‘So far, this looks like a healthy correction’: Baird Investment Strategist

The Fed announced it would be keeping rates to near-zero through 2023, triggering a selloff as investors face uncertainty in the coming months. Baird Investment Strategist Willie Delwiche joins The Final Round panel to discuss where he sees this market going for the 2nd half of the year.

Video Transcript

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MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Again, we got all three majors lower as we head towards the week's fourth closing bell, but we are a bit off session lows, right around 3:48 PM here on the east coast. For more on what's going on in the markets, not just today, but over the last couple of weeks, what it means to the rest of this year, we're joined now by Willie Delwiche. He an investment strategist over at Baird.

So Willie, let's start with how you see September so far compared to August. And have we learned enough information to sort of say, OK, maybe August was euphoria, September is some kind of a correction, but maybe if we go back to June or July and draw that line we get a sense of kind of how investors are feeling?

WILLIE DELWICHE: Yeah, thanks for having me on today. I think it is important to look at what we've done in September. And this question as the indexes have come off their highs is, is this a healthy correction or is this kind of the February redo kind of episode? And so far at least, it looks like it's a healthy correction. We're seeing sentiment start to back off of some of the excessive measures that we saw emerge in August.

And more importantly, beneath the surface, breadth is holding up really, really well. Coming into this morning, we were at a cycle high in terms of percentage of S&P stocks trading above their 200 day moving averages. That's improving, even though we've seen this volatility at an index level. So that's really encouraging for the rest of the year.

MYLES UDLAND: And this phrase, healthy correction, is one that's often brought up in markets, and I'd be curious how you kind of define that versus a correction or a phase in the market that would be more concerning to you.

WILLIE DELWICHE: Sure. I think I've defined it kind of with two basic metrics. A healthy correction is one where the underlying trend remains intact, especially with respect to the broad market. And you see some of the, some of the excesses that emerged in an uptrend, whether it be high flying stocks or sentiment, start to unwind a little bit. And so if you can have a combination of continued underlying uptrend, but a little less optimism, that's the setup for a healthy correction.

And that's what we're seeing right now. And that's encouraging, even though as we sit in the middle part of September, you got the S&P down about 5% for the month, you have the NASDAQ down about 10% for the month. The average stock on the S&P is down less than 1% for the month. So that's some good improvement beneath the surface. That's what makes it healthy.

MYLES UDLAND: And I guess in this kind of outline, it's sort of I suppose it's worth remembering for investors, that what giveth can take it. We saw the market go up because the five FANG names were 25% of the market. They went up every day. And we discussed this on yesterday's program, the math would tell you that the overall, the average stock as you outlined too, in the index, can be doing better if the index is down, given the way the weightings had kind of gotten distorted.

WILLIE DELWICHE: Yeah, that's really true. And I think we also, there was some concern I think that it was just the big FANG stocks that were holding up the indexes, and that if the air kind of went out of that, that trade, then you would be left with everything starting to fall apart. And what's been so encouraging, is that the air's come out of those trades a little bit, and yet beneath the surface, you're really holding in really well.

And I think it's also important to remember that this is 2020. And so volatility is kind of getting redefined this year. And so moves that you would have seen out of bounds in previous years, that's kind of par for the course in 2020. So we have these big month to month to month swings. Beneath it, you have breadth holding up a bit better than some people feared, and you have investors growing a little bit more cautious as we go to the fourth quarter. And that's not a bad setup heading into the final quarter of the year.

MYLES UDLAND: And as we get to the final quarter, of course, we do have the election coming up. And as you see it, it's sort of a neutral event right now maybe for the markets. But I mean I know if you look at the VIX skew, that's actually kind of tempered itself a bit over the last couple of weeks. But still, this would seem I guess, maybe just because we've been talking about it for four years, but this would seem like an event investors should be kind of cautiously positioned towards. Or is that not really the tone of the conversations you're having?

WILLIE DELWICHE: Yeah, I think the, historically and again, 2020 is its own unique beast, but historically, elections provide a little bit of volatility, but not much overall movement. I think the, or overall direction. I think the risk this year is that we get to the night of November 3 or the morning of November 4 and we don't so what the outcome is. That sets up the possibility of more meaningful downside.

Otherwise, I don't really think the market cares at this point whether Trump gets re-elected or Biden gets elected. There's pros and cons to both sides of that. I don't think we really need to argue for positioning one way or the other. It's the uncertainty that we don't know who wins after the election that would be, I think would upset the market.

MYLES UDLAND: All right, Willie Delwiche, Market Strategist over at Baird. So great to get your thoughts, Willie, thanks for joining the show today.

WILLIE DELWICHE: Yeah, thanks a lot.