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Recovery is in ‘early innings:’ Investment strategist

Yahoo Finance’s Alexis Christoforous and Andrew Smith, Chief Investment Strategist at Delos Capital Advisors, discuss the latest market moves and recovery outlook.

Video Transcript

ALEXIS CHRISTOFOROUS: Andrew, thanks for being with us. So do you think this recovery trade that we've been seeing this week-- do you think it really has legs?

ANDREW SMITH: I do. I do. Great to see you, first of all. But yes, we do think that recoveries trade is in the early innings as we see the renewed business cycle come into play. The leading economic indicators that we've been tracking since May of this year have really experienced that V-shaped recovery. And while we still know there's a lot of COVID-related issues that are going on and new COVID cases coming up, the initial jobless claims that we received yesterday were very encouraging. And then the PMI numbers that we saw early this month really confirm that that economic recovery play is underway.

And the relative performance that we've seen underneath the hood, just not only this week but since the first correction began on September 2 and then also in the PMIs inflected May 1, have led by industrials and materials, financials and energy-- more so financials and energy this week-- but that's been a very different story than what everyone's talked about with tech leading the way. We're actually seeing major bifurcation underneath the surface that allows cyclical outperformance, and we think that will last.

ALEXIS CHRISTOFOROUS: But Andrew, talk to me about this disconnect that we seem to be seeing again, where we're seeing this surge in COVID cases across the country, hospitalizations at a new record high. At some point, wouldn't that impact these fundamentals that you say are pointing to a V-shaped recovery, and isn't the market a little too optimistic here?

ANDREW SMITH: So we think that a lot of what's going on today with the new increase in COVID cases hasn't necessarily impacted the markets like you've brought up, and that's definitely a risk to our thesis. But what's happening right now is that as we've entered into these new lockdown phases, it was kind of like a lockdown light, right? We've seen just restaurants close down. We've seen schools go back. And we think that's going to be the path forward.

We think it's going to be more muted lockdowns instead of what we saw back in March and April. And so that gives us further conviction that the recovery is still happening. We've seen earnings still depressed and still in an earnings recession but a rebound a lot better.

So we do think that underneath the surface, those value plays, they're not priced like growth companies are, which is why we saw that massive rotation on Monday. It was a statistically extreme rotation between momentum, growth stay-at-home names versus those value names. And so we do think that there is better value in the markets, not necessarily overly optimistic in those cyclical exposures, and that's why we want to continue that trade for the foreseeable future.

ALEXIS CHRISTOFOROUS: I know you brought along some stock picks, Andrew. I want to get to those in a moment. But first, I want to talk about a risk-- a possible risk for this market. You know, the Federal Reserve has thrown everything plus the kitchen sink at the struggling economy, but you say a downside to that could be its impact on the dollar and commodities pricing-- prices-- and we could actually see higher inflation down the road. Talk us through that.

ANDREW SMITH: Yeah, so we believe that's one of the most underappreciated risks to the market. The Federal Reserve has come in and completely changed their mandate. Instead of targeting a specific level of inflation, they will allow inflation to run warmer or hotter than what they would expect. And so by allowing this to happen, what we have seen is a dollar debasement. We've seen the United States dollar come down, which in turn, raises raw commodity prices.

Well, why-- it's always hard to figure out, you know, the calculations of CPI or core PCE-- those are pretty murky numbers-- that headline inflation, nonetheless, that impacts consumers like you and me when we go to the gas pump, when we go to the grocery store to buy food. And so we do think that inflation is underappreciated, and we've already seen the University of Michigan inflation numbers this morning came in hotter than expected. So we think that's underappreciated and that will have a sensitive impact into the market and bond yields coming into Q1 of 2020-- 2021, sorry.

ALEXIS CHRISTOFOROUS: Andrew, I want to get to these stock picks real quick. Your two stay-at-home trades, Home Depot and FedEx-- why?

ANDREW SMITH: Yeah, so Home Depot really has capitalized on that stay-at-home-- but not only that, the move away from urban centers, right? So we've seen a lot of transition into the suburb areas. But most importantly, Home Depot's done a lot of work on transitioning into e-commerce sales, and we've seen that reflected in their earnings.

FedEx is kind of a double tailwind, right? So FedEx does well as the economy recovers. More goods are shipped. More people are purchasing. More people are going out. But we also know FedEx does well with people staying at home, and we've seen great cost controls. And in fact, FedEx has actually outperformed the market by almost, I think, 95%. So it's been a phenomenal trade so far this year.

ALEXIS CHRISTOFOROUS: I want to get one more stock pick in there quickly-- not exactly a sexy topic, but garbage, Waste Management, you like this company right now. Why?

ANDREW SMITH: I do. So Waste Management is heavily tied to the industrial, materials side of the economy. And so with Waste Management, because they went through some pretty heavy cost controls, we believe that their margins are very stable now. And what we see is as industrial companies and material companies start picking back up as there is a demand for metals and mining, Waste Management is poised to benefit from that increased revenue, which will be reflected highly in that profit margin.