Markets slide after President Trump, First Lady test positive for COVID-19

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with James McDonald, CEO of Hercules Investments, about the latest market moves.

Video Transcript

ALEXIS CHRISTOFOROUS: I want to get back to the markets now and this early morning selloff with James McDonald, Hercules Investments CEO. James, good to have you with us on this busy Friday. So we've got the selloff on Wall Street right now. Is this about this jobs report being disappointed or more about the president's positive COVID test?

JAMES MCDONALD: It's got to be about Trump. And we, obviously, care about our commander in chief and the first lady. And we wish them a speedy recovery. This selloff was coming. It needed a trigger. I think the news of Trump's COVID is the trigger.

I think the jobs report, the unemployment report we just saw does not help. But this market is overvalued. There is uncertainty in the market. And there was certainly going to be a catalyst. And this was it this morning.

BRIAN SOZZI: James, what trades are you putting on?

JAMES MCDONALD: We've been long volatility. Volatility has got to be the place where money is going. Volatility is still underpriced here, given all the risk in the market. We like UVXY. UVXY gives us short-term VIX futures, volatility upside. It is still underpriced. We have a target there for 40.

The NASDAQ has come out with an innovative new product. Just in one week, we will be able to trade volatility on the NASDAQ 100 through VOLQ, V-O-L-Q. That's an index that's been trading, but there will be options and futures on that. And we'll be able to protect portfolios that are along volatility with those two volatility instruments.

ALEXIS CHRISTOFOROUS: James, when you look at this report this morning, what stands out to you? Or what should I say concerns you the most? Because we did see the number of permanently and long-term employed both increase. Does this highlight the depths of the recession? And any hope at all for a V-shaped recovery now gone out the window?

JAMES MCDONALD: Well, there was a forest fire and the fed came in with a rainstorm. But that forest fire is spreading. And I'm talking about COVID. Unemployment, business closures, and recession was imminent when we got that news. That's why they came in so swiftly.

This report is not surprising. There's going to be an abatement of positive news, simply because we cannot keep the entire economy afloat with $600 paychecks, nor can we fund the replacement of revenue. Malls, if you go into any malls, if you look at the bankruptcies that are happening, if you look at any statistic about macroeconomic themes, this was coming. And it's going to get worse.

BRIAN SOZZI: James, the president's diagnosis of COVID-19, what do you think that means to the election?

JAMES MCDONALD: It's a good question. And so first, let's just use our quantitative hat here. No presidential candidate of a major party has ever died or withdrawn before a presidential election. These people are the best cared for in the world. No president-elect has ever died or withdrawn after winning the general election before taking office.

As somber as those statistics are, we have to play the odds for that. William Henry Harrison died a month into his term, but he was succeeded by a VP. We've also seen COVID affect other heads of state of major economies-- the UK, India, and, obviously, Brazil. All three of those had their heads of state test positive for COVID. And so those economies were not impacted by that news.

I don't suspect this will change our economic forecast. However, it will have a major impact on the sentiment of the electorate. Donald Trump is as strong as a bull, not just from politics, but from business, if you've studied his career. He's going to embolden his support base based on this news. I suspect we're going to see a tick up in support. We saw a 2.2 increase in the polls for Biden, record fundraising after that debate the other night.

I pause to say debate. I will say debacle. We are going to see this embolden the Republican base. And I believe it's going to trend up for popularity for him, simply because COVID had been looked at as an Achilles heel for his campaign thus far.

As far as the markets are concerned, we have to expect that financials, industrials, oil and gas are all going to see pressure based on the implications of potential increase in tax if the Democrat wins the White House. But right now, as I said, we were already in uncertain waters with this market. And this is certainly the type of trigger, along with the jobs report, that could trigger a selloff. And so we're very prepared for this. And we definitely look forward to seeing how the polls react to this as well.

JARED BLIKRE: James, you mentioned earlier that-- you said stocks were overvalued. Looking into the sector action, any stocks that-- or any sectors or industries that are undervalued? And what are the most overvalued sectors right now?

JAMES MCDONALD: Well, it's a great question. As you know from studying these charts, I'm envious of your position. You have probably the best purview on Wall Street to see what's happening. We have to study prior corrections. And if someone hires me today, I need to make money for them going forward.

Overvaluation is everywhere. But upside, I still think, is in technology. I want to see some pullbacks. Microsoft survived a dot.com crash. So did Amazon. So did Dell Computer.

We are going to be able to come in and we're going to be able to buy Zoom. We're going to be able to come in and we're going to buy Amazon again. We're going to come in and we're going to buy these e-commerce plays and DocuSign. Where these companies, everyone is using their services.

We like these companies. Going forward, after we get some pullback, the overvaluation certainly is in tech. That's why we're excited about VOLQ to buy volatility there.

As we see a rotation out of tech, particularly if we get a Democrat in the White House, that's where all the taxes are going to hit hardest. Those prices are going to come down. We're going to go back into buying. So certainly, tech is the most overvalued.

And them as far as other sectors with upside, we love the airline sector is a recovery play. We love the hospitality sector as a recovery play. We like the beverages and food sector as a recovery play.

Obviously, those sectors were hit hardest. And when someone hires me to make money for them, I've got to buy stuff cheap and sell it high. And that's where we're going to be putting money going forward.

ALEXIS CHRISTOFOROUS: James, there's one asset class reacting to the data today, and that is crude continuing to spiral-- spiral downward. It's been under pressure all week, definitely seeing another leg lower off this jobs report. What do you do with the energy sector right now?

JAMES MCDONALD: Well, energy has been incredibly challenging this year. We came into the beginning of the year before COVID very excited about the oil and gas space. We had a lot of interest in the US domestic oil space. And then we saw an absolute blow up in that sector.

I continue to believe this is a political, this is a geopolitical asset class, not to be traded by retail investors. And even us as professionals, we get whipsawed when we try to trade this asset class. I think the pressure that we're seeing now probably is a cue to some geopolitical conversations that we're certainly not privy to. I don't like this sector short-term.

Obviously, we're always going to need our homes heated. We're always going to need our homes cooled. Energy is a place we want to be, but it's particularly dangerous here.

I'm not surprised by-- I think last time I checked a few minutes ago, it was 4% off today. I'm not surprised, but this is a very, very dangerous sector. If it gets too underpriced, though, we've got to come in and buy.

ALEXIS CHRISTOFOROUS: All right, James McDonald of Hercules Investments, good to see you this morning.

JAMES MCDONALD: Thank you.