Sam Stovall, Chief Investment Strategist at CFRA, joins Yahoo Finance’s Akiko Fujita to discuss the latest market action ahead of the stimulus deadline.
AKIKO FUJITA: Let's kick things off this hour, though, with Sam Stovall. He is the chief investment strategist at CFRA. And Sam, we want to start right with those stimulus talks. It seems like there's a number of headlines that are coming out of Washington that do point in the right direction.
But at this point, are we just sort of grasping at straws, just trying to trade on every good headline that's coming out of Washington? How are you reading the messaging coming out of the House Speaker, as well as the White House?
SAM STOVALL: Well, the way I'm reading it is that, obviously, the stimulus has not been built into the market. So anytime we do see advances in share prices, that's because of the stimulus possibly occurring. And then the market sells off when it does not occur. So it's like people pulling petals from a daisy, saying there will be stimulus, there won't be stimulus, and so forth.
So we're seeing an advance today. We're seeing the sectors with the greatest improvements being industrials, financials, materials, those that would benefit from stimulus. But there's one hurdle I don't think they're going to get across between now and the election. And that is to get this bill past the Senate.
So even if we come to some sort of an agreement by today or Pelosi extends the deadline to tomorrow or later, I still think that the Senate might be a big headwind.
AKIKO FUJITA: Yeah, no question. So much of the trades that we've seen have been in the context of discussions between the White House and the House Democrats.
But of course, there is that big piece with the Senate Republicans having to come on board with a deal as well. You said the markets are setting themselves up for disappointment. What do you see in the trades that tells you that?
SAM STOVALL: Well, just because it's moving based on the headlines. We're really waiting for the bottom line to start to show improvement. We're early in the third quarter reporting period. And things are less dire than they have been.
But I think investors are waiting for some sort of stimulus, some sort of an improvement in the financial and fundamental undertones to really give them additional confidence that this market can continue its advance.
AKIKO FUJITA: And Sam, there is a question of what that expectation is for investors on the stimulus. Is it about any kind of deal getting passed? Is it a piecemeal? Is it something that's bigger in scale?
I mean, it seems like, when you look at where things have traded based on headlines, we could see a pop regardless of what kind of deal is reached. Do you expect this to be just a one-day pop, or could we see this as a catalyst, potentially, for sustainable gains down the line?
SAM STOVALL: Well, good question. I think it depends what's in there. If it ends up being just a very quick spend of money, then I think it could end up being a short-term pop. If it does end up being something that's a little longer lasting, such as infrastructure spending-- which I think actually would end up waiting until after the election, because the party in power certainly wants to get credit for that kind of infrastructure stimulus plan.
So I think that what we probably see is help for the airlines. We see help for the individuals who are furloughed and likely have lost their jobs permanently, help for restaurants, retailers, et cetera. So if we can get an injection that would help put a floor underneath many of the consumer discretionary and industrials areas, I think that would be quite beneficial.
AKIKO FUJITA: You could argue, in many ways, the headlines out of Washington have overshadowed what we've gotten out of earnings. We're really getting into the heart of these reports coming out. And, you know, the expectation was low going into this quarter, but we've certainly seen some positive notes coming out so far. You pointed to the losses coming down, nine out of 11 sectors seeing improvements. What's been your takeaway so far?
SAM STOVALL: Well, basically that things have been looking better. In particular, you have sectors such as financials that are showing a 16 percentage point improvement in their earnings. We're seeing improvement also in materials of about 5 percentage points. Energy can't seem to get out of its own way, seeing an additional reduction of 11 percentage points.
So I think, basically, what I'm seeing is that in particular industries, there are certain areas that are benefiting, like trading that's happening with the financials where interest income, general banking has not been helping the financials as much as the trading has. Even though all of the banks or banking type industries within the financials are showing an improvement in Q3 earnings expectations, the same cannot be said for insurance companies.
AKIKO FUJITA: So given that what you said right now, I mean, what's driving your trade right now? Is it about the fundamentals still? Or is it keeping a little cash on this side because of the expected volatility around the uncertainty and the political picture?
SAM STOVALL: I think it wouldn't hurt to keep some powder dry because we really don't know exactly what's going to happen with the election. Right now, the market is up more than 6% since July 31. Typically, July 31 through October 31 advance indicates that the incumbent will get re-elected. That failed twice since World War II, but 82% track record's not bad.
What it could also be saying is that maybe we will be seeing a Biden victory, but accompanied by a blue wave. And that's why investors are happy because this disrupter, COVID-19, could end up seeing special force be put on it, plus the possibility of a meaningful stimulus package if we do end up with that blue wave.
AKIKO FUJITA: Sam, is there a case to be looking outside of the US right now as well? We had a number of guests that have come on that had, you know, just a few months ago, have been talking about Europe as sort of the opportunity, although we've seen a lot of those COVID cases tick up there, which may change the dynamic in terms of how you see those economies recovering. But given the volatility in the US, are you looking outside right now?
SAM STOVALL: I'm looking outside, but I'm not necessarily buying outside just yet. There's an old saying that fundamentals tell you what, but technicals tell you when and how far. Right now, the fundamentals are saying, you know, things look pretty good.
In terms of earnings expectations, the US is likely to see about a 25% gain in operating results in 2021. Yet the developed international should see something like 45%. Emerging markets up 35% on a relative PE basis. These foreign markets are trading at a one standard deviation below the mean level, so looking for a reversion to the mean. The opportunity is there.
Plus, we think that the US dollar will continue to weaken as we move into 2021. Unfortunately, looking at price action, we're still seeing the developed international underperforming the S&P 500 on a concurrent relative strength basis, as well as a rolling 12-month relative strength basis. Really only the emerging markets are sort of keeping pace.
So if you had to commit some money to that area, I would say, look more toward Asia. Look more toward the emerging markets. Because they're likely to be the first to turn.
AKIKO FUJITA: OK, Sam Stovall, chief investment strategist at CFRA, always good to get your insights. Thanks so much for joining us today.
SAM STOVALL: My pleasure.