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Markets moving higher with stimulus, earnings in focus

Frances Newton Stacy, Optimal Capital Director of Strategy, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss whats moving markets around Monday's opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: Frances, good morning to you and thanks for being with us. So we've got earnings season kicking off tomorrow. JP JPMorgan Chase going to do the honors. A lot of analysts have actually raised their estimates for earnings this time around. Do you think this market is setting itself up for disappointment?

FRANCES NEWTON STACY: Well, it's interesting, because the estimates have been raised, and yet, who knows how much the market is actually going to pay for a beat in expectations, because the markets are already so high, the multiples are very, very high, and we've already discounted those cash flows well into the future. So it kind of remains to be seen how much that's going to pay off as far as a continuation of a rise in equities. It's certainly not going to take the market down necessarily. But I think we're more focused on fiscal stimulus than we are on earnings.

BRIAN SOZZI: Frances, has the market priced in a Joe Biden victory? And I ask that, because you have the Dow transports at a record. And now surprisingly, you have the Dow positive year to date, which is really just surprising given everything that's going on in this country and around the world.

FRANCES NEWTON STACY: Yeah, it's true. I mean, you're seeing a selloff in traditional energy, you're seeing an uptick in some of the greener approaches, et cetera. So some would say that that's pricing in a blue wave. I don't know that arise in corporate income taxes have completely been priced in, given the fact that balance sheets are going to come out of COVID, some of them much weaker than they went into COVID, for sure.

If you're a huge tech company, of course, you can borrow for very little, and you have really a lot of cash on your balance sheet. But many companies are entering zombie status. So the uptick in corporate income tax. But then, of course, it would require a true blue wave, where they would have to win the Senate and the White House and probably to have that pass. So I don't think that's being priced in yet, but I do think that the market shows a favoring of Biden at this point.

ALEXIS CHRISTOFOROUS: Speaking of the stock market and President Trump, he tweeted just a short time ago, saying remember, stock market at an all-time high and going up. 401(k)s at record. With Sleepy Joe comes tax increases, job losses and depression like never seen before. Vote. A little fear mongering going on there? What's your take on that, Frances?

FRANCES NEWTON STACY: Well, that's not a change in Donald Trump's rhetoric. Certainly coronavirus has not disabused him of his stock market enthusiasm. I think that the thing that's going to threaten the upward trajectory of markets is credit markets. When we do get the data of how many loans in deferment or forbearance comes through, we have to see the health of credit markets. And that's really the risk going forward. And that's the risk to the financials, and that's the risk to the economy.

We also have the lagging unemployment picture. And at some point in time, the more people who lose jobs are more likely to default on their loans. And we have a growing wealth gap, where you have credit cards charging people in some cases, 20%, 25% interest. You've got food costs that have gone up about 12% on average. And so the poorest Americans are paying premiums on all of that. So this is going to continue to weigh on whomever gets into office in the next four years.

And yes, I get it that the 401(k)s are up, and good that the stock market is up, because it would be bad [AUDIO OUT] if the stock market were down and the rest of America was suffering. But I think moving into four years, this gap between the two sides of America and the lagging unemployment picture is going to close at some point.

BRIAN SOZZI: How are your clients positioned ahead of election day?

FRANCES NEWTON STACY: So we've had very lightweight in equities most of the year. We've made [AUDIO OUT] a lot of money in commodities. [AUDIO OUT] COVID, we traded treasuries a lot. We made a lot of money in treasuries. And we have just dabbled into the equities. We have not played the stock market in a major way. So we also are considering taking on a position in the US dollar. You've got historical negative correlation between the US dollar and the SPDR.

You've also got that negative correlation between the US dollar and gold. So if you don't get an inflationary play, which of course, the Fed is, the narrative is around inflation, because they're going to let inflation run hot, and you do have problems in the credit markets, which creates deflation, then that US dollar makes a little bit of a nice hedge for any kind of surprises.

JARED BLIKRE: Well, moving on from currencies, let's talk about the bond market. What do you see in store for long-term rates? Do you see the Fed having to come into the market anytime soon? Because there have been some rumblings about possibly increasing asset purchases, increased QE, maybe yield curve control. These things all kind of came out in the last part of last week.

FRANCES NEWTON STACY: Yeah, so the mechanical perspective is, that if rates go up too much, we have a record amount of debt in the system and it's going to be really hard to service that debt. And so that's the whole discussion around keeping rates so low for so long. And they will. They'll come in and do all kinds of asset purchasing. And of course, yield curve control is just targeting one part of the curve with asset purchases, should that be necessary.

And absolutely. Because if those yields tick up too much, you won't be able to service the debt. And people holding all of those bond positions will lose so much premium on the face value, that they'll actually have losses in their principal positions if that yield moves up too fast. So yes, I would see Fed intervention if that were the case for sure.

ALEXIS CHRISTOFOROUS: Frances, what are you doing with the oil sector right now? Because so much is dependent on who wins the White House, who has control of Congress. We know that fracking was a big part of the conversation during last week's VP debate. Do you, if you're in oil right now, do you just sort of hold on and wait this out and see where the chips fall after November 3?

FRANCES NEWTON STACY: Well, I mean, the thing about oil stocks, is they pay really high dividends. So it kind of depends on if you have that sort of fixed income need, particularly with yields being so low. Exxon particularly, pays a huge dividend. So I think yes. If you have a low cost basis and you've held the position for a while, then I would hang on to it for the dividends.

I wouldn't necessarily jump into oil right here. But I think it does depend on who wins the presidency. But I think it's more of a dividend play at this moment in time. The world is not getting rid of oil anytime soon. So I do expect some kind of rebound as supplies move further lower and as we have a situation where the economy truly opens back up, when we get a vaccine or what have you.

BRIAN SOZZI: Frances, the thinking on the street, it's starting to emerge that November, could be a key month for vaccine development, but also potential treatments for COVID-19, and that investors should ignore the election and pay more attention to big pharma. Do you agree with that?

FRANCES NEWTON STACY: Yeah I think we will have a vaccine. I don't know exactly how quickly it can get out and how quickly it can be distributed. And I don't know how much the market has priced that in. I think we will have a vaccine. There's some rumblings about whether or not it's going to be mandatory. I think that's largely going to be who gets in the White House. I probably think that Biden will make it mandatory. With Trump, it sort of remains to be seen. And who knows?

But I think it's pretty much priced in that we're going to get a vaccine. And I think it's pretty much priced in that the majority of Americans are going to take the vaccine. And I think the hinging on a full reopening, which of course, is going to increase demand for things like oil, and even though there's a massive supply, we're burning through that supply. So these things are going to kind of get up and going again. It's just going to be whether or not the reopening can outrun the credit market situation.