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Markets mixed with earnings, economic recovery in focus

Gabriela Santos, JP Morgan Asset Management Global Market Strategit, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss what's moving the markets around Thursday’s opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: Good morning, Gabriela. It is the countdown to the election, just five days away. I want to start, though, with the economic data today. Should the market be excited about record GDP growth in the third quarter?

GABRIELA SANTOS: Good morning, Alexis. So I think, unfortunately, this was already very much expected, this surge in economic activity in the third quarter after the collapse in the second quarter. So I think that was already behind the rally in the market we had seen from late March towards the end of August.

And that's very much true about the third-quarter earnings season as well. It's already expected to be very, very good. I think the market is really very much focused on what's coming up ahead and the lack of visibility around fourth quarter and first quarter of 2021 activity. And that's what keeps daily volatility high. With the VIX near 40, we should be expecting daily moves up and down of around 2 and 1/2% while we get some better visibility.

BRIAN SOZZI: Gabriela, are you growing concern that the market is headed to a dark place? And that dark place, I reference what we saw back in February, March, those big spikes in volatility, in large part because the coronavirus, we had the sense then that it was out of control. And the sense is now coming back into play that it is still out of control.

GABRIELA SANTOS: So at the moment, we are talking about a return of volatility, but not at the levels that we had seen in February and March, which were extreme. And around the coronavirus, there is good news there. And that's the fact that we're coexisting with the virus much better.

This second or third wave, however you want to define it, of cases is not being accompanied by the same increase in fatalities. And that's because we have much better treatments, hospital procedures, a lot of self-shielding for more vulnerable parts of the population, and just better practice of hygiene. So I think we are going into this new season of dealing with the coronavirus on better footing. And let's not forget that we have a policy support to offset some of the negative impacts as well.

ALEXIS CHRISTOFOROUS: What are you seeing from clients right now, those who may have been sitting on the sidelines, sitting on some cash, waiting out this election. Are they sharing with you plans for post the election? Where will they put money to work? And are they going to? Are they just going to ride this out for the rest of the year and stay quiet during the fourth quarter?

GABRIELA SANTOS: So I think it's so interesting, there is a lot of optimism about the road ahead. When we think about the next 12 months, the next couple of years, we're in the early stages of a new economic cycle. That tends to be a very good period for risk assets. And we see a lot of investors wanting to be positioned overweight equities, overweight credit, and very regionally diversified. The trick is having some hedges and some diversifiers for some of the very short-term volatility in November and December.

And in terms of the election specifically, I think investors really just want a resolution. They just want an outcome. They want to know. And really, the outcome itself is not what matters. It's just getting the result would help to clear a lot of the fog.

JARED BLIKRE: I want to get your take on currencies and bonds, because the US Dollar Index has been largely sideways for the last few months. And treasury yields, although they've come up on the long end a bit recently, still been in kind of a trading range for several months. Do you expect that to change with the election? And in which direction?

GABRIELA SANTOS: Yeah, so both for the dollar and for treasury yields. The long-term trend is for treasury yields to continue gradually grinding higher, long end yields, and for the dollar to continue moving downwards. Short term, we might see bond yields fall and the dollar strengthen. And that's around the uncertainties.

Once we clear those around the election, the path of the virus, when we get more fiscal stimulus, then we expect that gradual steepening of the curve and the weakening of the dollar. So that would be good already to start adding some of the value style into portfolios, in line with that expected steepening of the curve, and some international exposure for that expected weakening of the dollar.

ALEXIS CHRISTOFOROUS: I would love to get your thoughts on energy, because it's been a big talking point throughout the campaign. And we see a lot of talk about fracking, are they going to frack, are they not going to frack in Pennsylvania? And this is on voters' minds. What are you doing with energy companies, especially post the election? Are you just waiting to see who wins and what policies might guide that sector?

GABRIELA SANTOS: So I do think the outcome of the election would have an implication for energy one way or the other. But there are also long-term moving forces here, regardless of the election outcome. And that's what we want to be positioned for.

And it's really two things. I think, unfortunately, traditional energy has a lot of headwinds here, keeping oil prices still extremely subdued into next year, maybe even beyond. So that's very, very challenging for traditional energy companies. So that's one sector that we're not really looking to get into at this point, both on the equity and the credit side.

There's also positive tailwinds, though, for alternative energy, clean energy. And that's beyond the election outcome, just in terms of economics. It's becoming a lot more cost effective to actually have clean energy. And that's something that we've been investing in, both through public markets as well as private markets.

ALEXIS CHRISTOFOROUS: And lastly, just want to get your take on earnings season so far. Lots of companies coming in better than expected. Today, we're going to hear from 70 companies, including those big tech names. What's your prediction for the rest of earnings season? And how much more important is guidance this time around than it has been in quite some time?

GABRIELA SANTOS: So third-quarter earnings season, in terms of the numbers themselves, have been really, really good. We're seeing a big quarterly improvement, a surge in the third quarter after the collapse in the second quarter. Year-over-year, still negative 15%, but a big improvement from last quarter. Record number of companies beating by record amounts, both on earnings and revenues.

The bad news is investors are not rewarding it. The companies that even are beating on earnings and revenues are actually down one year after-- one day after they report. And companies that miss are being very severely punished.

And I think that's a sign that we already know the third quarter was good. Investors really just need more visibility about the fourth quarter. And companies are not able to provide it, because they just don't know the path of the virus, the election outcome, and when we get more fiscal support.