Markets are not 'on the precipice of some ginormous move into Election Day': strategist

Paul Schatz, Heritage Capital President joins the On the Move panel to discuss the latest market reaction to stimulus talks and the presidential election.

Video Transcript

ADAM SHAPIRO: We shall look at the impact on all of this with the markets because there may be some surprises. Helping us to dissect all of this is Paul Schatz. He is joining us from Woodbridge, Connecticut. He is also the president of Heritage Capital. Good to see you again, Paul.

PAUL SCHATZ: You guys as well.

ADAM SHAPIRO: So let me ask you real quick-- a lot of people like to talk about volatility and when you're two weeks before an election. But you make a point that not so fast with volatility. Why, and what is that point you want people to consider?

PAUL SCHATZ: The data don't support the claims. It's very easy for everyone to go on TV, on Yahoo, and talk about all this perceived volatility in the market because that's what you think intuitively. Markets should be super volatile into elections. The data don't support the claims.

If you look at elections by whether an incumbent can run or not, incumbent-election September and Octobers are not volatile affairs. You get single-digit moves, mid-single digits at best. Sure, we could get a one- or a two-week pullback or a one- or two-week rally, but as option traders position for these huge swings, these huge swings don't come as a result of the election. People, it's a misnomer.

So I would subscribe that certainly we could sell off into the election. We could rally into the election. I would say whatever move we get this week, whether it's a peak or a valley, the opposite will happen into the election. But I certainly don't think we're on the precipice of some ginormous move into that interesting day of November 3rd.

JULIE HYMAN: Well, Paul, while we're talking conventional wisdom, the conventional wisdom also tends to be that the best outcome for stocks over the long term, that is over the course of an administration say, is gridlock. That is not seeing a sweep, for example, of president, the House, and the Senate. Is that conventional wisdom correct? Is that going to be the best setup for stocks if you're looking a little further forward?

PAUL SCHATZ: So the short answer is you would think yes, that if hypothetically the Democrats retain the House and Biden wins and the Senate stays red, the markets-- that is a good outcome for the markets. But also, if you look historically, apolitically, when there's been a blue wave, which I'm certainly not suggesting, the markets have done OK as well.

I would say this, and frankly, if you look at-- the red waves have led to more challenging markets. I would say it depends on where you're coming in in the cycle. Like to me, Reagan came in in 1980 in the-- and Obama came in in 2008. Those were the absolute perfect spots to become president because we had I'll call it malaise, challenges, struggles into the election, and the odds heavily favored that next president having a tide turn, regardless of who he or she was going to be. So you always want to become president or take control when things are kind of poor and stinky.

ADAM SHAPIRO: So where are we in that cycle? What do the average gal or guy who wants to make a buck here with their investments, what do they do? Do they wait? What's your advice?

PAUL SCHATZ: So post COVID, in 32 years in business, the single biggest question I've gotten was how can markets go up when unemployment's heading to 15, 20, 30%? That lasted all the way into August, from March to August-- all my questions. Now I'm getting, well, this election, you know-- what happens if there's no peaceful transition of power? What happens if it goes to the Supreme Court? Oh my gosh, what happens if it goes to the House?

The market is not stupid. The market is a pretty good discounting mechanism, and the market usually prices in all different kinds of scenarios. So I would subscribe now if we get a pullback into election day, if we get some quick elevator-shaft decline because we don't know who the president is on November 3rd or 4th, I would say pretty confidently that's a good buying opportunity into the new year because if Biden and the Democrats win, they're going to spend $3 trillion. You're going to get a short-term economic boost Q1, Q2 of next year.

If Trump or the Senate stays red, you're not going to have these proposed massive tax increases, so I would say there's a lot of good scenarios in the short term-- in the short term meaning Q1, Q2 of next year. I'll be much more concerned if there is a blue wave for Q3, Q4 of next year and beyond, but I think the short-term scenarios, absent something that I can't even think about, are going to be favorable for stocks into any kind of weakness.

- So, Paul, you talk about Reagan coming in and Obama coming in at kind of the right moment, do you think then that there is any credence to, you know, the market having a negative reaction or a positive reaction long term depending on the candidate's party?

PAUL SCHATZ: I do. So people are going to say either I'm in the bag for the GOP or I'm in the bag for Democrats. I-- listen, I just want to make money for clients. So to answer your question, yes, there is a scenario. So if there is a blue wave, we pump in $3 trillion, $2 and 1/2 trillion, whatever the number is in the economy-- we're going to get a boost. I'm going to say I'm really worried, underscore, that there is that second wave economically.

The Fed's there for the markets, but the unemployment numbers are starting to tick up a little bit. Things are not as easy as they perhaps were with all the money coming in. And if-- I know Biden said we're only going to raise tax on those making more than $400,000. I don't think it's feasible. You can't raise enough money, so-- and they're going to raise corporate taxes. I think that's going to be a decent headwind for the second half of 2021.

But certainly in front of us, we're seeing a nice broadening, so if you're an investor, you'll be sitting with some cash. Well look what's starting to lead-- transports, industrials. Even the crummy, stinky banks are getting off the mat-- something like a, you know, JPMorgan stick to best in breed. I mean-- and I would subscribe if by some chance there's not a sweep, you could even have a little kick for energy. I mean, when's the last time you saw the potential for energy bouncing?

So that's what I'm looking at. Small caps are starting to go, and it's not like we're having the Facebooks and the Amazons and the Googles sell off sharply. They're just no longer going vertically, which is actually a healthy intermediate-term change for the markets. You want more leadership. You want that rising tide lifting all ships, not just a couple of ships.

RICK NEWMAN: Hey, Paul, Rick here. So we're talking mostly about politics. What would be moving the markets either up or down if not for politics?

PAUL SCHATZ: If we weren't going to-- if this was 2019 or 2021, Rick, singular most important thing is the Fed. I know we want to talk about the fundamentals, the technicals, corporate earnings, all these fun stuff. The truth of the matter is the Fed is there. Forget about a bazooka. I mean, they've got an arsenal of nuclear weapons they're deploying, you know, every day.

So that's what matters most. Is the Fed going to continue to pump in? Are they going to continue to buy junk bonds and corporate bonds and treasuries and everything else? That's all that matters. And frankly, if we have the second leg down, Rick, I am terrified that the Fed's going to say, you know what? We're going to start buying equity ETFs. We're going to start buying stocks ala Japan. That would be a colossal, colossal failure and I think catastrophe for the markets.