Markets volatile with stimulus talks, earnings in focus

Yahoo Finance’s Alexis Christofous and Brian Sozzi break down today’s market action with Kevin Grogan, Buckingham Managing Director of Investment Strategy.

Video Transcript

ALEXIS CHRISTOFOROUS: Kevin, good to have you on the show. I just want your reaction to what we saw today in terms of the jobless claims number. Are you encouraged by the fact that that number, while still historically high, did fall below a million for the first time in months?

KEVIN GROGAN: Good morning and good to be with you. So I think, for sure, what we saw in the jobs report today is encouraging. We are seeing a slow but steady improvement in the economy. We saw the number actually beat expectations, which was great to see, to see fewer initial claims.

But I think the sobering aspect of the report is both just the extremely high level initial jobless claims continue to be, but also I wouldn't lose sight of where continuing claims are, which was at 15.5 million, which again, also beat the median forecast, which was closer to 15.8 million. But still, these numbers are staggeringly high and higher than what we've ever-- really ever seen in the modern economic data.

So again, on balance, good news, and that it's things are going better than expected. But still, a lot of work to do in terms of getting folks back to work.

BRIAN SOZZI: Kevin, the market breathed a sigh of relief yesterday on the Kamala Harris pick. Are you confident, as someone that manages money, that a ticket of Joe Biden and Kamala Harris won't derail the stock market rally?

KEVIN GROGAN: It's a really good question. I think there's still a lot of uncertainty, particularly with respect to the selection of a vice president, right? I mean, we've seen in history lots of different examples of very powerful vice presidents. So as an example, Dick Cheney would be one of those, all the way to those who had very little influence or say over the direction of a particular administration.

So upon the pick of Kamala Harris, you didn't really see much movement in markets. And I think that in general made sense, because you don't really know how that will influence the direction moving forward.

The other broader point I'd make about the upcoming election is that the market is already pricing that in to some degree. So if you look at betting markets right now as an example, prediction markets have Joe Biden and Kamala Harris as roughly a 55%, 60% chance of winning in November. And as those odds change over time, as we potentially get closer to the election, or as events evolve, new polls come out, things like that, the market will continue to re-evaluate those potential odds and will readjust based on that future forecast.

But one thing I would caution investors and what I've told our clients as they ask about the upcoming election is that you could be right that, let's say, a Biden-Harris election would be bad for the market. You could be potentially right about them winning, about them being bad for the market. But the market could still go up for other reasons, right?

We know that over time, stocks have positive returns well in excess of cash. So things can happen in the market and in the world that supersede you being right about the election than right about the potential impacts of the election. You could still wind up being wrong if you decide to make changes in your portfolio as a result of an upcoming election.

BRIAN SOZZI: Well, Kevin, if you say the market is pricing in the election currently, and the market's near a record, it sounds as if a potential Biden-Harris pick, given they are leading in the polls, is that good for the stock market, then?

KEVIN GROGAN: Right. So I think that the market has priced it in to some degree, so priced in basically a 60% chance that Biden wins in November. And so, of course, the market can move as we approach election day. But again, predicting what will happen as a result of a particular election can be very difficult.

So even you think back to 2016, the night before the election, now President Trump, then candidate Trump, just had just a 20% chance in prediction markets of winning the election in 2016. And we, of course, know with hindsight that he won that election. There were also lots of forecasts at that time that if Trump were to win, it would cause a big pullback in the market.

Mark Cuban was one forecaster who made that prediction that said it would be devastating for the stock market if Trump won. And, of course, what we saw was a great bull market coming out of that. Now, of course, it eventually pulled back, but due to circumstances that no one was predicting in 2015, 2016, much less in 2019. People were not predicting why the market would have pulled back earlier this year.

So it's very difficult to say what will happen as a result of the election. And again, if you think back to 2016, that election was a big surprise. And yet the day after the election, the S&P 500 was up 1.1%. So certainly a move, but not some dramatic move the day after a big surprise outcome in the election.

So it's very difficult to say which direction things will move as a result of the election and what magnitude they will move.

JARED BLIKRE: Hey Kevin, I want to ask you about the Fed, because it's kind of taken a backseat in the news cycle this week. But in a couple of weeks, they're going to be meeting at Jackson Hole and maybe discussing their new communication strategy, which would probably be officially rolled out in the September meeting. And a lot of that has to do with maybe yield curve control, forward guidance. How does this affect your macro outlook right now?

KEVIN GROGAN: Sure. So I think there's still a lot to be determined there. So I'll start with what we know, I think, in terms of Fed policy moving forward. I think the Fed will continue to keep rates extremely low for the foreseeable future. And I think the really good tell on that statement is-- was a statement from Chairman Powell, not this most previous press conference, but the one before that, where he said we're not even thinking about thinking about raising rates. So that kind of gives you a sense for where their head is at.

Now with respect to yield curve control-- that has been talked about for a while now-- still unsure if the Fed will actually undergo something like that, where they try to control yields further out on the curve. But in terms of how we're talking to clients about the current yield environment, it certainly is challenging. Because you think about your typical retiree, who has a 60% stock and 40% bond portfolio, that 40% that's in bonds is now at extremely low yields.

So looking at where or the 10-year treasury is and has been has been sort of in a 50 to 70 basis points range, which is extremely low relative to history. Historically the 10-year has yielded usually right around 5%-- 4% to 5%, somewhere in that ballpark. So as you're thinking about planning for retirement, what that implies to us is that you need to be more muted in terms of how much you can spend in retirement. It's the really the only surefire way to account for the lower rates and lower expected returns on your fixed-income portfolio.

Or you can look at ways of increasing the forward-looking expected return of your portfolio, either by increasing your equity allocation or by thinking about incorporating a modest allocation to alternative investments.

ALEXIS CHRISTOFOROUS: Kevin, value stocks are getting a second look by investors. They're largely outperforming growth stocks lately. Do you see this as a sustainable trend?

KEVIN GROGAN: So at Buckingham, we've long incorporated a tilt towards value within our portfolios. And the reason we've done that historically is that there's very, very strong academic evidence in support of such a strategy. So what we mean by value is there are just stocks with low prices, so low price earnings ratio. Low price to book ratio companies have historically outperformed the higher price to earnings ratio and higher price to book ratio companies.

So in the US, going back to the '20s, value stocks have outperformed growth by about 4 and 1/2% to 5% on average. Again, going back to the 1920s, it's been found not just in the US, but in pretty much every developed market that they've looked at. So within our portfolios, we'll incorporate tilts to value stocks within our equity portfolios. And it certainly has been a very rough three years for value, 3 and 1/2 years for value investors.

But what gives us comfort-- and we've looked for lots of reasons why value might not work in the future, and none of them have really seemed all that convincing, mainly because we've seen periods like this before in the historical data. Namely the late 1990s was another period where we went through a long stretch with value underperforming. And eventually value turned around and it did really well over the subsequent 10 years.

So we're not really in the business of making short-term forecasts. But over the medium term and long term, we certainly think that incorporating a tilt towards value stocks within your portfolio will increase the expected return of that portfolio.