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Risk in the market is a contested election: Belpointe chief strategist

Yahoo Finance's Alexis Christoforus and Brian Sozzi and David Nelson, Belpointe chief strategist, discuss market volatility ahead of the 2020 election.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, time to get back to those markets now. I see the Dow up 150 points. Nice way to start the Friday morning. Let's welcome in David Nelson of Belpointe-- of Belpointe. He is their Chief Strategist.

David, always good to see you. We are 18 days away from Election Day. What are you doing with your portfolio for clients at this moment? You moving things around or standing put?

DAVID NELSON: What I have moved around is I've had to take money out of large-cap secular growth. And the tape is telling you where to go. Look at what's working over the last six months, industrials, even materials, consumer discretionary. You saw that retail sales number this morning. Even department stores were up 10%.

So I think the message from the market is they understand that a stimulus is company-- coming. We may not get it before the election. There seems to be dysfunction in Washington. But one way or the other, it's just a matter of timing. They know it's coming either now, after the election, or certainly after Inauguration Day.

BRIAN SOZZI: David, so let's say we do get that stimulus after the election, what happens to the market?

DAVID NELSON: I think-- good question. You know, that's a great question. You know, I think the concern for the market isn't about whether or not we get the stimulus. They're more focused on the election, and not even the election, they're focused on the aftermath of the election, in fact, if it's contested.

That's really the risk in the market, you have a contested election that starts to drift up to the courts for a decision, election night's going to look a lot more like election month. And unfortunately, a lot of investors are going to try to time that event. We've heard from a lot of investors that want to put money-- cash on the sidelines.

That's a two-step process, because if you pull out, what's going to be your catalyst to get back in? I doubt we're going to get calls from clients with the market down 1,000 points saying, I want to get in. And even tougher is if the market starts to go up because it isn't contested and you have a smooth transition of power, are you going to be able to put in at higher prices? A lot of investors who got out in March still aren't in this market.

ALEXIS CHRISTOFOROUS: David, do you think that this market has priced in a blue wave that we keep talking about, right, which would mean a Biden win and the Senate then swings back to Democratic? And if so, is the market setting itself up for failure here and sort of pigeonholing itself?

DAVID NELSON: I think the market's really set up for both contingencies, certainly with the blue wave and the likely tax changes that would follow. It wouldn't happen next year. It would probably happen the year after, but the market would start to discount that earlier.

And I would have to start to lop off about 15% in corporate earnings because the corporate tax cut would likely go away. But there are some offsets there. Because with a blue wave, the stimulus spending will likely be larger, you might even be able to get a large infrastructure bill passed. And maybe, in fact, that's part of the reason that we're seeing this, you know, strong move in industrials and some other sectors.

BRIAN SOZZI: David, how have you liked earnings season so far? To me, a lot of the banks have done pretty well. You look at a VF Corp out this morning. They're telling you their business stabilized, and they actually see a path to growth. All in all, it doesn't seem to be as bad as a lot of people feared.

DAVID NELSON: You know, CEOs of companies are pretty adept at talking the Street down. And we talked these numbers down in advance of the earnings coming out. I look more really at the-- deep down into whether or not it's a headline beat. It's really the core earnings that-- that really I have to focus on.

I think-- look, we're in a transition period. We're going to be a monster GDP print for this quarter. But you know, Q4 GDP, those numbers have been drifting lower. We're still in a challenged market. And we can't forget the fact that the risk-free rate right now is effectively zero.

There is no alternative asset class, so valuations get pushed a lot higher. And the reason I'm cautioning that you should pull some money out of technology, I thought Fastly was something of a warning sign yesterday. That was a miss and a guidance lower from a pretty high-tech stock and a very populous sector in the cloud space.

Just before that announcement, this was a company trading at 46,000 times earnings. I didn't say 46-- 46,000. There are hundreds of companies like that in the technology space. I would tell investors look elsewhere.

ALEXIS CHRISTOFOROUS: You know, I'm glad you brought up Fastly. I was going to ask you about that. I mean, this is a smaller tech company, but it's worth $9 billion in the eyes of the market, and it's a cloud computing company. Do you really think, though, that their guidance cut spoke to the larger cloud computing industry, or even the larger tech industry, which is what it seemed like investors were interpreting yesterday? Or was it really more a Fastly story?

DAVID NELSON: I think it's mostly a Fastly story, but it speaks to that not all these cloud companies are going to work. They all want to be the next salesforce.com, or the next Google, or the next Microsoft, which is a cloud company as well. But they're not all going to make it. And whenever a sector is really hot, a lot of companies have formed, a lot of these companies are fairly new, they came out in the last couple of years, some of them are going to have a better widget, and some of them will be leaders in the years-- in the out years, but some of them will fail.

And not all of these companies will be here five, six, seven years from now. So investors are going to have to do their homework. And whenever you see this kind of valuation priced in, you're really pricing in a perfect world. And it obviously can't be a perfect world for all of them.

BRIAN SOZZI: David, fourth quarter GDP, you briefly just mentioned it. Absent a stimulus plan, do you think we'd go back to negative growth?

DAVID NELSON: I don't think we're going to go back to negative growth. We're not going to sustain these monster numbers. We're going to have probably a 5% quarter for the fourth quarter. But just three, four months ago, that number was more like 10%. So we're starting to temper that at this point.

I think the message from the market is that we have to get back to work, and I think that's largely what's going to happen. One of two things are going to happen, Brian. Either we're going to cut the legs off this virus with a vaccine and/or a cure, or we're going to find ways to deal with it and go back to work.

Even the WHO has come back out and said that maybe complete shutdowns of the economy are not the answer, there are unintended consequences. But it's going to be stair steps higher. It's not off to the moon.

ALEXIS CHRISTOFOROUS: Hey, David, if you're still there--

DAVID NELSON: I'm here.

ALEXIS CHRISTOFOROUS: --you were saying that there aren't many other places to go right now, any other asset classes to go. What about outside the US? I mean, I know that Europe's got a lot of issues right now, the UK dealing with Brexit. You've got rising infections there of coronavirus and some more lockdowns going on. But do you see any pockets of I'll call it value right now in European markets?

DAVID NELSON: There's lots of value out there. Certainly, the European markets are cheaper than our markets. And there are other parts of the developed world that are cheaper. And certainly, the emerging markets are cheaper. My problem with the emerging markets, and we've discussed it in the past, is that they don't have the rule of law.

And I never know as an investor whether or not the currency is going to be devalued, they're going to nationalize an industry, and I find that challenge. And China, which is obviously a massive growth engine, I can't even peek behind, you know, some of their numbers. Their accounting standards are not what they are here in the United States. And I expect China to be an adversary in every sense of the word for years to come.

So I'm still back here in the United States. My biggest concern going forward isn't the election or any of these things, it's interest rates. That would be game over. If the 10-year rate went from 0.7% where we are right now even up 1%, that's going to lop off three or four multiple points. And as it goes higher than that as the economy recovers, markets will be challenged. It will be difficult, because you will have an alternative asset class.

BRIAN SOZZI: David, I'm sure we'll see you again before the election. But by chance if we don't, for the investors that watch this program, what's your best trade into the election with only a few weeks to go?

DAVID NELSON: You know, probably stand pat. You know, if you have a rules-based approach to trade in and out of the market, then go for it. We've run tactical programs that do exactly that. But if you're going to try and sit in front of the tape and trade by your gut and just trade off the headlines, you're going to probably hurt yourself. So probably stick with what you have.

ALEXIS CHRISTOFOROUS: All right, David Nelson of Belpointe. Always good to see you. Enjoy the weekend.

DAVID NELSON: Thank you, everyone.