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Sr. Investment Director on how election uncertainty is impacting markets

Bill Northey, Senior Investment Director at U.S. Bank Wealth Management, joins The Final Round to highlight what he is advising clients as the presidential election draws cloer and stimulus talks continue.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance, Myles Udland with you in New York. It is time now for our weekly retirement segment, brought to you by Fidelity Investments. And thinking about the markets here, the context of the election coming up, squaring up, it's been a very eventful year in financial markets. We're joined now for more on all this by Bill Northey, he's a senior investment director at US Bank Wealth Management.

So Bill, let's just start with the market today as we head towards an event we've all been talking around, talking about, looking forward to for some time. How are you thinking about the election in the context of everything else that's gone on this year, everything going on right now, and maybe what you do or don't expect 2021 to have in store?

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BILL NORTHEY: Right, thanks, Myles, I'm glad to be back with you. You know, so we really look at-- there is about four catalysts that are driving the markets right now. And it's really an order of operations. We're looking at the virus and then economics policy and then ultimately corporate fundamentals and investor sentiment.

And so eyes today, as we know, were cast towards Washington with the upcoming election. And a lot of focus in and around what's happening with the next coronavirus stimulus bill, which doesn't seem to be making a lot of progress. Although, we're hearing more rhetoric that they're starting to narrow the gap between some of those differences.

But ultimately, it's a question of whether this is posturing or whether it's actual progress towards the coronavirus relief bill.

MYLES UDLAND: And then, I guess, thinking about the virus because we started with that. It's been strange, right? Because we've seen the virus come and go in the US over the last couple of months, and stocks, at times, have reacted to it but mostly focused on what you mentioned in terms of policy, in terms of corporate fundamentals, been very bulled up on that.

Do you think there's a chance, maybe, that the virus would come back into play as a major market driver? Or do you think that investors have made peace with what this process might look like?

BILL NORTHEY: Well, you know, it's our perspective that that's really the largest catalyst that sits in front of us is when we get a health solution to the virus, probably more so even than those events that are coming up in 10 days with the National election. We're seeing, again, a third wave, almost, of a virus count both domestically and abroad. And the big concern is that with this resurgence, will we see further retrenchment efforts to try to mute the impact of the virus? Which really plays through to the real economic environment.

And so we remain focused on that. We think it's the biggest catalyst, perhaps even more so than the election forthcoming. Now, we understand that all of this plays forward into policy. And policy is really one of the second catalysts that we think is out there. And monetary policy and fiscal policy have been necessary but not sufficient supports to prop up the US economy, and really the global economy.

And so that's why focus on Washington and focus on the next relief bill is so important at this point in time. And as we're headed into the election, we know that there's really two potential outcomes here. And it looks like a policy status quo. And by that, we mean divided houses of Congress, and the president could go either direction.

Or we could have a Democratic sweep, which has some implications for policy. But our focus, as we think about portfolio construction and management of assets and the capital markets, is really thinking about that order of operations. It's about the health solution. And then it's about how that plays through to economics and ultimately corporate fundamentals.

MYLES UDLAND: But it does sound-- it does kind of sound to me, Bill, like all the scenarios you're outlining really have an upside risk, if nothing else. I mean, a health solution would be a positive catalyst, a more fiscal stimulus would probably be a positive catalyst. And so in many ways, it does seem, at least in your view, it sounds like the market has contemplated a lot of the downside scenarios, and maybe it's still the upside scenarios that offer some opportunity.

BILL NORTHEY: Well, I think the risks are really two sided. But ultimately, as we march each day closer to that ultimate health solution, we do think that that is a positive catalyst. But we recognize that as we look at 2020, we're looking at a year in which corporate earnings for the S&P 500 are likely to decline somewhere in the high teens rate.

And that's at the same time that we've seen the broader index advance by 7%. So it's all been about valuation and valuation aided by low interest rates and low inflation and the policy supports that we just discussed. And it really requires then that that recovery in 2021 in corporate earnings comes to pass. And that requires a health solution.

MYLES UDLAND: And then just finally, I want to ask you quickly about what's going on in the bond market. Because we've seen a backup in Treasury yields over the last couple of weeks, still obviously extremely low. You know, basically 30, 40 basis points above record lows for the 10-year. But how do you see, maybe, fixed income playing out next year if we do get better than expected growth, some of these solutions come through, but of course, the Fed maintaining and saying they will be at 0 for years to come?

BILL NORTHEY: Well, and we've got monetary policy accommodation around the globe. And the Fed has indicated that they are going to keep their foot on the accelerator and allow inflation to run a little bit higher. And you're starting to see that the yield curve is steepening, so we've seen the longer maturities start to rise and yield here just over the course of the last couple of weeks.

And some of that is really in response to things like rising inflation, expectations, albeit from incredibly low levels that will be supported by the Federal Reserve. So we think when you're looking at balancing a portfolio, right now, we're neutral to our long-term allocations within fixed income. But we do like having a little bit of a long duration bias, just simply as a hedge in case things go wrong either on the virus front or the capital markets front. And then thinking about, from a sector standpoint, we do favor looking at good investment grade credit.