals are managing to rally. And you know, that's still the bet I would make into year-end. I mean, you know, a lot of things are still uncertain out there, though.
So I mean, I'm in the camp I think we get a 10%-- at least 10% rally to year-end. But I'm-- I mean, coronavirus is not under control.
ZACK GUZMAN: On that flip side point, though, Tom, I mean, we talk about downside risks and maybe not getting that. Obviously, the political games were going to be played heading into Election Day to see how these votes we're going to go. Now that we're past that, one would hope that you could get on to the time where Republicans, Democrats can come together and realize the point you're making, that the average American out there who is depending on some of this aid to come through can't wait much longer, doesn't want to wait much longer.
So when you think about that and the flip side of not getting it as we head into the winter months-- obviously, the holiday shopping season going to loom pretty important here-- how does the underlying data stack up, in your view, as whether or not it looks a little bit shaky if you don't get that round of stimulus before year's end?
TOM LEE: Yeah, it's going to definitely be shaky. You know, we're already seeing some soft lockdowns, because you know, we're in wave three of this coronavirus spread. And even if it's only in 30% the country, COVID's still quite contagious. And it's out there. And so soft lockdowns are going to slow people's movement and the economy. So a financial bridge is really important.
I don't know how to handicap it. I guess I would just be, to me, watching a lot of the cyclical groups. Today, they're acting like the chance of a deal has materially moved up, just because the election was preventing people from even having any idea, any foggy idea of which way that would go.