CSchwab’s Chief Fixed Income Strategist, Kathy Jones, and Brown Brothers Harriman Chief Investment Strategist, Scott Clemons, join Yahoo Finance to break down the market action amid election uncertainty.
MYLES UDLAND: --want to bring in Scott Clemons. He's the Chief Investment Strategist over at Brown Brothers Harriman. We're also joined by Kathy Jones. She's the Chief Fixed Income Strategist over at Schwab.
So Scott, I want to start with you and maybe just pick up on the point we were just discussing as it relates to the NASDAQ and some of the initial moves we've seen in the equity market over the last 12 hours and sort of how you have seen those swings play out, and what maybe you think is driving some of this action.
SCOTT CLEMONS: Myles, I think it's important to put it in the context of what we've been through over the past two months, if not even six months or eight months. A day-to-day market volatility is hard to assign any sort of causation to. I think there may be some relief rally, picking up on the conversation that Rick and Andy were having. If we wind up with divided government, it lowers the risk that the regulatory pendulum is going to swing back. It lowers the risk that tax increases are around the corner. Those are the sort of things that investors, I think this morning, are welcoming, even before we have the definitive results of either the presidential election or the Senate balance. Although the Senate balance is looking increasingly like the GOP is going to hold on.
JULIE HYMAN: Kathy, I want to bring you in here. Because we did get some economic data this morning as well, right. We got the ISM services number. It fell to 56.6 in October. That's the lowest since May. We got the ADP report that, if it is a predictor of Friday's jobs report, is not a good number. And now we have maybe lower prospects for fiscal stimulus. All of this means the 10-year yield is going down. Do you think that it's accurately pricing in the outlook right now? Is it even worse than what it's indicating?
KATHY JONES: Well, I think it-- so if we came into today with this expectation that we would get enough of a change in government to get fiscal stimulus, now we're looking with the Senate, the Senate is really critical. And if the Senate stays in the hands of the Republicans, the size of any fiscal stimulus would likely be much smaller. So I think the market is reflecting that. We've seen bond yields plummet overnight and the yield curve flatten. Those are indications that the market is looking at lower growth going forward. And I think that's really tied to where the Senate is right now, much more so than the White House.
And I think the second thing is just positioning. The market was positioned the other way. And now we've got some negative news, I think, which is probably foreshadowing a slowdown in the pace of recovery. We've had a nice bounce off the bottom. We're about 2/3 back to where we were pre-pandemic. And that extra 1/3 may be taking a lot longer if we don't get some fiscal stimulus of size out of Congress.
BRIAN SOZZI: Scott, I think one thing we can all agree on after Election Day, the polarization in American politics is here to stay and here to stay for some time. As you take a step back. what does that mean if you're a longer term investor and you have an investment time horizon, let's say three to five years?
SCOTT CLEMONS: I think once we get through this election and it's in our rear view mirror, our attention is going to pivot back to precisely those kind of fundamentals that drive that three- to five-year or longer term view. We're going to go back to talking about economic vitality, corporate earnings, monetary policy, the monetary backdrop, the kinds of things we usually talk about on these shows. We're going to get back to that. And I think that's what's going to end up driving the markets.
From an investment standpoint, I would be very reluctant to make any kind of investment positioning predicated upon a binary outcome of a presidential election, of the balance in the Senate, of a certain regulatory development. I think what investors want to look for are those kind of companies that can not only survive but thrive in any kind of political alignment. No company is completely immune from a potential headwind of regulations heading against them, but some companies are in greater control of their own destiny than others. And that's what we've positioned our clients. It's not that politics is unimportant to those companies, it's just less of a part of the investment analysis.
MYLES UDLAND: And you know, Kathy, Scott's talking about this return to a fundamental type backdrop. So then maybe let's fast forward a couple quarters and we're sitting here in 2021 and we're trying to think through where fixed income can fit in portfolios with 75 basis points on the 10-year, you know, you're getting basically nothing from AAA corporate, depending on the kind of company. What sort of role is fixed income to play in a portfolio over the next decade, where we've seen so much crowding into a few areas that are higher risk that have been working, might not work forever? And I think there's a lot of questions. You know, 60-40 is dead apparently, right? We hear that. We hear that one all the time.
KATHY JONES: We do hear that all the time. And I think people confuse two factors here. There's the expected return, which clearly is low if yields are low. So in fixed income in general, you know, you take the current yield, project it forward, or the yield to maturity, and that's going to be the basis of your expected return. So we know that's lower. But it's also, on our calculations, lower for other asset classes as well.
So that's one component. But the other is diversification. And I really think that people have gone way overboard in saying bonds no longer provide diversification from stocks. You're hard pressed to look at any period when you've seen a significant decline in the stock market, 15%, 20% or more, that you haven't seen fixed income rally.
So I don't think 60-40 is dead. I think two things. One is it was never probably optimal for, you know, a large number of people anyway. And secondly, that you need to be much more broadly diversified within fixed income. And still, you could still get that diversification benefit with a little bit more return without giving up a lot of safety. So I don't think 60-40 is dead, but I never thought it was perfect anyway.
JULIE HYMAN: Kathy, very interesting point there about diversification. Scott, I want to take it back to you and diversification within stocks. Because of course, there has been continued hand-wringing not just this year, but over the past several years about the domination of tech. Guess what is happening again today? The NASDAQ 100 is now up by more than 4% today and tech is leading, as people sort of seem to be going back to what has been working all year. I don't know how granular you can get for us, but is big tech going to continue to work, do you think?
SCOTT CLEMONS: We talk about this all the time with our clients. And it's both good news and bad news in a market that is narrowly led like this. It's not unprecedented. If you go back in time, think about the dominance of financials in 2006 and '07, the dominance of technology again in the late '90s, the dominance of energy in the early 1990s. It happens from time to time. And what we know from history, the bad news is that narrowly led markets can be quite fragile. If market sentiment turns against large tech, which is now dominating, then the market overall averages will reflect that.
The good news is for active investors, it implies that not every company has participated in the sharp market rally that we have seen going back to April of this year. So there's still plenty of opportunities to be found for active investors. We're not chasing technology. We're a very value-oriented investor so you wouldn't expect us to be doing so. We're just cautioning our clients that technology, you know, those large stocks that are now a quarter of the index almost, will determine the day-to-day volatility index. And we're seeing that today on the upside. We've seen it a number of days in September and October on the downside.
MYLES UDLAND: All right. Scott Clemons is the Chief Investment Strategist at Brown Brothers Harriman. Kathy Jones, Chief Fixed Income Strategist at Schwab. Thank you both so much for joining the show today.
SCOTT CLEMONS: Any time.