Stocks renew declines, as stimulus may be off the table ahead of the election

Ed Clissold, Chief U.S. Strategist for Ned Davis Research, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets around Tuesday’s opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: Let's turn back to the markets now and go around the bell with Ed Clissold. He is chief US strategist at Ned Davis Research. Ed, good to have you on the show. Big week-- not only are we dealing with earnings, but we're just a few days away from Election Day. To your mind, what is the biggest catalyst for this market right now?

ED CLISSOLD: Yeah, the election seems to be front and center. Where-- when the market doesn't know who is going to win or how long it's going to take to find out who the winner is, there seems to be a move to somewhat of a risk-off appetite-- popular averages going down, VIX going up, and in general risk assets, you know, underperforming. So we're going to have to be in this environment, especially without another stimulus deal with the Senate adjourning until after the election. So that's off the table. So it seems to keep politics front and center, and of course, the virus making a comeback is probably 1A in the issues for the market.

BRIAN SOZZI: And that quarterly disaster out at SAP yesterday I think really shook the confidence of a lot of investors. And I see tinges of that fundamental weakness in business throughout some earnings reports this morning. You look at a Stanley Black & Decker, some weakness in the industrial side of the business. Do you just simply think-- let's just put the elections outside for a second. Just from a business standpoint, if infections are going up, are investors just too optimistic on the fourth quarter?

ED CLISSOLD: Well, I think the challenge as we go into earnings season is that we're coming off really one of the best earnings seasons versus expectations that we've ever seen. In fact, the beat rate last quarter for the S&P 500, the percentage of companies that beat consensus expectations, was a record high 84%, and we have data going back over 20 years on that. So, the upside was partly because the expectations were so low that they beat them.

Expectations are not nearly as low this quarter. Consensus is for around 16% decline in S&P earnings this quarter. So it's quite possible that earnings could be better, but versus expectations they're not. And market's going to have to adjust for that. And as you alluded to, as we start turning into Q4, expectations are for single-digit decline in earnings. And so if the economy isn't going to be opening up, then we could actually have downward revisions to earnings going into Q4, which is something we haven't seen for almost two quarters now.

ALEXIS CHRISTOFOROUS: Ed, we know the market seems to be pricing in a Biden win, perhaps even a blue wave if the Senate can switch Democratic. Is the market setting itself up for disappointment? Because when you look at Biden's proposals, there are big tax increases there, and he wants to raise the capital gains tax. It would be one of the largest rises in US history. So what is the market expectation do you think for this election?

ED CLISSOLD: Yeah, going into the election, the market really just wants to know who the winner is and then go from there. I don't think a whole lot of focus has been on some of his tax proposals because that's not what Biden has been running on. He's been running on basically not being Trump. But some of the things he's put out there are pretty big increases, particularly the capital gains tax. His proposal of 39.6% would be the second highest ever, just a few tenths below what it was during the Carter administration. So that would be a pretty big adjustment.

Now I'm not so sure that's going to be one of the first things a Biden presidency would put forward. They seem to be more focused on COVID relief, expanding Obamacare, infrastructure spending, green energy, and then trying to figure out a way to pay for it. So I'm not sure that's going to be an issue for 2021, but if it is, that would certainly be an adjustment for the market, and probably the market-- something the market has not focused on up to this point.

ALEXIS CHRISTOFOROUS: All right, Ed Clissold of Ned Davis. Thanks so much for being with us this morning.

ED CLISSOLD: Thanks for having me.