Markets open higher on stimulus talks, earnings data

Yahoo Finance’s Brian Sozzi and Alexis Christoforous break down today’s market action with Comerica Asset Management Chief Investment Officer, John Lynch.

Video Transcript

BRIAN SOZZI: Very interesting, this deal activity we have started to see this week. It's not small deals, not medium deals. These are pretty big deals happening at valuations that are pretty lofty by any stretch of the imagination given the situation the world is in with COVID-19. Do you think the market is undervalued?

JOHN LYNCH: Hey, Brian. Good morning. I think the-- well, the first part of the question has to do with the liquidity environment. And the market really hasn't been rewarding those companies that are trying to grow capex or trying to pay yield. If you look at attribution on market, the market has been rewarding companies with M&A activity. So those companies who are using recent weakness as an opportunity to pounce on future growth opportunities, the market is clearly rewarding those.

To the second part of your question, I believe the market is fairly valued in that 3,000 to 3,250 range. So we're slightly above that now. I know the market is excited about the M&A activity today, but we did see the ADP job growth about a fraction of what it was expected to be. So I'm curious to see why the market's rallying so significantly currently.

ALEXIS CHRISTOPHOROUS: There does still seem to be that disconnect, John, sometimes between the real news of the day, especially news surrounding the virus, and what we're seeing playing out on Wall Street. We had a guest on earlier talking about a possible correction for this market, a drop of at least 10% in the coming weeks, because he believed there were parts of this market that were overvalued, namely tech and the gold sector. Would you agree with that?

JOHN LYNCH: Yes, we wrote a weekly market update earlier this week that kind of highlighted-- everyone was excited about getting through last week's Fed meeting, getting through the GDP report, and then seeing earnings. So we got through all three of those, but gold is hitting new highs, and treasuries up until this morning were hitting new lows. So that tells me the market's not fully convinced in this liquidity-driven rally. So yes, we are in a seasonally weak period.

We could very well see further frustration about stimulus, or we could have any number of variety of issues that could cause this. But I would not be surprised to see perhaps not 10%, but I think anywhere in the 6% to 8% range given the August, September seasonal is quite a possibility.

BRIAN SOZZI: John, how are your portfolios allocated right now? We've seen a tremendous run in tech stocks. We're seeing the latest surge over the past two weeks in some of those big-cap tech stocks. And gold just broke $2,000 an ounce.

JOHN LYNCH: Absolutely. Well, we take a conservative approach, try to base it on the fundamentals. So we're slightly overweight growth relative to value. We've been overweight large relative to small and US relative to the emerging space or international space. I am encouraged to see emerging gain traction.

As you know, we can focus on a premium on economic growth, a premium on earnings growth for the emerging space, as well as a discount on PE ratios. But it always seems to be a weak dollar and liquidity flows that tends to drive that space.

ALEXIS CHRISTOPHOROUS: John, we're less than 100 days away from a presidential election. How much of that is part of your decision-making now, and how much of that are you hearing about from clients saying they're concerned about it, they're looking to move things around in their portfolio ahead of the election?

JOHN LYNCH: Yes, it's a great topic of conversation. But we've looked at history, and we've tried to emphasize that to our clients of America, that the market tends to have a really strong track record of picking the winner of the election, if you will. The market's up. We're inside of 100 days. As you mentioned, if the market's up 100 days going into the election, you typically see the incumbent party winning. If the market's down, you see otherwise.

It'll be curious over this next week or so, or next couple of weeks, once we get clarity on party platforms after the virtual conventions. And I think the market then will start to factor in. For example, Vice President Biden's proposal could be-- the tax proposal could be the largest since the Johnson administration, Lyndon Johnson, when you think about percentage of GDP. So the market may have a hiccup over that if that does gain traction.

BRIAN SOZZI: John, what's your playbook in the lead-up to election? Are you thinking about raising cash?

JOHN LYNCH: I think cash right now-- we have the 2% to 3%. We're not doing anything. I know you're seeing a lot of firms there with 8%, 9% cash. We're not doing that just yet, and I'm not sure we will.

But I was asked a question at a client seminar just the other day about cash. And in a zero interest rate environment and a zero inflation environment, I don't believe excess cash is crippling to portfolios the way it may have been in a more normalized environment with 3% inflation and, say, 5% or 6% 10-year Treasury yields.

BRIAN SOZZI: We've had a lot of guests come on here, John, and say to ignore the election. Elections don't matter. It's something I don't agree with because it's something you should absolutely pay attention to if you're an investor. What side of the camp do you fall in?

JOHN LYNCH: I'm with you, Brian. I think the election is very important because at a minimum, it drives market sentiment. And to the degree sentiment-- some of these guests may have been talking about longer-term fundamentals when you look at longer-term performance. But in the near term, I think it will have significant impact until investors get to digest what it actually means.

ALEXIS CHRISTOPHOROUS: John, we see Joe Biden advancing in the polls. We know polls can be wrong. But do you think that this market is possibly setting itself up for failure? Has it priced in a possible Biden win?

JOHN LYNCH: You know, I'm not sure if it's priced in the Biden win. I think the market is really benefiting from liquidity now. We saw second-quarter stimulus exceed that of second-quarter economic activity. So those are dynamics right now that could potentially alter what has traditionally been an impact of an election.

But nonetheless, I don't think the market has priced in a Biden victory just yet. I think the market needs to get a real good handle of what it means for the corporate tax rate. Because I believe that of all the many, many issues that the election is going to bring, I think the most important for the market is what the corporate tax rate is going to be. And if that increases significantly, that may dampen sentiment. It could be a three, six, nine-month period. But once the market gets new traction on another catalyst, then I believe the fundamentals can be focused on once again.

BRIAN SOZZI: As someone that manages money like yourself, John, are you excited about a potential Joe Biden presidency in the potential for higher taxes-- not just corporate taxes, maybe even higher capital gains taxes?

JOHN LYNCH: Well, I think we have to see what the proposals and ultimate legislation does. But the best thing to drive equity markets tends to be low interest rates, low inflation. And if tax rates get too far ahead of that dynamic, then you're going to see a weight on the market. So it will make it more challenging.

But what it could do-- those of your viewers who may be concerned that growth is running away from value-- if we do have a Biden presidency and we see a big hit-- or a big supporting tailwind, if you will, for infrastructure, that could also boost some of the value plays-- the industrials, for example, materials, which are starting to gain strength. And to the degree we get a steeper yield curve, that could help the primary value play, which is financials.