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SVP on why the market is 'not going back to where it was in December'

Jay Jacobs, Global X ETFs SVP and Head of Research & Strategy, joins The Final Round to discuss the day's market rally and what sectors investors should watch.

Video Transcript

SEANA SMITH: Let's get back to today's broader action. Again, a big rally on the Street with the Dow closing up just around 530 points. S&P and NASDAQ also posting solid gains. For more on that, we want to bring in Jay Jacobs. He's a senior vice president and head of research and strategy at Global X ETFs.

And Jay, just, first, let me your thoughts just about today's rally. We were talking about how much investors, or how important it is to investors, that we get some sort of stimulus deal over the next couple of weeks or the next couple of months.

Is it just the fact that we will get some sort of deal, and what's included isn't that important at this point, and also, the exact timing of it is not that important? I mean, help us understand what exactly is going on in the markets right now.

JAY JACOBS: Well, the reality is, I think market participants realize that this is a very soft economy still. We're in the reopening stage of this pandemic, which means it's a very tenuous environment where stores are trying to reopen. We have new policies and procedures being put in place. And at the same time, we're seeing COVID-19 outbreaks continue in places like New York City.

So right now, it's clearly a tenuous environment. And a lot of people are still out of work. So I think any type of fiscal stimulus is very much being appreciated by the market right now, even if it's mostly just ceremonial right now in terms of [INAUDIBLE].

Because last night, I think, certainly looked like a low point for the markets with the potential for no stimulus over the next month. Now maybe it's back on the table, which is very much being celebrated by these markets.

SEANA SMITH: Jay, we've seen volatile market action here over the last 24 hours. Is this indicative of what's to come over the next couple of weeks as we lead up to that November 3rd election?

JAY JACOBS: There's no question the markets are expecting a lot of volatility going forward. So I think for investors, that means there could be some tactical opportunities here that could present some buying opportunities if we were to see a sell-off in specific areas. Because we have not seen monetary support falter at any point.

And if anything, the Fed is looking at potentially increasing bond purchases or purchasing longer dated bonds. So if that's still the case, we think the markets can still maintain these bubbles. But if the market is whipsawing back and forth, that could be an opportunity for investors.

AKIKO FUJITA: So how should investors be playing that volatility? You know, today, we're making so much of the president's tweets. The bottom line is, fundamentals haven't really changed in terms of where things stand on the stimulus bill.

And yet, you look at something like potential for aid with the airlines, I mean, that seems to be giving some optimism for those who are looking for opportunities in that space. How are you positioning yourself? Is it still about the reopening trades? Is it about the tech trades that you think are more sustainable? Where are you putting your money?

JAY JACOBS: Well, I want to make a clear distinction that the reopening economy is not the same thing as buying technology stocks-- or buying airplanes stocks, in my mind. Because the market is not going back to where it was in December 2019.

If you look at Boeing, they reduced their expectations for plane sales by 11% over the next decade. So Boeing is not expecting planes to be the same as they were over the past decade.

So we see the reopening trade is really looking at companies that are promoting flexibility and safety within our economy. One of those segments that we think is the best position for that is cloud computing.

We're seeing work-from-home, video conferencing, internal communications not going anywhere, as we continue to see this whipsaw between offices reopening and then sending people back home. So we think cloud computing is well positioned.

The other one, internet of things companies, particularly semiconductors and people developing connected devices, look really well positioned in this environment. We're seeing wearables that may be able to do early detection of COVID-19, as well as certain devices that will be placed in offices and public spaces that can measure things like social distancing and proximity.

SEANA SMITH: Jay, when do you expect us to see more of this rotation into-- it's leading the market today, but materials and industrials, more of this cyclical trade? What do you need to see in order to be convinced that this rotation is here to stay? Is it stronger economy? Is that what you're looking for?

JAY JACOBS: Well, the strongest stimulus we can see for materials and industrials would be an infrastructure package. And I think there's increasing odds that if Biden and the Democrats sweep the Senate, that you could see a pretty major infrastructure package being passed.

That would benefit everyone from materials companies and cement and steel to industrials companies like construction and engineering. So we think that might be the Biden trade here that is starting to pick up more steam.

ANDY SERWER: Hey, Jay, let me ask you, just to go back to your cloud and IoT place, a lot of people have talked about that. You know, of course, Salesforce is front and center there [INAUDIBLE] cloud category. Oracle wants to be. But, you know, what happens when we go back to work? Are these stocks just going to come back down to Earth?

JAY JACOBS: Well, I don't think we're going to go back to work the way we thought that we were. If you look at some recent surveys, about 15% of people used to want to work from home about three days a week. Now 40% of people want to work from home three days a week.

So people want it. Big companies like Facebook, Twitter, and Square have said that they will allow people to work from home indefinitely. So I don't think they're going to be tearing up those contracts with the cloud computing providers anytime soon.

But the real exciting part of cloud that we haven't really realized yet is the [? profitability ?] of the space. A lot of these cloud computing companies, their strategy this year was get in as many computers as possible. Just cut prices. Say yes to any company that was willing to buy their product, even at cut rate prices.

Just get into those businesses, and then raise rates in 2021 and 2022 when we're in a stronger economy. That will be extremely profitable for these cloud computing companies because they will be deeply ingrained in people's businesses and will have all this pricing power to start raising the costs of their services.