Markets higher as investors swallow the presidential debate, close out Q3

Alicia Levine, BNY Mellon Chief Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what’s moving the markets around Wednesday’s opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: Time to dive back into the markets now with Alicia Levine, Chief Strategist at BNY Mellon. Good morning, Alicia, so let me just begin with last night's debate. Did it have an impact on the markets, because we saw the futures market react pretty aggressively to the downside, but now things are starting to come back.

ALICIA LEVINE: Yeah, look, I think-- nice to see you guys again-- I think last night, the word I would use is dispiriting and also unfair to the American people, because we're faced with I think very different policy choices going forward, and none of that was teased out last night. And what the market is responding to is really a sense that we have no clarity on either side. The process of the election in itself, regardless of who the ultimate winner is, is the risk. It's the process, and that's why the markets sold off. You're going to start seeing sectors react to pricing in an eventual winner here, by the way. I think last night, essentially, Biden had a better night, and the market's going to start pricing in a Biden victory.

BRIAN SOZZI: Alicia, when Biden was able to talk, did he sound weak on the economy to you?

ALICIA LEVINE: I will tell you this-- the Wall Street concern about Biden is how beholden he is to the more left sounding policies of where the Democratic party has gone. He won the nomination in the primary, because he has made the case that he is a centrist. We did not hear that last night. Wall Street needs to be comfortable with the fact that we're not going to get a tax increase on day one in the middle of a recession and understanding that recovery is about a series of trade-offs and different policy choices. We didn't get any of that last night, and it's, again, unfair to the American people, because there are choices here, and it was just very muddled.

ALEXIS CHRISTOFOROUS: Was there any big takeaway for you in terms of policy that could impact the market? I'm thinking health care. I'm thinking taxes. Did you hear anything substantive amidst, you know, the talking over each other and the shouting matches?

ALICIA LEVINE: So it really wasn't so much what I heard last night. The issue on taxes remains the same, which is you need a Democratic sweep to change the tax code, because only Congress can make laws. So to the extent that the Senate stays Republican even if the Democrats take the White House, you should see less of a market impact here, simply because the Democratic president will be unable to change the tax code.

That's really what the market's looking at. The markets looking at the Senate right now, because that's ultimately how we change laws. So that's what we're seeing. It's not what we heard last night. The calculations are really quite the same. The issue is how comfortable can that 15% of undecided, where are they going to be more comfortable? And I don't think anybody heard anything last night to be able to make that choice.

BRIAN SOZZI: Alicia, how do you put-- and where-- do you put money to work into an election that may not have an outcome on November 3?

ALICIA LEVINE: Yeah, look, I think there has to be some volatility protection here. As I said, as we get closer, I mean, look, Biden has been outpolling, including in the swing states, and to the extent that there are certain sectors at risk under a Democratic administration where the president can use the levers of the administration, that is executive power, you will see impacts, so energy and financials. And look, I think it's no surprise that those are the two worst performing sectors over the last few months. I mean, even though it looks like the economy's recovering better than expected, you can't get financials moving at all, and I think that is somewhat pricing in a Biden presidency that does not need the Senate to change [? regulatory ?] regulations, right? So that's what you're seeing here, and ultimately, you do need volatility protection here.

- Alicia, let me just build on that. Talking about volatility protection going into the election, where can investors put money that is somewhat detached from the vicissitudes that we're all expecting here?

ALICIA LEVINE: So I'm going to bring up an investment idea that we almost never talk about, which is Japan. Japan looks great. Asia looks great. And for investors who have a wide ranging portfolio and want to diversify risks, I suggest doing some investment in Asia and particularly Japan, which is recovering and doing well, stable government, stable policy framework, and I think that's some place to put capital. I also think that gold is reaching support here, so I still like investing in gold. We've talked about this.

I think gold is a long term diversifying play here, which is really important. I think you have to be a little bit more careful on credit in the high yield space, only because you will start seeing bankruptcies here. I mean, clearly, the pandemics going on for longer than we would like, so travel and leisure, hotels, all those are really at risk here, something to look at. But investment grade is fine, because the Fed is supporting it.

ALEXIS CHRISTOFOROUS: You mentioned Japan and China. Not always easy for US investors to get in on investing in that part of the world, so how would you recommend people do that? Are there ETFs out there that you're looking at versus individual stocks?

ALICIA LEVINE: There are ETFs. I would play an ETF and not individual stocks. Again, individual stocks concentrate your risk. I do think it's important to diversify. The manufacturing data, if you look at the data worldwide, manufacturing has actually bounced back in a V-shape recovery and is actually higher than it was in February. So the countries that are levered to manufacturing are doing fairly well, and that's why we like Asia and Japan in particular. You know, the Japan market really based for the last two and a half years, didn't go anywhere, so we like that as well.

Earlier in the year, we were positive on Europe. I think the issue with Europe here is that to the extent that they're more willing to actually shut down parts of the economy, you have to be a little bit careful here, and the US data, frankly, is getting better. So in the beginning, it looked like Europe was better, but the truth is, the US recovery is stronger than expected. And actually, we're pretty positive on the US recovery here.

BRIAN SOZZI: Alicia, Palantir going public today, and really, this is essentially going to be a private company that so happens to be public, given their voting structure. When you see a company like Palantir and that type of very strong corporate-- not corporate governance, just strong voting power. Clearly, it's not good corporate governance. What are your thoughts on that?

ALICIA LEVINE: You know, so I came into this business in the late '90s during the bubble, and I think we were seeing some excesses in the governance side and the IPO side, things that were reminders of froth and excess and trying to get capital in while you still can. Again, I do think the election calendar is part of this, the M&A, the Mergers and Acquisitions mania that we're seeing also is part of this, trying to get it in the calendar while perhaps it's a more friendly kind of administration and regulatory set framework. That's what I'm thinking, and I'm thinking there is some excess out there, but I think we know that, and it's really important to back test and not to say things, well, it's different this time. Because honestly, it's almost never different this time.

ALEXIS CHRISTOFOROUS: Yeah, well said. Alicia Levine, BNY Mellon's Chief Strategist, thanks for being with us.

ALICIA LEVINE: Thanks, guys. Nice to see you.