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Stronger cyclical leadership will be a clue ‘that markets are pricing in some economic recovery’: Strategist

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Baird Investment Strategist Willie Delwiche joins The Final Round to discuss his thoughts on the markets and what signs investors should be looking for to see a a more stable recovery as states continue phasing into being fully reopened.

Video Transcript

MYLES UDLAND: Let's take a quick look at this market with about 15 minutes to go in today's trading session. Market is actually adding to-- I guess, coming off the bottom here, extending some of their gains that we saw over the last hour. The Dow is now up right around 1.5%. And for a bit more on what's going on in the market-- not just today, but what's been happening over the last couple of months-- let's bring in Willie Delwiche. He's an investment strategist over at Baird. And so Willie, I guess in this environment, what are the things that you've been keying off when you try to make sense for your clients of what's been happening, what's likely to happen? Because everyone keeps asking this question, why is the market going up so much when the news is so bad? What's kind of been your answer there?

WILLIE DELWICHE: Sure. Well, first of all, thanks for having me, Myles. Glad to be here. So I think we want to look past just what the S&P 500 is doing and look beneath the surface. That's what we've been telling clients, telling our financial advisors. We need to look for the broad market to start to improve, not just the S&P 500 or the NASDAQ and the mega caps there, but look beneath the surface and see breadth improve, see small caps improve, and start to see a turn towards maybe more cyclical leadership. That would give us some clue that the market's not just responding to weakness, but is starting to price in some kind of economic recovery.

MYLES UDLAND: Now, we started to see some signs of that in the last couple of weeks. And it's not like those trades completely went away, but suddenly, this week, there was some weakness in there. When you look at a market that kind of, at least as far as I can tell, falls 5% out of nowhere, what does that say to you, I guess, about the durability of this rally, which I think some people have started to get quite enthusiastic about it being more than just a quick bounce?

WILLIE DELWICHE: Sure. I think there's two things that we can do in response to the weakness we saw yesterday. One, we can see whether or not it cools some of the optimism that was building. Lots of charts on options data right now that shows really low put/call ratios, things like that, lots of complacency. The other thing we can look at is are we seeing a sustained improvement beneath the surface. And so, you know, the market gets away from itself on the upside. You have consolidations. That's when breadth can really take a leadership role away from some of the indexes. That will be the important key as we move forward from this week.

MYLES UDLAND: And then thinking about what the market might get focused on next, I think there's been a growing narrative that rising COVID cases in a number of states is a real concern for the market here. Do you expect us to be back into a-- let's say, a March-type environment where we're looking at headlines on Texas hospitalizations, Arizona hospitalizations as the incremental driver of the market's direction on a daily basis?

WILLIE DELWICHE: I certainly hope not. I'd like to see us move beyond some of that and I think focus more on what Powell was talking about with-- in his press conference, in terms of the-- how long it takes for the economy to get going again. We-- I think we can work through some of the virus-related headlines if we can start to see some sustainability in the economic data trends, get away from just, you know, the really bad data then the really good data that we're going to see this summer and say, OK, what is the actual underlying trend in terms of what businesses are doing, what consumers are doing. What's the overall health of the economy after we get through some of the noise?

SEANA SMITH: Willie, when we're trying to figure out what exactly is going to be this next catalyst to continue this momentum after we've seen such a surge from those March lows, what are you looking at in terms of that-- the positive impact that it could have on the market, and what sectors do you think are going to lead us in that direction?

WILLIE DELWICHE: Yeah, so I think the thing that leads us next is not just the action, reaction but the areas that have lagged for years now have a chance to start to step up a little bit. And so we're out of that narrow participation, not just, you know, a handful of stocks moving. But you have small caps taking a sustainable lead relative to large caps, international stocks maybe starting to make sustainable leadership relative to the US.

And from a sector perspective, I mean, let's look at industrials. Let's look at materials. Let's even start to think maybe about financials and energy eventually starting to make some sort of sustained leadership turn. If we see that, then that's the market looking forward to the future and not just kind of responding to what we've seen recently.

MYLES UDLAND: Yeah, and again, we've seen some, like, maybe head start-- fake head starts--

WILLIE DELWICHE: Yeah.

MYLES UDLAND: --in that direction? Something like that. We'll see kind of what sticks around in the months ahead. All right, Willie Delwiche with Baird, thanks much for your time. We'll talk to you soon.

WILLIE DELWICHE: Yeah, thanks a lot.