Markets move lower with earnings, stimulus in focus

Seema Shah, Principal Global Investors Global Investment Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Thursday’s opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: Good morning, Seema. What do you chalk up today's negative momentum in the market to?

SEEMA SHAH: Hi. I think, as you said, it's just down to those weak jobless claims figures. That, along with the somewhat disappointing news around stimulus, as well as you said the COVID cases, which are causing a new round of social restrictions in Europe. I don't think we're too concerned about these things. I think all of this was actually to be expected. I think maybe the key disappointment for markets is the unemployment situation.

Now, I have to say, look, as we get into the winter months, it is going to become more difficult to see the kind of job gains that we have been enjoying over the summer. And essentially, the summer was when you saw easy gains. That's when you saw reopening. You saw sectors starting again.

So of course, that was when we were going to see the improvement in unemployment numbers. This is where it becomes an uphill struggle. It doesn't mean that we should be too frightened, but it does mean that we are going to see slowing momentum for the economy.

BRIAN SOZZI: Seema, there's now talk that we are entering a third wave of COVID-19. What does a third wave mean to the pace of the economic recovery as we enter that first part of 2021, post-election we're beyond, hopefully, the worst of the election, and we're all trying to figure out where the economy, in fact, is?

SEEMA SHAH: Yeah, I think what's been interesting is although we're seeing cases rising across, I think, most of the world again, Europe is the only one where you haven't seen governments trying to re-prioritize reopening. And this certainly puts Europe in a slightly weaker spot relative to other countries. Now, again, this was to be expected. I think everyone was anticipating a winter wave.

We've had so much help from the fiscal side, and in Europe, actually, it continues. Most governments have continued to extend the furlough schemes. So they should be in a stronger position than what we saw in Q1 and Q2 of this year.

So again, you know, we need to get through the winter. A lot of things are going to be moving against the economy through these months, but that doesn't mean that the recovery is going to come to a halt. It just means it's slowing momentum.

ALEXIS CHRISTOFOROUS: So then what is the average investor to do with that information, Seema? How can they best position their portfolios? Is just standing by and holding what they've got sort of the best thing to do with so much uncertainty?

SEEMA SHAH: I think the key thing is is, you know, in a way, this is a good reminder to investors that keeping a little bit of defensive positioning in portfolios is still very important as long as we have the pandemic beside us. So maintaining that focus on things like mega-cap, the large-cap stocks which are more likely to weather this storm in a more formidable way than many other companies, is still important.

Now, having said that, I can say that we have been trying to reposition a little bit into more cyclical areas, into more small-cap stocks, because if we do believe that there is a fiscal stimulus package coming at some point, those are the areas of the economy that will perform well. So having something of a barbell strategy with a little bit of cyclicality, as well as a bit of defensive, I think this is that pivotal time where you need that kind of barbell strategy.

BRIAN SOZZI: Seema, if you're inclined to believe the polls, Joe Biden is going to run away with this on November 3. But if we've learned anything it is to not believe the polls. If President Trump were to pull a rabbit out of the hat here and win re-election, what does that mean for the stock market?

SEEMA SHAH: I think it's really important for investors to remember two things about elections. One is that, look, volatility always builds up in the run-up to election. Elections hate uncertainty. And elections are the exact-- exactly that. It is just all uncertainty. So this is a typical. This is not unusual. And so that's the first thing.

The second thing is that what you also see is that markets typically return to their trajectory that they were on prior to the election. Fundamentals are what matters. So the best thing to do at this time is whoever wins, and as you said polls have a tendency to be wrong so we never know what's going to happen, is to look away, ignore the noise, and maintain the positioning, focusing on what the fundamental drivers of the market will be. And we've seen this year that those two key drivers are COVID-19 and policymakers. So if you believe that policymakers are still going to be in the game, then, actually, it's time to maintain that almost risk-on positioning that you've had over the last few months.

ALEXIS CHRISTOFOROUS: Seema, as you look at fundamentals, and I would define fundamentals as part of that being the jobless claims numbers that we got this morning, what kind of picture of the economy are you seeing right now in the fourth quarter and into early 2021?

SEEMA SHAH: So what we're seeing is Q4 will be tough. It will be tough. We're going to see, I think, a slowdown in a lot of the momentum indicators. We'll see slowdown in some of the activity around the retail space, so services are probably going to struggle a little bit more than manufacturing as we get into Q4 and into early 2021.

We still think that this recovery, it's on path, but it is going to be slow and protracted and that we should expect that to extend through 2021. But I think people also need to remember that look, there is a recovery in play. It may not just move at the same kind of pace that we've had through much of 2020.

BRIAN SOZZI: But Seema, isn't the lack of stimulus ultimately crippling the recovery? Aren't lawmakers crippling the economic recovery that we have seen play out over the past couple months? Look at jobless claims this morning here. And isn't the main read from that that it can get worse over the next couple weeks? We're sitting on a potentially mountain of negative economic data.

SEEMA SHAH: Well, I think what's been interesting is that if we had talked about this maybe six weeks ago, the general consensus would be that the bottom would fall off the recovery if we didn't have any fiscal stimulus package in the US. And actually what's happened is, even since then, a lot of the economic data has remained relatively robust. Even if you look at the small business index, Small Business Owners Optimism Index, that's actually stayed very high, in fact, it had gone above the 46-year average.

And it's almost back to where it was at the beginning of this year, pre-COVID. So that's telling us that, actually, a lot of the economy is more resilient than we expected. So the fiscal stimulus package, of course, it would be a real bonus. It would be very important, and it would add the additional amount of support that a lot of the economy needs.

But without it for the time being, we're not going to be facing the point where the recovery suddenly comes to a standstill. It will continue. It just needs a little bit of a boost. And I have to say, it certainly looks like we will receive something. It's just the timing is the big question mark.

ALEXIS CHRISTOFOROUS: Yeah, timing. And timing is everything, we know, for millions of Americans suffering right now. Seema, when you look at portfolios, is there an area that you are just hands-off staying away from for the time being?

SEEMA SHAH: That's a difficult question. I think the one thing that we have maybe kept a little bit of distance from is still on the value side. So growth versus value, we still like the growth area. For value to outperform, we really need to see not just growth returning, but we also need to see bond yields rising.

And at this moment in time with the Federal Reserve and other central banks all around the world adding as much stimulus as they possibly can, we're not seeing the upside to bond yields. So unfortunately, in that scenario, value, especially financials, will continue to struggle. You need to have some kind of catalyst, and unfortunately, we're not seeing that in the immediate horizon.