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'We're likely to get a stimulus once this election is over': Strategist on market outlook ahead of the election

Sam Stovall, CFRA Chief Investment Strategist, joined Yahoo Finance Live to discuss his market outlook ahead of the Presidential election and why he says investors are expecting a Biden win as well as a blue wave.

Video Transcript

SEANA SMITH: Well, with 55 minutes left in the trading day, we want to bring in our first guest, Sam Stovall. He's the chief investment strategist at CFRA. And Sam, we're seeing some buying action ahead of tomorrow's big election day, with the Dow up just over 400 points at this point. I guess the big question is, how should investors be positioning themselves ahead of election day tomorrow?

SAM STOVALL: Well, I think, Seana, first off, you realize that you don't want to be trying to play an event that is going to happen a day or two from now, that the outcome is very uncertain. So you focus on being positioned the way you expect to be in terms of your goals, time horizon, et cetera.

I think that what we're seeing today in terms of sector growth traditionally in your industrials, also materials, and energy stocks doing very well, the implication is, we're likely to get a stimulus once this economic-- once this election is over, and also, possibly some infrastructure spending. So it would be an indication to me that investors are expecting a Biden victory and maybe even a blue wave so that we do get the stimulus and the infrastructure spending to kick in fairly soon in the new year.

ADAM SHAPIRO: Sam, I realize that history does not guarantee outcomes. But as you pointed out, and other analysts and smarter people than us have pointed out, whenever the S&P 500 declined in price from July 31 through October 31 of a presidential election year, the incumbent person or party removed from office 88% of the time. So that kind of happened. That was-- it was slightly down. So what does that say to us about the potential victor in this thing?

SAM STOVALL: Well, Adam, looking at face value, it would imply but certainly not guarantee a Biden victory. Because with the market being down, it's a reflection of uncertainty because investors are expect to change horses in midstream. And they aren't really sure exactly what the new administration will bring and what kind of an effect it will have on the market.

But that said, I think COVID has also been playing a part in this, playing a role in the market's advance since the March 23 low. And as a result, it could end up being a disruptor, the way we've seen in prior misses with this predictor, such as in '68, 1980, and 1956.

SEANA SMITH: Sam, I want to ask you about stimulus because when we take a look at some of that data that we got out this morning, the ISM number in particular, it doesn't look like the economy is losing momentum because of no stimulus. Does a report like this, do you think, weaken that argument that we need a big stimulus package?

SAM STOVALL: Well, that one does, but construction spending came in a little bit weaker than expected. So I think certainly that's the reason that the Republicans and the Senate were not able to agree with the Democrats in the House. Because the Republicans feel we don't need the additional stimulus because we already have enough debt that we have to deal with.

Whereas the Democrats say, no, we need the stimulus, and we can address the debt later on. So yeah-- and also, realizing that the economic data is backward looking and we have to see what kind of an impact the new spike in COVID will have on forward economic data, as well as earnings. I think that remains a big question mark as well.

ADAM SHAPIRO: I was reading one thing, though, that depending on who wins, if it's a Biden victory with a blue wave that puts the Democrats in control of Congress, we get a $3 trillion stimulus. If it's President Trump who said he wanted about $2 trillion, but Republicans maintain control in the Senate, maybe you get a $1 to $1 and 1/2 trillion stimulus. Does it matter if it's 1.5 or 3? Stimulus is stimulus. That would drive equities even higher, no matter what, right?

SAM STOVALL: I think stimulus would be helpful to supporting the economy and certainly to support in confidence of Main Street. And that could then help to boost Wall Street prices. Yes, I think the real question, then, will be the conversation surrounding infrastructure spending in 2021 and how quickly that might be rolled out.

SEANA SMITH: Sam, we're in the midst of third quarter earning season. Lots of speculation going into this, just in terms-- or I guess, questions, I should say, about how closely we should be paying attention to these numbers, what that really means for the future. What's your read just on the reports that we've gotten and also some of that selling pressure that we've seen on results that have actually beat Wall Street's expectations?

SAM STOVALL: Well, we've been-- expectations were for a very weak third quarter. We're getting much better results. Still negative, but much better than what had been anticipated earlier. We're seeing upward revisions to fourth quarter earnings, as well as for 2021. I think those companies where the whisper numbers were a little bit higher, or possibly with the technology firms, you want to buy on rumor, sell on fact, I think that's what's causing the price action there.

So I think that another example of how management has managed expectations because of the expectations heading into the quarter, and basically saying all sectors, but energy improve on their third quarter results.

SEANA SMITH: All right, Sam Stovall, chief investment strategist at CFRA, always great to talk to you. We'll talk to you soon. Have a great day.