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Stocks rally on election day as the early vote surpasses 100 million

Kathryn Rooney Vera, Bulltick Chief Global Markets Strategist and Brian Jacobsen, Wells Fargo Asset Management Multi-asset Strategist join Yahoo Fianance to discuss the day's market action as stocks traded sharply higher on Election Day.

Video Transcript

SEANA SMITH: And Kathryn, I'm just going to kick it over to you first. When you're looking at how we're set to finish up-- Dow, S&P, and NASDAQ all up just around 2%, as it stands-- what's your take on why we're seeing this rally today ahead of the election results tonight?

ADAM SHAPIRO: Kathryn, I think you got to unmute.

KATHRYN ROONEY VERA: I think the markets, Seana, are internalizing the inevitable additional fiscal stimulus package that's coming, regardless of who wins. In the case that it is a blue sweep and the Democrats take control of the Congress and the White House, the difference between their stimulus package and the Republican one is multi-trillions of dollars. So the market really internalizes the fact that what has taken us to current highs, which is the combination of both monetary and fiscal stimuli, is going to continue.

ADAM SHAPIRO: Brian, I want to bring you into this because we see huge government stimulus, as well as central bank stimulus, worldwide. But what's happening with the global economy? Investors have to pay attention that, especially as France and other parts of the world lock down again.

BRIAN JACOBSEN: Correct. I think that's one of the things that's been giving people a little bit of angst. You have to remember that we experienced, you know, more than a 14% decline with the NASDAQ, 9% with the S&P 500. And it was really because the economic data was weakening, right? You had the renewed restrictions on activity in certain parts of the United States but then also throughout Europe. And it's the expectation that we're going to see that in the economic numbers.

Now, that's kind of yesterday's news, in a way, because that's already been priced in. And investors are really looking forward to getting the election behind us, likely having resolved relatively quickly, it seems like. That's-- in the betting markets, it looks like it should happen, you know, later tonight or at least tomorrow, as far as knowing what the outcome is.

But we're a little concerned that you could be getting a little ahead of yourselves here in the markets with the expectation of stimulus. This could be setting us up for a little bit of a buy the rumor, sell the news kind of event here. If everybody's already pricing in a blue wave, then what happens when you actually get that? Then the market moves onto the next thing. You know, the attention is going to shift pretty quickly.

SEANA SMITH: Jared, I wanted to get your thoughts just on the leadership that we're seeing today because financials among the winners, as we see this bump in the 10-year Treasury. Also just industrials are an outperformer, that cyclical play coming back into favor. What do you think is behind the move in these two areas of the market today?

JARED BLIKRE: Well, getting back to our original theme here, it's probably about expectations for fiscal stimulus in some way or another coming rather sooner rather than lately. And it's possible, and I think we should definitely be on alert for a buy the news, sell the rumor-- excuse me, buy the rumor, sell the news event. And I think any weakness over the coming days or weeks will probably be a buying opportunity. It's no reason the indices themselves shouldn't go higher.

But if you're looking for the leadership here, you look at the Dow, up about 3.6% over the last two days. That's a nice run for it. I believe it's the best in several months. And then you look at the financials, XLF on a tear as well.

And just going back over the last five years, there's an interesting parallel to look out for. In 2016, XLF was having a very tough time getting over this resistance here. And similarly, we have this consolidation here. It could be the driving force that sets it off for another run or to the downside. But again, I think we'll find out in the days and weeks to come here with a brand new set of trends and sector rotation.

ADAM SHAPIRO: And we're standing by for the closing bell, which is going to be any second, Jared. But want--

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--value. Might we see a little bit of short covering driving things a little higher right now in anticipation of what's going to happen tomorrow on the day after?

JARED BLIKRE: It's possible. We look at some of the most beaten-down sectors. Those are the energy sector and the financials and some of the others as well. We have seen this rotation in the cyclical, which you expect with the infrastructure. Value also typically gets a nice little bump there. But we can look at some of our leaders, and these are kind of the canaries in the coalmines. XRT, that is up 3.5%-- excuse me-- 3.5% today, biggest leader. That does have a lot of names that have high short interest in them.

And one of the better sentiment indicators for the blue wave is TAN. That's a solar ETF. So blue wave, you think renewable energy. That's down slightly today, 2.5%. Does it mean that, I guess, theme or meme is not in play anymore? I don't think so.

But you look at the trends here, KWEB, that's the Chinese internet ETF. That's down, but that's mainly because of the Alibaba news. So that's kind of idiosyncratic. But I'm also seeing some broad-based buying. I look at the internals. You know, I like to look at the advanced decline lines, and the S&P 500 and New York Stock Exchange both up very sharply today. So we could have some short covering, but we did get a two-day surge back in 2016 as well when everybody thought Clinton was the shoe-in-- so interesting parallels here.

SEANA SMITH: Kathryn, as we look ahead to year-end past this election-- I know your S&P price target's 3,500. Right now, we're sitting at 3,369. What needs to happen to get us there?

KATHRYN ROONEY VERA: Well, just going back to buy the rumor, sell the fact, I've-- what I've been telling our clients, Seana, is to sell-- green energy, have a rally from 100% to 300% year to date. And that is certainly, I think, a place to take gains.

What we're telling clients is, look, if you have-- if the market gives us the opportunity to enter, it is an entry point. That means if we get a correction because there is a blue wave or because of it's a contested election or as, I think, Brian, one of your guests said, we don't get that fiscal stimulus package, which I think is not going to happen before year-end, and the market does sort of a temper tantrum, then we would be recommending going long US equities.

Why? Because the Federal Reserve is there to backstop markets. I think that trend will not change until we have a surge in inflation or until we have a replacement to the dollar in the US Treasury, which is not in the offing. So I think the current trends are going to continue, regardless of who wins. If we get that entry point, we must take it.

I'm going long industrials and materials, but I'm also counterbalancing that, Seana, with long positions in inflation-protected instruments. If we do get a Democratic sweep, we should expect accelerated rates of inflation in the coming 18 months, and I think we need to be positioned for that in gold and consumer staples. The possibility of additional lockdowns under a future administration is very real, so be in utilities and staples. And also, I like gold positions to act as a barbell strategy, counterbalancing that risk-on trade.

ADAM SHAPIRO: Brian, is the excitement among individual investors there, though? If we're watching, as you point out, fading fundamentals on quarter-on-quarter improvement, just not enough to get people to truly get back into this market long term?

BRIAN JACOBSEN: Yeah, and when you look at the individual investors, as far as how they've been positioning, they've actually been underweight equities. I mean, obviously, there are exceptions to that. There's been a lot of talk about, you know, like, the Robinhood investors and that. But your actual retail investors, the broad public, has been underweight equities. There's been outflows from equity ETFs and mutual funds throughout a lot of this rally.

So there is plenty of opportunity for people to-- you know, when they think about this as almost like a mile-marker. We're going to get past the election, and then we get towards the new year where there's new optimism about perhaps a new vaccine, where people can get to some semblance of normal activity. We do think that it's setting us up for, actually, some decent support.

So over the medium to long term, we remain very optimistic about the outlook for equities, US equities, more cyclical plays. It's just that in the near term here, we are a little bit concerned that if you do get the buy the rumor, sell the news or if there is a bit of a surprise where perhaps, you know, you might have, say, a Biden presidency but the GOP retaining the Senate, which, according to the prediction markets and to, you know, like, say with FiveThirtyEight, as far as their probabilities, that seems to only be in the 12% to 17% probability range, that would be a bit of a surprise that maybe you could get a risk-off move. But we think that would be very temporary. So the trend is your friend, but there might be a few little hiccups along the way.

SEANA SMITH: Jared, I got to ask you about what's going on in the bond market because we when you're talking about this little spike that we're seeing in the 10-year yield-- we have the 10-year yield right around 88 basis points, right near the highest level that it's been in just around five months. How should we be thinking about this, just in terms of what, potentially, the Fed could do if the yield curve does continue to expand by a little bit too much?

JARED BLIKRE: Well, I think that's an excellent question because we have a Fed meeting in two days, and that's one of the things that they're considering is yield-curve control. So we were talking about the financials earlier. Are they a good play right now, given the potential for the Fed to kind of rein in-- rain on its parade? And that would be a collapse in the yield curve, which is antithetical to their best interests. It gets net-interest margin down, and they can't make as much profit.

So in that scenario, I think the Fed is a risk for the banks, even if we see the reflation trade play out. I've talked to a number of analysts over the last few weeks. They don't really see the 10-year getting above 1%. It's currently at 88 basis points, and that is the highest since June. But you know, if it does get beyond that and the Fed has to come into play here, that's a pain trade.

And then the other pain trade I'm looking out for a potential, not the base case, is a stronger dollar because the dollar has been going sideways. And if you see this in our chart here, going back to about July, August, hasn't really made any headway here. And if it were to spike to the upside, there's very little positioning ahead of the election that is prepared for that.

ADAM SHAPIRO: Kathryn, based on what Jared was just saying about a potential, you know, collapse in the yield curve, you were talking about positioning a bid in gold, which is now over $1,900 an ounce. What would the impact be if Jared and the Fed are headed in that direction?

KATHRYN ROONEY VERA: Well, I'm actively recommending that our clients buy 10-year Treasuries above 85 basis points because I do think that if you get steepening-- an ongoing and tenacious steepening of the yield curve, that that goes directly against what the Fed has spent the past more than a decade trying to achieve. So yield-curve control, I think, is inevitable under that circumstance, so one should bet on that.

Just as one would bet on the Fed's additional asset purchases, were the S&P to drop 10%, 15% 20%, I think the same thing can be, you know, assumed, given that if the 10-year rallies-- or the 10-year yield rises above 1%, we should expect a clamp-down on that. One other thing that we're actively recommending is fallen-angel bonds. The Fed has opened the door to the purchase of high-yield bonds.

And in the event it deemed it necessary, it would continue and accumulate positions not just in Ford, which is the only high-yield bond that the Fed currently owns. But the Fed being the biggest, most important investor in the entire world, we think would not blink in the face of a threat to its intended goal, which is to accelerate inflation and extend and maintain the economic expansion.

SEANA SMITH: All right, I want to get your take just on the other big event that's happening right now. It's kind of getting lost in the shuffle with the news flow this week. And that, of course, is third-quarter earnings. Because when you take a look at the results that we're getting from a number of corporations, we're beating by a pretty wide margin, yet we're seeing many of these stocks come under pressure despite these big-- Why don't you think the quarter-over-quarter improvement is enough to get investors excited this time around?

BRIAN JACOBSEN: Yeah, I think it's because when you go in, it's oftentimes about the guidance, right? It's not necessarily what did you do for me lately, as far as did you actually beat expectations. That does help. But with certain stocks, it didn't because if you look at what was the type of guidance, maybe they don't have any clarity whatsoever to offer guidance. Or when they do, effectively, the message has been, don't expect a repeat, right?

So we are seeing quarter-on-quarter improvements, a significant number of companies beating, as far as with not just bottom-line, but top-line revenue growth. So it does look sustainable. But that's-- again, it's kind of yesterday's news. So when you're looking out forward, it's about, are they going to continue this growth rate?

We were a little concerned with our exposure to technology stocks, as far as just had they gone too far too fast. Did it become almost like the Icarus trade, right? In mythology about flying too high and then the wings melt. And did that kind of happen where people were just taking the trend that happened and extrapolating that out too far? And in our minds, that's exactly what was happening, which is why we lightened up on that, you know, NASDAQ trade, favoring something more cyclical, looking at broader-based S&P 500, where there isn't as much concentration, or as far as with industrials, so being a little bit more sector specific.

ADAM SHAPIRO: Kathryn, I'm going to let you wrap this all up for us. I'm the worst kind of investor because I'm a set it and forget it and literally years down the road kind of person. I should be more active. But you expect the S&P finishing year at about 3,500, so that reinforces my passive, lazy trajectory. Is there anything you want to warn me and others like me about that?

KATHRYN ROONEY VERA: Hey, it's worked for you, right? I mean, you could have freaked out at March 23 and sold everything because the market dropped 35% and missed out on a 55% rally. So I don't tell you-- I'm not going to tell you that's the wrong thing to do, Adam. I think it's a very good approach to buy and hold, especially if you're not-- you don't need the liquidity in the near term.

But what I would say is, to a lot of investors who perhaps haven't looked beyond the US horizon, I think emerging markets is going to have a phenomenal year in 2021. It's one of my strongest conviction trades. The combination of low interest rates in the developed world, negative real interest rates in the United States, a weak and a likely weaker dollar going forward, global economic recovery, and not to mention, I would say most importantly, Adam, is capital flows.

We see a lot of big money really interested in returns in the emerging space. I would tell the individual investor to take a look outside of US shores and start accumulating positions in the MSCI emerging markets index and start adding risk. Because the fact is, the Fed is going to continue to support markets. Anytime it gives us the opportunity, I think we should be accumulating, and we should be overweight equities over fixed income.

SEANA SMITH: All right, Kathryn Rooney Vera, chief global market strategist at Bulltick and Brian Jacobsen of Wells Fargo Asset Management, great to have you both on the show. We'll talk to you soon.

KATHRYN ROONEY VERA: Thank you.

BRIAN JACOBSEN: Thank you so much.