Strategist on market sell-off: I don’t think this is the beginning of a big downturn

Kim Catechis, Martin Currie's Head of Investment Strategy, joins Yahoo Finance’s Kristin Myers to discuss Thursday's market sell-off, as another 881,000 Americans file for new unemployment claims.

Video Transcript

KRISTIN MYERS: What a time for you to join us, because last time we talked, we had essentially been stunned at the run-up in the markets, despite what we've been seeing in the economy, despite all of the news of coronavirus. Of course, now, we are having a sell-off. Wondering what some of your thoughts are on what we're seeing today, and if there was any reason why today-- why September the 3rd-- are we seeing these moves today?

KIM CATECHIS: Hi, Kristin. I mean, it's great to be on again. Thanks for having me. First thing to say is, I don't know. You know, I'm not smart enough to work out why it's happening today. But as you know, this is a conversation we've had over the last few months-- a complete separation between real life and Wall Street, you know, if ever there was one.

So you know, look, all I can say is in spite of these impressive numbers of, you know, stocks being weak today on the S&P 500, you're still up. You know, the S&P is still up year to date around 7%. And you wouldn't have thought that when you were sitting there in March, you know, with a complete sell-off.

So you know, touching on the things you've already mentioned-- I mean, unemployment, you know, the jobless claims, that's pretty much following a trend. I know there's a little bit of difference of opinion out in the market right now about whether this new methodology for accounting, you know, adjusting-- or less adjusting, rather, for seasons, because coronavirus has basically messed up the seasons. So you know, there is no seasonality anymore in the same way as we were used to.

Having said that, you know, it's also not surprising that you should get people going back to work as different states are trying to reopen. And they're all at different stages right now. The key worry, I guess, for all investors should be coronavirus. Because at the end of the day, that's the one big distortion factor. And you know, to call it a distortion factor is actually underplaying the importance of it, obviously, because this is a deadly disease. You know, let's make no bones about it.

So you know, jobs probably in line with expectations, given the rebound that we've had. The sell-off today-- I don't think this is necessarily a permanent, you know, situation or the beginning of a big downturn. But it doesn't stop me feeling that the market's probably pretty well overvalued-- you know, certainly at 27 times as it was this morning my time, not yours. You know, it wasn't looking a bargain.

KRISTIN MYERS: All right, so a lot to did you pick up on there with you, Kim. So you're saying that this is not the beginning of a broader correction, correct? Do you think that this might be a wake up call for a lot of those folks who've been very aggressive about their growth stocks, very aggressive about apples, their Zooms, and even SalesForce. Because as we are seeing today right now, they are being slammed.

Zoom right now down almost 9%-- 8.73% right now. Apple, again, down 6.29%. So this isn't the beginning of a correction to you, but do you think that this is meaning something to those tech investors?

KIM CATECHIS: Look, it absolutely could be, but I'm just saying, I don't see a reason why to expect a proper crackdown to happen from today. All I'm saying is, nothing's really changed. We've got a coronavirus pandemic that's out there pretty much rampant. We haven't got it under control in anywhere, really, in the globe. The US is clearly struggling with it. That is on its own going to be a massive weight around the economy as it tries to get going again.

If your employees are getting sick, you're not going to be able to make your products and you're not going to be able to sell them. You know, it's pretty simple. At the same time, you know, why is the market runaway? We touched on this a little bit last month-- the fact of the matter is that the S&P 500 is not representative of the economy. It's just representative of a segment of the economy. It's the big cap companies that are well-connected, they've got lots of big strong balance sheets.

These guys can get through, you know, the next two, three, four years if they're lean. What also is really important to remember is that, you know, while in the first stage the market ran away with itself because of the stimulus-- the weight of the stimulus being thrown at it-- right now, it seems to me that equity investors are thinking, well, there's a floor under the market now. So I'm sure a lot of them don't believe that today is going to be the sea change.

For a sea change to happen, it means that we need maybe to see that, you know, for example, a vaccine is not coming, you know, anytime soon, or the vaccine that comes doesn't get taken up-- you know, that's another issue. The fact of the matter is there's big swathes of the economy that are going to be struggling.

If you take another index, which is the S&P Russell 2000, the smaller cap companies, you know, earnings are not great. They're under a lot of stress. And I think you'll find that, you know, with the exception of the FAANGs and the kind of guys who are in the papers every day for doing really well as part of the S&P 500, there's a lot of companies there that are struggling. So it wouldn't surprise me if we see a markdown over the next few months. All I'm saying is I don't expect it to be all coming this week.

KRISTIN MYERS: And the Russell right now it's actually down 2.85%. That's about 45 points. So you've been talking about coronavirus a lot, so I kind of want to pick up to two prongs of this. One is stimulus, which we still do not have, and the other is the vaccine. So let's start with the stimulus. Right now, the negotiations, essentially, are at a complete standstill, before the markets had baked in that a stimulus would be coming soon. And yet week after week after week has passed, and we haven't gotten any. If we do get that news, do you think that we're going to see a huge boost to the markets?

KIM CATECHIS: I think there'll be a kind of relief rally on the news. It probably won't last necessarily very long, because all it is is kind of sticking plaster over the wound. It's not actually sorting anything-- you know, solving the problems. I think the one thing you've got to remember is that maybe-- and I'm just speculating here, I'm not in the heads of any of the people on the Hill-- but what I would say is that maybe if you're sitting there arguing about the finer points of the package that you want to put your name to, you're looking at the Dow and you're looking at the NASDAQ and you're looking at the S&P 500. And you're saying to yourself, people are making money. The stock market's up. So it doesn't feel quite as urgent as it did in March or in April.

And maybe that's behind this delay and the kind of stalling. We all know there's different views within the main parties as well, which are probably not helping getting to a resolution. The bottom line is the economy needs it. And people need it. If you look at what's going on in the rest of the world, Germany, Italy, Spain, and France have already declared that their furlough system, which is obviously, as we've said before, is different from the US system, just paying the unemployed-- it's actually stopping them becoming unemployed-- that's going to be rolled out to-- extended to well into 2021, in the case of Germany, right through to quarter four.

So what that does is it puts a proper floor under the economy. And that I think is probably the better outcome right now. But to answer your question straight on, Kristin, I don't think-- you know, there seems to be an awful lot of excitement on the market. There's a lot of hot money. And don't forget-- when interest rates are low and they're likely to remain low for a very long time, that means that any growth-- any growth is precious, and people will fall over themselves to lock some in.

KRISTIN MYERS: So I have to ask-- I asked you just now about stimulus, I also want to ask you, of course, about the vaccine. At first, it had seemed like it'd maybe several months away. And apparently now, it's imminent. It's going to be coming at the end of October-- right ahead of the elections. What do you think the impact is going to be if, of course, we do see some sort of vaccine at the end of October?

KIM CATECHIS: Look, I'm clearly not qualified to talk about the actual science of it. But what I'd say is that I'm as flabbergasted-- absolutely gobsmacked that there is a vaccine coming out in October. I just-- you know, I'd be amazed if that were the case. I'd be delighted. But you know, I'd be amazed.

How the market will react-- you know, the market will get excited. There'll be a relief rally or whatever you want to call it. Some more hot money will come in. It won't have legs. And then we'll gradually start to come down to the reality of seeing just how bad the damage in the underlying economy is. And it may take months for that to sink in.

You know, in the past, when you've had these huge crashes in the market like we did in March, it's taken years to get back to that point. We've condensed that this year in an absolutely unprecedented way. It's an overused word, but I think it's relevant. And what we're likely to maybe see is a very-- it's like a slow puncture on your bicycle. You know, it's going to take a long time for that air to come out.