Markets lower with earnings, election in focus

Keith Lerner, Chief Market Strategist for SunTrust Advisory Services, now part of Truist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets on Thursday morning.

Video Transcript

BRIAN SOZZI: Let's bring in Keith Lerner, Chief Market Strategist at Truist/SunTrust Advisory. Keith, always good to see you. Before we get going here, I want to toss to a clip, what we just heard from Boston Fed President Eric Rosengren, get your reaction on the back end.

ERIC ROSENGREN: I am very worried that we're pretty far away from what we think is maximum employment, and I think there are going to be significant headwinds to getting there quickly. So I have a somewhat more pessimistic forecast than my colleagues that you could have seen from the Summary of Economic Projections that the FOMC recently put out. They're expecting that the unemployment rate will get below 6% by the end of next year. I'm not expecting that.

And some of the headwinds include the problems with re-employing people, so I am worried that many of temporary layoffs are starting to turn to permanent as the pandemic drags on much longer than people expected earlier this year. So I think that's going to be a challenge, and particularly the segments of the labor market that are being impacted.

So if you think about travel, if you think about tourism, if you think about restaurants, if you think about retail, those are areas where a lot of payroll employment increased over the course of the summer, but continued progress is really going to require that the pandemic be tamed to the degree that people can be fully employed, people feel comfortable, once again, going to restaurants and hotels.

BRIAN SOZZI: Keith, that continues, just this sobering tone by Fed officials, Rosengren, certainly Jerome Powell this week. Does this explain why the market is selling off?

KEITH LERNER: No, I don't think it explains it. I actually think if you really think about where we've come from since March, you know, we were up over 60%. That was the strongest bull market we saw off a low in history coming into the month. And we pointed out on this program back in August that we thought there was some complacency building in the market, there was some overconfidence. We had the stock splits that came in, so there was a lot of retail excitement.

And don't forget, we were up five straight months 60%. So I think the market is really right now this is more of excuse more than anything. Because the reality is, the Fed's going to continue to provide stimulus. I do think a bigger picture why we've seen a little bit of weakness, besides this being an excuse, is that, you know, the fiscal stimulus package looks like it's likely not going to be done before the election, and that's-- that's hit the market on the margin itself.

ALEXIS CHRISTOFOROUS: I want to talk about some sectors with you now, Keith, because when I look at financials, they're coming under pressure because of this low interest rate environment. But are valuations attractive there, because a lot of the big banks are talking about other areas of their business that are doing quite well, namely trading, their trading desks are booming?

KEITH LERNER: Yeah, well, we've been underweight financials for several months. We're still underweight financials. They are cheap. They've been cheap. But they have to prove themselves, right?

I mean, the low interest rate environment is here to stay, so that's a challenge. We think the economy, the trajectory is still positive, but it's going to be uneven with fits and starts. And for banks to do really well, you typically, historically, have needed to see rates rise.

And if you track the 10-year treasury and overlay that with the banks, there's a pretty high correlation. So yes, they're cheap. But we need more proof that something's turning, and so far we're not seeing it, so we remain underweight in the sector.

BRIAN SOZZI: And Keith, big tech continues to lag here, but it hasn't been, I would say, steep, those big steep one-day sell-offs. It's been very much drip, drip, drip throughout September. Does that big sell-off lurk over the next couple of weeks?

KEITH LERNER: Yeah, I think the same thing we talked about that about a month ago, I think it just got over-owned. I don't think it's a growth problem. I think it just got over-owned and expectations got too high. I will say on a relative basis, you're starting to see tech somewhat stabilize. And if you get more of this uneven growth, at least near-term with the uncertainty into the election and also some of the uncertainty on the economy just more short term, I think you actually, as we get through this, you'll likely see a more rotation back into tech probably closer till we get to the earnings season so investors can be reminded that the earnings growth there is still spectacular.

In fact, it's the only sector where forward earning estimates are above where they were pre-COVID. But short term, I think it's going to be more of a consolidation. But again, they are stabilizing relative to the overall market, and that's a different tone in the beginning of this market decline where they led on the downside.

ALEXIS CHRISTOFOROUS: Keith, we know there's still a lot of cash sitting on the sidelines, a lot of folks holding on to some dry powder. What are you seeing with your clients? Are they in a wait-and-see mode, waiting for this election to come and go with so much, and you just said it, so much uncertainty swirling around the election, President Trump coming out and basically making it sound like he's ready to contest this election if he doesn't win?

KEITH LERNER: Yeah, I think, in general, what you just said is right. It's a wait-and-see mode. I think maybe there's a little bit of a bias strike even this last week because there's so many headlines ahead of themselves. I think if-- you know, we're already down 10%, but from my perspective, though, if this goes a little bit longer and we have a little bit longer duration-- because the correction is both in price and time-- we're going to be looking at leaning into that.

And in fact, we've been telling our clients that we should be averaging in during this period because the big picture as we get past the election-- I realize there's-- you know, there's a lot of questions about when we will know the election results. And we still think we're in the early stage of an economic recovery. The Fed is likely on hold, as we mentioned at the top of the segment. And the relative opportunity is still within stocks, but the admission price to being in the market are these short-term corrections. But we think we might be in the early stages of a multi-year bull market, one that moderates from those big gains, but has some longevity as far as time.

BRIAN SOZZI: All right, we'll leave it there. Keith Lerner, Chief Market Strategist at Truist/SunTrust Advisory. Always good to see you.

KEITH LERNER: Great to be with you.