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Trump says he would go above $1.8 trillion on stimulus deal

Jason Draho, Head of Americas Asset Allocation at UBS Global Wealth, joins Yahoo Finance's Zack Guzman to discuss the stimulus outlook amid worse than expected jobless claims data.

Video Transcript

ZACK GUZMAN: I want to dig into a little bit more in terms of what this means for the recovery here. It's not just unemployment claims investors are grappling with today. Of course, we're still getting earnings coming in here, as well as new updates on the stimulus front.

When we think about what more the White House can do to meet Democrats in the middle, President Trump still pushing for going big or going home, even beyond that $1.8 trillion mark that looks to be some sort of a compromise space, though big questions loom over whether Republicans in the Senate would go along with that. So here to discuss everything investors need to digest right now with us is Jason Draho, head of America's asset allocation at UBS Global Wealth Management.

And Jason, I appreciate you taking the time. I guess we'll jump off on that unemployment claims update we just heard from Emily. Obviously, something investors are watching to see how this recovery is holding up. But what are you looking at, and what are you seeing influence us most, as we're now under 20 days to election here?

JASON DRAHO: We've just forgotten the jobs number. I think this is consistent with the trend over the past few weeks where we've seen not weakness necessarily in the labor market, but definitely slowing of the pace of recovery, compared to where things were in the summer.

And it's not really surprising. You know, you alluded to some of the extended unemployment benefits that was part of, you know, the CARES Act. We're starting to see some of the fiscal stimulus that was done earlier in the year roll off, some mini fiscal cliffs that are sort of taking place from the start of October, which is why there's so much focus on the prospect of more fiscal stimulus.

Because without it, you know, the economy-- the recovery is going to slow. I think it doesn't get sort of derailed, but this is a challenge in the near term. Until we get that extra stimulus, we're going to see some weakness in the labor market, at least in terms of the pace of the recovery.

ZACK GUZMAN: Yeah, when we talk about getting that next round of stimulus, not a lot of people are optimistic, including Secretary Mnuchin, if you listened to him yesterday, or Mitch McConnell, I should say, for that matter. When we think about getting these things through, it sounds to be difficult, seeing as we're so close to the election now.

On that front, I mean, you've been writing notes here about how the market was a little bit on edge about the idea of a Democratic blue wave controlling the Senate, and also a Biden victory potentially here. Talk to me about how that might have flipped, as investors try to grapple with the idea that a larger stimulus bill here might be better, not just for the market, but the underlying economy.

JASON DRAHO: So the assumption, I think, for investors going back, at least a few months, in fact, earlier this year, once it became clear that he'd be the nominee, is that if you get a Democratic sweep, you know, with Biden becoming president and the Democrats getting in the Senate, that the fear would be, you're going to get tax increases because they've already said they're going to raise taxes in different cases, so some repeal of the tax cuts from a couple of years ago.

You'd get some height regulation in different sectors, both of which would be viewed as sort of negative for growth, and certainly negative for corporate earnings, which is going to drive the equity markets.

But some of that was sort of kind of focused on, let's say, the negatives for the economy or for that financial markets. People tended not to focus on the fact that if you look at Biden's proposals, just on paper, what they are, they total up towards $7 trillion of spending over the next decade, whereas the tax increases are $4 trillion.

These are massive numbers, but the net result is a $3 trillion difference in terms of what they're talking about additional spending. The assumption back in the summer is that we get a fiscal deal first by the August recess. That didn't happen. And then something would happen by the end of September before the end of the budget year. That didn't happen.

Now that it looks likely it's going to be pushed off post-election, it seems like the first priority for the Democrats will be to pass the HEROES Act 2, which means a couple trillion in spending, if that materializes, where tax increases would be a 2022 problem, which is why, really in the past two or three weeks, investors are kind of warmed up to the idea of a blue wave because it unleashes the gridlock and potentially unleashes kind of fiscal floodgates for next year.

ZACK GUZMAN: Yeah, and I can understand warming up to the idea of that. But when you think about it, right now, the way that we've heard from a few market guests that the market doesn't enjoy surprises specifically when it comes to elections-- and on that front, we got the new Wall Street Journal NBC News poll, showing Biden does have a lead of about 11 points among registered voters nationally, 53% to 42% as of that poll.

But when you look at kind of the overhang here, the biggest question, I think, in terms of what could happen has been the idea of unrest and what could happen if you don't have a peaceful transition of power. That's been a repeated question at a lot of these Trump pressers. I mean, is there still not the idea of civil unrest and overhang, considering how divided the country is right now, and what kind of impact that might have beyond just the results we get on November 3?

JASON DRAHO: A lot hinges on what the results are. So let's assume that, you know, that the polls are right that Biden is going to win. If it's a very decisive victory, you know, and across the electoral college, so he wins a number of the states that are the swing states so there's no prospect, really, of further contesting the results, looking at recounts-- it's clear by November 3 that evening that he's won by decisive margin-- I think that really reduces the prospect of this either being a delayed result, contested result.

I think it makes it harder for Trump-- President Trump, but also any Republican state legislators to kind of push forward. If it's very close, then that kind of drags on.

What you've seen is the markets, just in terms of what they're pricing for volatility right around the election, which is a pretty good proxy for concern, that's come down just in the past couple weeks, which suggests that their conviction of a clearer, at least, Biden victory has increased. And therefore, the potential for some social unrest right around the time has declined.

ZACK GUZMAN: And when we talk about the other things driving the market right now-- of course, we are moving forward in Q3 earnings season. About a little over a tenth of the S&P's market cap has now reported results there. Surprisingly, the upside by about 23% in aggregate, 82% of companies beating their projections.

So by your estimates here, how is the underlying economy through earnings and what we're seeing on that front looking to you as we move forward in Q3 and wrap up 2020?

JASON DRAHO: So it's still early. You mentioned it's 10% into the earnings season for S&P 500 companies. But what the results are saying is that the earnings recovery is quite strong. We saw this for second quarter earnings back in July when they first kind of reported they were beating expectations also by around 20%. So there's clear strength in the recovery.

A lot of that was sort of expected. It was unusual leading up to the earnings season. Typically, analysts kind of revised numbers down going into it because companies guide lower. In this case, expectations were being revised higher so that's unusual, and companies are still beating it. Thus far, though, the markets, I think, are much more focused on the fiscal situation, the situation with COVID, especially in Europe.

But the takeaway I would have from earnings is that it's a strong earnings recovery. I think it's important remember, though, is that the stock market isn't the economy. When we look at the economy overall, it's very interesting to see if you look at the dynamics where some parts are doing well, others clearly not doing as well.

For example, consumer spending on durables is up 10% relative to pre-COVID levels. But spending on services is down 10%. So people are buying refrigerators, but they're not going to the movie theaters.


JASON DRAHO: The stock market is actually much more skewed towards goods, not services, which is why it can actually have good earnings, even if the economy is still-- the recovery is still slow.

ZACK GUZMAN: So given all that, just to wrap up, I mean, we talked a lot about a positive and negative catalyst here, earnings seemingly holding up pretty strong here. So what would be the advice to investors out there in terms of asset allocation, as we move forward in the recovery and look ahead to next year?

JASON DRAHO: So in near term, it's going to be volatile. It's going to be choppy. It's difficult to really kind of play. That's why we advise investors, don't get too aggressive, to try to de-risk. In some cases, an opportunity to add exposure if things kind of pull back.

But looking out 6, 12 months, you know, we still have a fairly constructive view. You know, ultimately, we're going to get more stimulus. The question is exactly how much and when. We expect a vaccine and sort of medical solution to allow sort of economic activity normalized by middle of next year. All that sort of positive, it's not, in our estimation, kind of priced into equities at this point in time, so still more upside.