'Next year is going to be a tremendous opportunity for investors': Eddie Ghabour

Eddie Ghabour, KeyAdvisors Group and the Author of "Common Sense Bull", joins Yahoo Finance’s Akiko Fujita to discuss what investors should expect ahead of a big earnings week.

Video Transcript

AKIKO FUJITA: Roughly one fifth of the S&P 500 companies out with their quarterly reports this week. Expectations are low, with Wall Street expecting roughly a 12% drop year-on-year But will there be any surprises to the upside? Let's bring in Eddie Ghabour. He is the author of "Common Sense Bull," and also with Key Advisors Group.

And Eddie, we're going to look ahead to-- to earnings, but let's start with the stimulus talks right now, because we have seen the Dow turn negative on sort of uncertainty on what could come out of this 48-hour deadline that we've seen the House Speaker Nancy Pelosi now set forward. How much does that delay actually matter to the markets? What are investors looking to? Is it about the scope of the stimulus, or just how long that delay is likely to be, if a deal is not reached in the next 24 hours?

EDDIE GHABOUR: I think it's a combination of both. Again, the market was hoping we would have stimulus by August. There's a lot of families and small businesses that really need this PPP money, as well as all the other things that go to the airlines. So I don't think we're going to get a stimulus deal within this 48-hour period. I mean, it's stretched out this long, what makes us believe that now all of a sudden two weeks before the election that something's going to happen?

So this is why you're seeing the action in the market today. And frankly, I expect this downward trend to continue over the next two weeks until we get clarity on the election. The other big risk, too, is if we don't have a clear-cut winner on election night and that stretches out for weeks, then that delays the stimulus even further, and that can cause a tremendous much more downside to the markets because of that added uncertainty.

So there's a lot at risk here. They're taking a big gamble that if they don't pass a stimulus now, let's not assume it's going to automatically happen right after the election, because there's a chance it could not happen till the end of December. And that would be very detrimental to the path of growth and the success that we have made since the March lows.

AKIKO FUJITA: When you talk about more moves to the downside, I mean, how significant of a pullback are you talking about?

EDDIE GHABOUR: I think you can easily see a 10% drop in the equity markets from here if we don't get stimulus and it stretches out well past the election. So I think investors need to brace themselves for that. That's why for the last couple of weeks, and with you on your network, I've been telling investors to have some dry powder on the sideline because we've expected this to happen. I hope I'm wrong, but it's rather to be safe than sorry and have some dry powder to be able to buy those dips, because I am very bullish on equities heading into 2021. We just have to get through this rough patch here that could be either two weeks away or 10 weeks away.

AKIKO FUJITA: So having said that, how do you think investors should be approaching the fundamentals? We're talking about more big names reporting earnings this week. You've got the likes of IBM, and Netflix, and Tesla. How do you trade some of the names that are reporting, given the risks that you've highlighted around the uncertainty in the election and the stimulus?

EDDIE GHABOUR: So it really depends on how their portfolio is structured. If they already have good positions in these great companies, frankly, I wouldn't look to try to guess what their earnings are going to do and add or sell here. If you're a long-term investor and you have those names, then I say stay the course and actually buy the dips if they react negatively due to stimulus or due to earnings.

If you don't have any exposure, then go ahead and look to nibble and put a position on with these. But again, most-- our clients are long-term investors, so these short-term moves don't negatively impact their long-term goals. But again, in my opinion, I would not be fully invested in equities right now. If you're trying to get short term what direction this market's going, I would bet to the downside here in the near term.

AKIKO FUJITA: Yeah, and Eddie, I heard you say a number of times in the last several months about having some dry powder on the side. Where do-- where do investors hold that cash though? I mean, is it just about pulling money from a portfolio or looking to diversify assets beyond equities?

EDDIE GHABOUR: So I think-- you know, again, for our clients, we've got fixed income, you know, some of your corporate bonds that are paying a decent yield relative to the 10-year Treasury. But look, there's nothing wrong with just having cash. Cash is not going to grow right now, but cash is a very short-term play, you know, maybe two to three months, as we've been saying over the last couple of months.

And that there is for protecting some on the downside, but more importantly, being able to be opportunistic. So that way when you see sell-offs like we saw in September, and potentially the one that we will see during these next couple of weeks-- and again, if we don't have a clear-cut winner on election night, we are in unprecedented territory right now. So in my opinion, now's not the time to be a gunslinger and try to guess what's going to happen. So I guess we're playing it a little bit safer than normal due to the circumstances.

AKIKO FUJITA: Eddie, there is a reverse to all of this, right? The contrarian view is that for all of the talk about election uncertainty, things do go according to normal, whatever that normal looks like on Election Day, and there is a clear winner there. I mean, shouldn't investors maybe game out some of that scenario as well? And what does that look like, you think, in terms of positioning?

EDDIE GHABOUR: So if we have a clear-cut winner on election night, I think this market is going to just head upwards, and we're going to break through all-time highs, is my opinion. And I think next year is going to be tremendous opportunity for investors. So when we say have dry powder, we don't mean sell out of all of your positions and sit all in cash. We're talking about a tactical change of maybe 10% to 20%, so that way you still have a big chunk of your portfolio working for you in case that worst-case scenario does not unfold. And we hope that we do have a clear-cut winner on election night, because that uncertainty is not going to be good for equities, and it's not going to be good for our country.

AKIKO FUJITA: And Eddie, you talked about buying on the dips here, some potential opportunities. What are particular sectors you're looking at right now?

EDDIE GHABOUR: So we do like the value stocks that have not participated in the year that we've had this year. You know, it's kind of been a one-sided trade with technology. We still like technology, but we think this rotation out of tech and into value is not a head fake. So although we are still-- we still like tech as a core holding, we still like housing. We think housing is going to be very, very strong.

Health care should continue to be strong. And then, again, look at the value plays like the Starbucks of the world that's going to bet on the consumer strength heading into next year. We do not like the traditional banks though. This yield curve is flat, and it's going to stay that way, in our opinion, so we're not as bullish on that sector. We think there's opportunities to the upside over the next 12 months.

AKIKO FUJITA: Eddie Ghabour with Key Advisors Group, some good insight there. Thanks so much for joining us today.

EDDIE GHABOUR: Thank you. Have a good day.