Stock market opens higher with first presidential debate, stimulus in focus

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s market action with Brown Brothers Harriman Chief Investment Strategist, Scott Clemens.

Video Transcript

BRIAN SOZZI: So let me frame it this way, we've seen a remarkable turnaround in the markets here this morning. We were down pretty substantially in the futures. We're seeing green on the screen now. We have John Tuttle over at the New York Stock Exchange just told us wave of IPOs coming here. What is your take? Does the debate last night even matter? Do the elections matter? Is the read here just go long into 2021?

SCOTT CLEMENS: The debate and the elections and the anxiety around the elections matters from a sentimental standpoint. It'll certainly dominate news flow between now and the election and probably even a few days afterwards. What I'm reminded of last night with the debate is how important it is for investors to focus on the longer term durable fundamentals as opposed to the day by day Twitter feeds and news flow that can certainly dominate sentiments on a shorter term basis. To the fundamental end, the next important thing is today's the last day of the month. Give it a couple of weeks, but we will start to get corporate earnings reports, and we were going to get some more real insight into how companies are dealing with the volatility in the economy and the degree to which at the corporate sector, both public and private, companies have participated in the economic rebound we've seen so far.

BRIAN SOZZI: Scott, how do those fundamentals look like to you? The ADP report, a little bit of an acceleration there, but, again, we have companies like Disney laying off massive numbers of workers. We've seen some pretty sizable layoff announcements throughout September. How is earnings season shaping up in your view?

SCOTT CLEMENS: I think what we're going to find is that the early V-shape to this recovery has flattened out significantly. And I see that, if you look at the high frequency data, whether it's restaurant reservations or travelers through TSA checkpoints, these sort of pulse takes on the economy, I think we've seen a market slowdown over the month of September. You've seen that in the initial claims for unemployment. They've sort of bottomed out at about 900,000. I think we'll see another-- it'll be a gain in jobs or recovery in jobs when we get the September jobs report on Friday, but it will not be as strong as July's 1.7 million growth or August's 1.4 million growth.

Now, we're in this weird period in which the economic data is all very volatile. So following on the heels of a second quarter GDP that was down 31%, if you follow the Atlanta Fed's research on the current quarter, we're likely to see a positive 30ish percent GDP growth in the third quarter of this year. And we need to remind investors all the time that the convention of GDP is that's reported on an annualized basis. And, of course, as we all know, if you go down 30% and then up 30%, you're still not back to where you started. You're about 9% short, and I think that's going to be the pattern in the second half of this year. I think that's what we're going to learn from the corporate earnings reports that we start to get over the months of October and November.

ALEXIS CHRISTOFOROUS: Scott, during the debate last night, they talked a little bit about the economy, and Trump was talking about this being a V-shaped recovery. Biden says it's a K-shaped recovery. How do you see it?

SCOTT CLEMENS: I think it's more of a K-shaped recovery. There's no question that the people who own financial assets have enjoyed a rally in risk assets fueled in part by investors looking forward to the other side of the health care crisis, but also in part to the fact that the Fed has cut interest rates to zero, and without saying quite so much, has basically said they're likely to stay there for the foreseeable future. When the discount rate on anything goes to zero, the present value of that begins to rise, and that's exactly what we've seen. So again, in periods of economic volatility like this, yes, it's important to look at rates of change, which is how we typically look at economic activity, but it's also important now to look at levels.

So if we get a 30% annualized rebound in third quarter GDP, that still leaves us only about halfway back to the pace of vitality that the economy had in the fourth quarter of last year. So I think the president will clearly focus on rates of change, because those are pretty impressive over the past three, four months or so. Not coincidentally, that third quarter GDP report will come out four days before the election, at least the preliminary report. You're going to see a lot of tweets about that. Biden is focused more on the level of unemployment, the level of absolute economic activity. Both are right, mathematically, but both tell kind of different stories.

ALEXIS CHRISTOFOROUS: You know, last night as well highlighted, I guess, the risk for a contested election. What are clients doing to sort of offset that volatility? We had a guest on earlier talking about Japan and China, you know, parts of Asia being an area where there is opportunity and hedging with things like gold. What are you doing with that?

SCOTT CLEMENS: Well, we're investing for taxable clients, so there's a cost related to changing portfolios too often, a tax cost, a friction cost, so the short answer, Alexis, to your question, is nothing. But the way in which we're investing in the kinds of companies that have strong balance sheets, a lot of free cash flow, very loyal customers, global footprint, creates a certain amount of a hedge or a resistance is in the portfolio to the slings and arrows of outrageous politics. I do think if you go back to the nearest example, and it's not a perfect one, if you look at market action around the contested election in 2000, not only went on for a couple of weeks before it went all the way to the Supreme Court, and the Supreme Court shut down the Florida ballot recount. Yeah, there was a lot of day-to-day volatility around that just because of the uncertainty. It wouldn't surprise me to say the same thing this time around either, but I think that by the time we get to mid-December, at the latest when the Electoral College is scheduled to meet, there will be clarity, and the fundamentals will reassert themselves.