Yahoo Finance’s Alexis Christoforous and Brian Sozzi discuss the latest market moves with Frances Newton Stacy, Director of Strategy at Optimal Capital.
BRIAN SOZZI: All right, let's dive back into the markets here and bring in Frances Newton Stacy, Director of Strategy at Optimal Capital. Always good to see you, Frances.
When the jobs report hit this morning, we saw futures pop. But now the market's selling off. Last time I checked, down on the Dow about 95 points. Why that selloff?
FRANCES NEWTON STACY: Well, I think it's time for a little bit of a pullback. We've seen mostly upward momentum. I'm not concerned about this little bit of a breather, unless the VIX starts trading and closing above 25.
You know, the markets are in a-- we've priced in COVID. The markets traded the beat on expectations in earnings rather than the 10% decline in earnings. So I think that's very interesting.
With the employment picture this morning, while it is very dire-- there's no question about it-- number one, there were no huge surprises. It's better than expected, even though some of the data is obviously latent. It's better than expected.
And then, of course, I think the markets are still expecting a stimulus bill. I was just watching an interview with Larry Kudlow. He says that that's unlikely at this point. The negotiations have kind of broken down. But that being said, the president has said he will step in with executive orders to make sure that the American people have continued support.
The markets are trading on the fact that the liquidity risk is gone. There's tons of liquidity in the system. And the market's trading forward, and it's not trading on the latent economic data coming through.
Now, is that going to work forever? Probably not. We have a lot of headwinds that are coming in the system. But for right now with the data that we do have, the market's digested it quite well.
ALEXIS CHRISTOFOROUS: If we get that executive order from the president, Frances, that would most likely affect payroll taxes. Wouldn't probably give us that cushioned unemployment benefit, that extra $600 a week that millions of Americans were actually able to draw upon.
If that doesn't happen, if that's not part of a new stimulus package, what happens not only to the economy, but also to Wall Street? Because the rally we've been seeing has really been a stimulus-led rally lately.
FRANCES NEWTON STACY: Well, the extra unemployment insurance, whatever-- I mean, I've heard everything, from $400 a week to nothing to, we'll just have to wait and see. I don't think Wall Street and the markets are dependent upon that. That's more about the people who are really struggling.
And I think the biggest effect that we'll see from that is, you know, we're going to add loans to the forbearance. So anybody who's been using that extra $600 a week to keep up with their mortgages or their student debt or their credit card debt, it'll be interesting to see.
And the reason I think that that should be extended is because you have no way of knowing how many people are using that not to get a job, which is one of the arguments for not having it extended, versus people who are really going to starve to death for not having that extra $600 a week.
And the other problem is that you have the moratorium on evictions occurring at the same time that that has expired. And I think that that's really sad, because you put a certain percentage, an unknown percentage, at risk for eviction and homelessness that wasn't, you know, that weren't at that risk maybe with the $600 a week.
Of course, you will still have people evicted despite the $600 a week. But you just want to try and manage those numbers and manage those percentages and manage that risk.
As far as the payroll tax cut, I'm actually in favor of that. The reason I'm in favor of that is because almost 20% of US firms at this point, meaning one in five of course, are, you know, at zombie status, meaning that their profits are lower than their debt service. And that's really going to put pressure as companies try to save their balance sheets.
And then we move from the liquidity issue to the solvency issue. That's really going to put pressure on the employment picture. So I'm actually a fan of the payroll tax cut in the temporary emergency, you know, necessity to get us through COVID.
And COVID has certainly been more prolonged than we initially thought. Whether this new wave of shutdowns or the states kind of rolling back-- what effect that has on the employment picture is not going to be known probably until next month's jobs numbers, the August numbers coming out in September.
So I think it's smart to put every backstop possible in the system. However, of course, our debt to GDP is growing. Our deficits are growing. I just think you have to handle the immediate need of people, and then you have to address the debt later.
And further too, you know, I don't think this market's even really looking at the election quite yet. But you see some of the tax increases that Joe Biden is talking about, particularly the corporate tax rate going from 21% to 28%. And I'm not a political person, but just looking at the numbers, The Tax Foundation has estimated that that's really only going to earn $3.2 trillion over the next decade.
So then you have to look, well, we've added $3 trillion on the Fed balance sheet in three months. So is that tax pressure on those super levered corporate balance sheets in the interim worth it if you're going to make $3.2 trillion in the next decade and you risk having even a further uptick in those bankruptcies?
BRIAN SOZZI: Frances, Joe Biden continues to lead in the polls. And just based on some of the proposals that he has put forth, is it your inclination when you talk to clients-- do they want to sell stocks in front of the election on fears of higher taxes?
FRANCES NEWTON STACY: Well, clients are, you know, they're more asking us what we should do. And we are not selling stocks at this moment. I mean, the technicals have kind of overtaken the fundamentals in the short-term. And we're watching the technical indicators.
And the technical indicators-- and particularly the NASDAQ, because that's the one that has gone up the furthest. And so from a technical analysis perspective, you know, that'll be the first one to show signs of weakness, because it's gone up on a steeper angle.
But the thing about it is I still see the NASDAQ growing up to 11,250 and just looking for resistance. And so we're going to be selling stocks for our clients or unloading positions or changing our sector exposure based on the technicals.
Because the fundamentals are, number one, COVID, the worst numbers ever. That's sort of been priced in. And number two, the data is lagging, and we are not, probably for several quarters, going to really know where we've come out of this.
ALEXIS CHRISTOFOROUS: OK, Frances, so you're not selling stocks right now in this environment. But what are you doing with commodities? Anything there? Do you have a position in gold, and have you been adding to that position, as so many people have been lately?
FRANCES NEWTON STACY: Yeah, so the portfolio has had a large position and, you know, relatively speaking, a large allocation and overweight to gold and silver. We did pare off our silver a little bit after yesterday's movement, but we are staying in the metals space.
And definitely commodities. We've been adding exposure. We've been adding exposure for commodities and Asian countries, who have kind of come out of COVID a little bit sooner than we are. We are watching all of our allocations very closely, and we are not adverse to being tactical if things change. This is very news-driven.
But definitely-- and it's kind of interesting, because we're borrowing at quote unquote, "zero interest rates" right now. Of course, the Fed funds rate trades in a range. But the thing is that food has gone up dramatically, the price of food, because of supply chain disruptions and things like that.
And the other thing that's gone up dramatically-- you know, energy prices are going up, these things. Commodities are going up. So you know, I watched an interview on one of the networks where there was a restaurant owner that's saying, not only can we only have 50% capacity because of COVID, but the price of steak and cheese and all of these things has actually doubled.
So you know, these kind of adjustments haven't sort of moved through the system. And of course, there's no meaningful inflation from the Fed's perspective. But the cost of living is going up.
And if you think that health care and food are going up, the government's borrowing at zero. But I've seen some estimates that these costs have gone up by 6%. So if you crunch that on the calculator, that's not very good going forward as far as the inflation perspective.
BRIAN SOZZI: All right, we'll leave it there for now. Frances Newton Stacy, Director of Strategy at Optimal Capital. Always good to see you.
FRANCES NEWTON STACY: Good to see you guys. Have a great morning. Thank you.