Markets mixed after Trump orders coronavirus relief

Seema Shah, Chief Strategist at Principal Global Investors, joins The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets around Monday's opening bell.

Video Transcript

BRIAN SOZZI: Seema Shah, Chief Strategist at Principal Global Investors. Seema, always good to see you. Help investors understand here, why is the-- we still have no stimulus deal. So why is the market hovering around its February 19 peak?

SEEMA SHAH: Yeah. I think what we're seeing is that the market is really just making the assumption that something's going to come in, whether or not it's in the next week or so. And-- but I think that there is a general consensus feeling that something will happen. But to me what I think this really raises is that if and when the US needs a third round of fiscal stimulus, what's going to happen then? I think the argument is building up, the government is becoming more and more reluctant to add to those debt numbers. And actually, this is a situation that a lot of countries around the world are going to be facing as well.

ALEXIS CHRISTOFOROUS: And that, of course, leads us to inflation, right? I mean, if we continue to balloon our deficit, what happens with regards to inflation? Certainly, the Federal Reserve has room to move with interest rates near zero, or at zero. They can certainly ratchet that up to help fight inflation. Are you worried at all that that's on the horizon and we're not spending enough time thinking about the possibility of higher inflation, Seema?

SEEMA SHAH: Well, look, this has been a question that's been going around. We talk about it almost continuously over the last couple of months. Our feeling is, look, over the next two years, given the size of the output gap, you know, how much economic-- economic activity is being hit, it's going to be difficult to see very significant inflation pressures emerging in the time being. But two years out, once the economy has recovered and given the amount of monetary stimulus, fiscal stimulus that's come into play, as well as some diversion from supply chains, deglobalization, then I think at that point, yes, inflation could become more of a concern, especially as we know that the Fed is likely to let the economy run hot before it starts to tighten policy.

BRIAN SOZZI: Seema, what's your best advice to investors who have set out this-- this really shocking rally, those investors that see unemployment over 10%, they see corporate earnings that are still trickling in completely fall off the cliff, not getting any outlooks? What do you tell them to do with their money?

SEEMA SHAH: Yeah, look, it's a difficult one. You know, if you've missed out on this rally, it's going to be a very, very difficult position to be in. I think when we look at the US, we feel confident that we're not going to see a renewed touching of that previous low. The real reason is that although we have got concerns about the economy, as long as the Fed is standing behind the market, we feel that equities are a little bit protected from that perspective.

But we do still prefer to be in the defensives. We have been in technology all the way along. It's done very well for us. It might be the time to take a little bit of profit. But generally speaking, you need to look for the areas where there's going to be a secular growth story. So continue to look for the companies with strong balance sheets, positive cash flow, and companies, as I said, which have a secular story, you know, which ones are going to do well through these challenging times.

And I think that's where you need to be looking. But on top of that, if you want to take a bit more risk, we've certainly started to like emerging markets a lot more than we did. We think they've weathered the storm better than expected, and their valuations are still a little bit more attractive, at least in what we're seeing in the US.

ALEXIS CHRISTOFOROUS: Any areas in particular in the emerging markets that you find attractive right now, Seema?

SEEMA SHAH: Yeah, that's a really important question, because you know, emerging market, there's so many differences there. What we're seeing is we don't really like Latin America at the moment. We do have some concerns. From a valuation perspective, it looks relatively cheap. But I think there's good reason for that-- struggles to contain the virus, problems with regards to how much more policy stimulus they can provide on the monetary side and fiscal side.

So actually, our preference is with an emerging Asia. They've done pretty well in terms of containing the virus. And as well as that, they have the-- the exposure to more than the new sectors, such as the technology side, which should really benefit pretty well from what we've been seeing in the last few weeks.

BRIAN SOZZI: Seema, what part-- what component-- what areas of tech do you like?

SEEMA SHAH: So we're actually-- we still like the big tech. So mega cap has really been our preference all the way along. We continue to like that. You know, we did have concerns going into two weeks ago with the hearings and setting into earnings season because expectations were so high. But really, they kind of flow a lot of those challenges out the window.

You know, we-- we think that those companies can do well. You still want to have exposure to the large companies, the ones that are really not going to struggle so much. So they are expensive. We don't deny that. But I think that there's still a pretty good story going on with those ones.

ALEXIS CHRISTOFOROUS: Seema, just would like to get your thoughts on these executive actions we saw President Trump take over the weekend, adding $400 a week to unemployment benefits, but states would have to chip in about a quarter of that. Also, this sort of temporary hold on employees paying the payroll tax, specifically social security tax. Do you think that it is effective enough in terms of the broader recovery?

SEEMA SHAH: It's not. I mean, you know, still a lot more needs to be done. You know, there is-- as such, you know, as you said, the missing link is, where do the states get those finances from? You know, I think they're really running down low. So that's another question mark that-- that Congress needs to deal with. But even so, you know, this is kind of for three or four weeks. This is not enough.

There is still a lot of pressure on Congress to come together and make a-- make a deal. And we have to remember that look, over the last few months, we have seen an economic recovery come in play. But a lot of that has been driven because of the policy support. So without policy support, then I think you would be looking at a much, much weaker outlook. Consumer spending would be in a far more difficult position. So as I said, the pressure is definitely still on.

BRIAN SOZZI: What would be enough? What number are you looking at in terms of overall fiscal stimulus that would suggest to you that you know what, maybe the rally makes sense and it has further legs to go?

SEEMA SHAH: Well, again, so I think you need at least about a $1.5 trillion number. But I think the most important thing from an equity market standpoint just to continue going is the Fed standing behind the market. So I think we can take some consolation that that's going to be there.

Now, anything less than a $1.5 number does start to raise question marks over consumer spending. And I think there will be then feedback effects through the rest of the economy. But again, as I said before, you know, this is just for now.

In a couple of months time, for however long the next package is going to last for, there's probably going to be question marks again about how it can be an-- how it could be extended. So I think we just have to play this by ear almost and not take too long of perspective, because it's so dependent on policy stimulus, as I said, not just in the US, but also in Europe and also in Asia as well.

ALEXIS CHRISTOFOROUS: Seema, we're expecting Joe Biden to announce any day now his pick for his vice president on the Democratic ticket. Do you see that his choice as being a possibly market-moving event?

SEEMA SHAH: I think it could be. I mean, what I think the market's hoping to see is someone, again, who's a little bit more moderate-- who is also moderate and can keep the electorate onside with-- with Joe Biden. I mean, when we look at the election, look, there is going to be a lot of volatility in the run-up to the election.

But I think investors have to be careful about trying not to try-- trade the election. It is a fool's game. It's very, very difficult to know which way the market is going to go, who's going to win even.

So I think the important thing is to keep in mind on fundamentals what's been really driving the market up till now and what's going to drive the market afterwards. And we still think that's going to be the Fed, and it's going to be coronavirus. And keep your eyes on those two things, rather than really keeping that focus on the election.

BRIAN SOZZI: All right, let's leave it there for now. Seema Shah, Chief Strategist at Principal Global Investors. Always good to speak with you.