A 'Democratic sweep could create pretty significant volatility in the back-half' of 2020: Chief Strategist

Amanda Agati, PNC Chief Investment Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss what’s moving the markets on Friday morning.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's get back to the market action on this Friday with Amanda Agati, PNC chief investment strategist. Good morning, Amanda. Before we get into the market action, would love your reaction to the retail sales report we saw. I mean, some people might say, look, a rise of 1.2% in retail sales during a historic pandemic is actually pretty good. What was your take?

AMANDA AGATI: Well, we'll take it, that's for sure. Any kind of positive data points and growth is certainly a positive in this unprecedented environment. But I think it's just reflective of the fact that there is still just tremendous uncertainty out there. Consumers are, indeed, spending, but they're certainly not splurging. And I think it just really reinforces the point that we need to get some fiscal stimulus going again, despite a three-week recess, that the consumer does not feel like things are anywhere near back to normal.

We should be seeing some acceleration in spending heading into a back-to-school season, so that may contribute a little bit. But it'll be interesting to see what happens once we get past that hump. So good to see that news but hard to say that that's, you know, a tremendous success at this point.

BRIAN SOZZI: Amanda, I'm sure you've been watching this week the backup in treasury yields. Is that the first indications that this market is beginning to get worried about all the debt we're adding on top of an already indebted US economy and that, in fact, might be the trigger point for a sell-off here?

AMANDA AGATI: I'm not sure that that necessarily is the case. I mean, I think you have to take the movement in rates with a little bit of a grain of salt, given how active the Fed continues to be in fixed-income markets. I don't think it's necessarily providing the signal that perhaps it once was. I mean, obviously, we're concerned about deficits and debt levels longer term. I'm not sure that it really factors into the market's psyche or line of sight in the short run. At some point, that's going to come home to roost, but that's a way-down-the-road kind of story. And I don't think that's necessarily an issue for the market right now.

I think really what the market is fixated on is the short-term path forward-- what happens with stimulus? What happens with the election? We're 2/3 of the way through earnings season, and I think the results came in a bit better than expected. So that's helping put a floor there in for the market, but the rest of the year is still going to be a tough slog. So this market is really pricing for perfection when the backdrop is really anything but that. So I think it's a number of things. I don't think it's just one particular factor here.

ALEXIS CHRISTOFOROUS: Amanda, you mentioned the election, and you make a good point in your note saying that perhaps even more important than the actual presidential election is what happens in Congress because the balance of power is so important for Wall Street too and that sometimes investors would rather see gridlock than anything else. So we're going to be watching that balance of power in those congressional races very closely. What's your take right now on how the market is reacting or not reacting to the upcoming election?

AMANDA AGATI: Well, the market, I think, has been surprisingly calm, all things considered, as it relates to the election. I mean, there's plenty of things for the market to chew on that have been top-of-mind as opposed to the election. But we're now in the final kind of three month race into the election. So it really is important, on a number of levels, to help gauge the path forward.

You know, typically, we look at a number of different variables to get a sense of what's going to happen around the election, although there is no perfect indicator. And usually with the market being up in the three months kind of leading up to the election, that's usually a pretty good predictor of the incumbent remaining in control.

So it's a really pivotal time. We've had this massive rally, historic rally off the bottom. But if we continue to chop around here for a while, I think that may very well be a signal that we're in for a little bit of fireworks, potentially, around the election.

But you're absolutely right. It's not just about who controls the White House. It really is the power across the House and the Senate as well. I don't think the market is really focused on or pricing in a Dem sweep, which I think could create some pretty significant volatility in the back half of this year.

Polling odds are suggesting that that is certainly rising. So relative to pre-COVID levels, I think the polling data has doubled, in terms of probability, from something like 30% to 60% now. So we'll see. I think it's going to be a really interesting race to the finish. We're not going to have a great indication of who's going to win probably until the election itself or that night.

BRIAN SOZZI: Amanda, it sounds as if you're maybe a little more short-term focused, at least for right now, with these markets. Now, this weekend, US and Chinese officials are supposed to meet up to review the progress on that phase one trade deal. Looking towards next week, could that be-- that outcome-- could that be a big-- could that upset the market?

AMANDA AGATI: Well, you know, I hate short-termism as much as pretty much every other investor, I think. But in this environment, you have to shorten up your line of sight and, you know, try to assess higher frequency data and all of these data points that are coming in around all these macro issues. There's just such a complex backdrop that it's hard to just take a purely long-term, multi-year kind of focus.

And so absolutely, we're watching what happens on the trade policy front very, very closely. That had faded into the background. And now, over the last few weeks, we're starting to see that come back into the equation with a bit of a vengeance. And so that has important implications for emerging markets, certainly. Emerging markets has been and continues to be one of the strongest performing equity asset classes throughout the pandemic. The fundamentals continue to be very, very strong there. But any meaningful shift on the trade policy front could be a pretty significant negative.

And so that does translate into potentially what happens with the election. If the Republicans remain in control and we see a more of a status quo, I think there's going to be a harder line stance certainly taken around trade policy. And so that could have some important implications for positioning in the second half.

JARED BLIKRE: Hey, Amanda. I wanted to get your take on gold, since we talked about bonds earlier. The other half of the safety trade, very volatile week-- we had that sell-off at the beginning of the week, kind of come back about maybe 1/3 of the way here. What's your take on precious metals?

AMANDA AGATI: Well, we tend not to invest in precious metals in general. It's not that we don't have exposure in portfolios, but we tend to try and gain exposure there through more hedge fund or alternative strategies where you can kind of play both sides of the trade. We're not really long-only investors in commodities for the very reason that we don't think that they provide adequate protection, in terms of an inflation hedge. And they don't throw off cash flows, which can be a very important component of our investors' portfolios and allocation.

So we're watching gold certainly very closely as a guidepost for the inflation backdrop, for sentiment around-- just given how unprecedented the environment is, you have to think that this rush into gold is a function of investors looking for stability here. But beyond that, you know, I don't think we're too fixated on the path forward there or thinking that this is going to continue running kind of into infinity. We think that story has kind of played itself out. And if we're really thinking about inflation becoming an issue at some point, we'd much rather try and play that story through equity exposure and dividend growers and dividend payers, at that.

ALEXIS CHRISTOFOROUS: What do you make of the rotation we've been seeing out of growth into value? Is that a trend you are buying into right now, Amanda, and do you believe it's sustainable?

AMANDA AGATI: So this is the, like, zillion dollar question. We get asked this question all the time, and I think it comes back to just the highly bifurcated nature of this market and really driven by the pandemic and these macro-dominated factors. You know, you're seeing a big distinction between growth and value. You're seeing a big sanction between larger capitalization and smaller capitalization, a big distinction between US equities and international, even in fixed-income markets. It's really a distinction between the haves and the have-nots, the Wall Street versus the Main Street.

And so at the end of the day, as long as we remain in the-- kind of this arm-wrestling match between the stay-at-home trade, which is really growth, tech, mega caps, versus the go-outside trade, which is smaller and more value oriented, I think we're going to continue to see the fits and starts here. We're very much believers in the longer term, secular growth story and the potential that there still is with the stay-at-home trade.

We think the fundamentals there-- certainly as a function of Q2 earnings-- really distinguish themselves, relative to the smaller caps in the value-oriented trade. And so you know, regardless of how long this pandemic continues and the stay-at-home trade continues, we think that when we emerge from this, the secular growers will just be in such a tremendous position of power to keep forging ahead.

And so the leadership that we've seen coming out of the stay-at-home trade we think will continue to win the day, even though we're going to see some fits and starts between growth and value and sort of the haves and have-nots here in the short run. It's just-- it comes down to a function of COVID, the path of the virus, the shape of the curves, and reopening plans. And at the end of the day, we're still sticking with the stay-at-home trade.

ALEXIS CHRISTOFOROUS: All right, Amanda Agati, the chief investment strategist at PNC. Good to see you. Have a great weekend.

AMANDA AGATI: Thank you, you too.