Market volatility is pointing to a ‘tough’ October, ‘ugly’ November: McMillan

Brad McMillan, chief investment officer and managing principal at Commonwealth Financial Network, joins The Final Round to discuss the pace of economic recovery in the U.S. and what the market’s recent action tells us about its direction through the rest of the year.

Video Transcript

MYLES UDLAND: Back to the financial markets rallying on this Monday. What do we make of what we've seen in September and how do we think about things as we head towards the fourth quarter and the election. For more on that, we're joined now by Brad McMillan. He is the chief investment officer for Commonwealth Financials.

And Brad, thanks for joining the show. Let's just kind of start with your thoughts on September, because it's been a challenging month for investors even with today's rally. We know September historically weak month in the market. But as you've thought about this little correction we've had, how have you kind of thought about maybe explaining in the simplest terms, here's why we sort of saw this go down in markets?

BRAD MCMILLAN: It's pretty simple. When we came into September, the markets thought everything was awesome. The virus was going to be under control. We had a V-shaped recovery underway. Everything was going to be fine. And if you look at the earnings projections, we're going to be back at something approaching normal probably towards the end of the year, the start of the year.

And then September happened and all of a sudden, thought of a second or third wave became real. We started to see that V-shaped recovery pull back. Job growth started to pull back. And all of a sudden, a lot of that good news, everything didn't look as awesome. I think this is just a recalibration for where we are.

MYLES UDLAND: And so as we look towards, you know, third quarter earnings season, which is going to be coming up here in just a couple of weeks, you noted how strong second quarter was at least relative to expectations. Do you think that we could see a similar dynamic where results once again are beating very much lowered estimates and investors get very excited once again about corporate results and corporate profits as we head towards the end of the year?

BRAD MCMILLAN: We could see that. But the problem is this. We came in-- last quarter was one of the best beats ever. In other words, expectations-- companies did a great job managing expectations down. So when the news actually came out, it was great. Investors said, wow, things are a lot better than what they thought they were. And I think there's at least some of that residually right now.

It's not just are we going to be in the third quarter? And we probably will. But are we going to beat by that much? So what concerns me is we're going to do well. But are we going to do well enough? And, of course, if we don't do well, if we don't beat the expectations, that creates a whole another issue.

MYLES UDLAND: Now, you note that, you know, we came into September. Everything was great, and that was-- that was rethought. Another risk we have out there, as we all know-- we've talked about it for four years-- is the election coming up in just five weeks from tomorrow.

So a lot of commentary this weekend where to the expect of, well, September was partly pricing in what could happen in the election. Do you buy that? Do you think there is more to go in terms of markets getting concerned or pricing in these various scenarios as it relates to election outcomes?

BRAD MCMILLAN: I do think there's farther to go. And the reason I say that is we've only started to confront what might happen. You know, we still have the debates to go. We need to see what happens there. Right now, there's an expectation that Vice President Biden is in the lead. So we're not immediately facing the consequences of the election.

I think September was kind of the first wave where we really had to start to deal with that. But I don't think markets have priced that in yet. Markets right now, if you look at the VIX forward numbers, if you look at what markets expect volatility to be, you're saying November is likely to be ugly. And I think that's-- as we get closer to that, markets are forward-looking. So we could see a tough October as well.

MYLES UDLAND: And then obviously this week, we have the jobs report. It will be the last one before the election. But it also just gives us some data on how things are happening in the real economy. And I think that's gotten maybe a little bit of short shrift here in the conversations about asset prices, so on and so forth.

But, you know, GP growth getting downgraded by a number of economists across the street. I think expectations are now tempered for 2021 to some extent. Do you think this might creep back into the minds of investors even more than it perhaps already has in the last couple of weeks?

BRAD MCMILLAN: Well, I think the jobs number, we've already-- we've seen-- we saw jobs drop significantly. We lost over 20 million jobs. And then we've seen millions and millions of jobs come back. But the problem is they're coming back slower every month. And if it keeps slowing down, we're not even halfway back yet for total jobs.

We got halfway back in four or five months. We're not going to get half-- we're not going to get the other half in another four or five-- and the jobs report is really going to underline that for this month. No, the fourth quarter isn't going to be like the third quarter was.