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Stocks buckle on jobless claims increase and uptick in coronavirus cases

Federated Hermes Client Portfolio Manager Jordan Stuart joins Yahoo Finance's Akiko Fujita to discuss the latest market action as stocks react to this week's jobless claims data and an uptick in coronavirus cases.

Video Transcript

AKIKO FUJITA: Let's kick the conversation off this hour with Jordan Stuart. He is the client portfolio manager at Federated Hermes. And Jordan, a number of headlines to get through to, but let's start by talking about the stimulus here. Because we really have seen the market move as a result of the headlines we've gotten over the last several days.

You know, we thought that the stimulus, a potential for that being delayed until after the election had actually been priced in. But it looks like, again, that we're seeing reaction there on the uncertainty today.

JORDAN STUART: Yeah, thanks, Akiko. You know, I think the additional stimulus talk is more about structural incentives and building confidence. It's less so about the amount that's being spent. And I think what companies and investors are looking for is that confidence. Companies need that confidence to hire back employees, like you saw the jobs number today. Consumers need that confidence to invest and spend again.

So I think, believe it or not, the government does have to think longer term. We have to think about liability protection, capital markets, even a backstop for some of the debt that's been taken on. Otherwise, we're going to be in this malaise, he said, she said, right versus left. And uncertainty is not good for the market. So I think there needs to be something kind of longer term passed. And I think that will be very good for the market from here.

AKIKO FUJITA: What do those initial jobless claims numbers that we got out today, what does that tell you about where the recovery is right now in the absence of additional stimulus?

JORDAN STUART: I think we're in the spot where, look, the market's at all-time highs. It's responding to the stimulus, both monetary and fiscal, that we saw in the first half of this year. Now we're at the crossroads. We want to go higher. We want to see that expansion phase. And in order to get there, like I mentioned with the confidence, you need to see corporates, you need to see consumer spending a little bit more.

And one of the areas that we're telling investors and where we've been sticking with, are companies like biotech, technology, software, cloud-- you name it-- that don't need-- that are less economically sensitive and don't need more stimulus, more spending, and more economic pickup. And those companies can grow on their own without any kind of macro backdrop help.

AKIKO FUJITA: When you talk about biotech, what particular names are you looking at?

JORDAN STUART: You know, we like gene therapy. I mean, that's the future of biotech. And just kind of take a step back. Look at what biotech has brought us in-- whether it comes to vaccines or therapies.

The innovation that's there is so idiosyncratic, is so focused on the science and the breakthroughs and the innovation that we've seen as a country over the last 10 or 15 years, where we can respond so fast to this virus, the next one, cancer, or other things, that-- you know, and for the most part, they can control their own destiny. So they're not dependent on stimulus, on GDP, on rates, on oil prices. And we really like that about those companies structurally.

AKIKO FUJITA: You also mentioned tech there. And tech is a pretty broad tent these days, whether we're talking about the chip sector, whether we're talking about the cloud sector, whether we're talking about the big social media names. I mean, how are you diversifying within that sector alone? And where do you see the biggest potential for upside?

JORDAN STUART: Yeah, look, this is, as you mentioned with Walgreens and United, it's a tale of two economies, right? It's the future economy, online, e-commerce spending. We saw the Amazon Prime this week. E-commerce expected to break records.

Look, we're looking for companies within technology that have secular trends that are taking market share or creating market share that have commoditized parts of the current tech sector. So they're looking not just at cloud and cloud data, but what do you do with the cloud data? Analytics, analyzing, making your ad dollars go a lot further with some of those analytics.

Those are the areas where we think, again, similar to biotech, where they can control their own destiny, grow through a tough backdrop, and I think those companies will continue to thrive because they have visibility versus other companies in the old economy, we'll call it, that can continue to grow through this.

AKIKO FUJITA: And Jordan, you talked about also looking into the IPO market, specifically with these tech names, like a Snowflake, where you see real growth opportunities. I mean, we have seen a huge run here in the IPO space, particularly around tech names, software, as well as cloud. How do you think investors should be looking at some of these startups that have gotten into the market ahead of the election, even in the face of the volatility we've seen?

JORDAN STUART: Yeah, look, the IPO market is a great area for new ideas. These are companies that are coming to market that, again, have secular tailwinds, whether it's cloud, software, CRM systems. And these are the companies of the future.

I think these are companies that aren't in the index yet. They're taking market share. They're dominating their sector. And they're growing significantly. You know, companies, like, that went public recently, you know, Snowflake growing 75%, 100% year over year for the next couple years. You can't find a lot of companies like that in this environment.

And I think the IPO market, whether it was last quarter, I think the US market had 81 IPOs, the average IPO up 30% after the first day pop. The IPO market's open, it's healthy. And I think it's got legs from here. We've got a lot of companies that potentially could go public in the next couple of quarters.

And there's appetite. I think there's appetite for these type of companies that are less sensitive to the stimulus, the recovery, and the second wave or third wave of COVID.

AKIKO FUJITA: And we are less than three weeks out from the presidential election. We have been spending the last few months talking a lot about the election risk, the potential for uncertainty of the outcome. And yet, we're also seeing this against the backdrop of an earnings picture that, in some cases, have improved, although you could argue the expectation has been low.

How do investors weigh those two? Is it really about positioning yourself on the fundamentals? Or is that election risk significant enough to try and position yourself ahead of that because there could be potential volatility after November 3?

JORDAN STUART: Yeah, there really could be some change next year, whether it's tax rates, whether it's slower growth, second or third waves, you know, how the government's going to respond. We've noticed that, as you mentioned at the top, the European countries considering additional lockdowns.

We've noticed the market has really looked past a lot of the cases increasing. But the lockdowns are really where the market takes a step back. So there's a lot of uncertainty out there. And what we've done is we've found what companies have visibility into next year, what companies can grow through next year.

And you might have to pay up for those. But we found that those fundamentals are better positioned-- those companies with better fundamentals are better positioned to grow next year. Because I agree. I think earnings probably will bounce off, but-- off the bottom next year.

But how sustainable is that? How sustainable are those business models? And how dependent are they on this recovery with all these headwinds that you mentioned that are building into the early part of next year?

AKIKO FUJITA: Yes, certainly some good takeaways there. Jordan, always good to talk to you. Jordan Stuart, client portfolio manager at Federated Hermes.