If those stimulus check stop coming, it is going to put a damper on the market: Strategist

Peter Tchir, Head of Macro Strategy at Academy Securities, joined The Final Round to discuss his outlook for the market as stimulus talks remain at a standstill in Washington.

Video Transcript

SEANA SMITH: Welcome back to "The Final Round." Stocks still mixed here with just around 15 minutes left in the trading day. Dow off 63 points. S&P though, still above that record close 3,391. We need to close above the 3,386. So for more on today's market action, really what we've seen over the last several weeks, we have Peter Tchir. He's the head of Macro Strategy at Academy Securities. And Peter, let's just start with the market's momentum. We are right now above that all-time record close for the S&P. But what do think we need to see in order for this market's momentum to continue to the upside?

PETER TCHIR: I really think we need to see DC deliver on more stimulus. We heard some of the earnings calls today. People are already concerned. If those stimulus checks stop coming, It is going to put a damper on the market. Talked to a lot of people. It feels like half the people believe this is strictly because of the Fed. I think that DC has played a much bigger role in helping the economy muddle through this coronavirus. And if we don't get those stimulus checks, I would look to the economy to take a downturn.

SEANA SMITH: Well, how big of a downturn are we talking, Peter?

PETER TCHIR: You know, I think we could see a 5% to 10% pullback in the market, given where we're at. I think people are a little bit reluctant to see that coming right now. There's still a lot of hope that DC will find some common ground. I'm less sure that that will happen, especially now that the conventions have started. And the other weird factor I think facing the market right now, is almost this massive bet. Will Tesla be in the S&P 500 or not? But I've seen trading away from that trade slow down dramatically.

JARED BLIKRE: Peter, if the economy rolls over, the stock market does, what's going to happen with the bond market and currencies? Because we just finished this pretty big spike up in bond yields, at least on the long end. I know this is your wheelhouse here, so how does this fit into your macro picture?

PETER TCHIR: You know, I think right now stocks could face a headwind of further higher bond yields as it is. I don't think they're going to get out of control. I think if we get any slowdown, we're going to see more and more dollar weakness, which generally has been helpful in the past for stocks. I just don't see it this time. I think what we're seeing now, is a realization across the globe that the Fed is really artificially suppressing rates.

And when that's happening, the only other way to express views is really through a weaker dollar. So I think the weaker dollar continues. And it goes from being a help to corporations, you know, a 45% to 55% of profits are from overseas, so that currency devaluation actually helped. But at some point, does it scare away investment from the US?

SEANA SMITH: Peter, what about the lack of breadth though in the market? Because I think one of the things that we've been talking about here on the program, is the fact that tech stocks continue to lead the way. And that, of course, brings up the question about maybe this rally, the fact that it's only driven by a small number of stocks, that that could trigger a big reversal and a quick reversal. What do you make of that?

PETER TCHIR: You know, I'm a little bit confused on that subject. But the one thing I've been taking a lot of look at, we talk a lot about Tesla, right, and Tesla could go in the S&P 500. But if Tesla goes in, it would be the largest entrance ever. It could be anywhere 30 to 60 billion of people have to buy Tesla. But guess what. They have to sell the other 499 stocks that are in the S&P 500.

So I think one of the things we're seeing over these past few days is, this gravitation to the hopes that Tesla comes in the S&P 500, which is very good for Tesla. But I think that's been acting as a damper on the rest of the market. So when this decision is made on Tesla, I think that actually frees up the rest of the market to finally outperform.

For me, we really need to see financials take a leadership role. I think the financials can do OK if the stimulus checks come. But I do think that the other side of this Tesla story people aren't talking about is, people are going to have to make room for that. So I think people been very reluctant to buy those other stocks. I think that's what we need to get cleared up to have a further rally in that. And if Tesla doesn't get in the S&P 500, I think you see tech pullback.

DAN ROBERTS: Peter, Dan Roberts here. I know Tesla is so interesting, but to stick with the FANG names, I just wonder what could slow down names like Apple and Amazon? Because the gains have been crazy. And also, a lot of these names have so much cash on hand, they're not necessarily doing that much with it lately. We're not seeing that many acquisitions.

Of course, we were just discussing what'll happen with TikTok. But man, it's just been such a contrast to all of the ongoing discussion in those tech hearings about their size. It kind of seems like the market does not care one bit. And I just wonder if you think anything can slow down those FANG stocks in the next few months.

PETER TCHIR: You know, I think as a contrarian, it's the fact that everyone's gravitating towards those stocks. They become a favorite of every hedge fund. Everyone who's dismissing some of these stocks now seems to be on board for them. So maybe it won't take us much news. I also wonder whether this Robin Hood community and the day trading community that have become very popular, why don't they, I do think they are very focused on options trading. I think the view has been, buy calls, buy calls. And you kind of get the self-fulfilling rally.

At some point, do they buy put to catch the pros offside? What changes? I'm not sure what changes, but it seems now such a consensus view that these stocks only go up. And look at some of the earnings. Walmart, right? Walmart would be insane not to look at Amazon's valuation and commit billions and billions to some sort of online, better online experience. So maybe it's competition that surprises them.

SEANA SMITH: Well, Peter, that's interesting, because we've been talking about the fact that it seems like nothing is deterring these investors from piling into a lot of these tech names, yet there's so much speculation about regulation and the potential impact that that could have. But do you think there's any of those lesser known plays within the tech sees that could regain some momentum here over the next couple of months, that might look attractive to you, that maybe isn't on our radar at this point?

PETER TCHIR: Yeah, right now, I'm definitely a fan of kind of a lot of the beaten up names and sectors. So I think there's going to be better potential returns from some traditional sectors, like financials. I still like actually the equal weight S&P versus the market cap weighted S&P. And for all that's gone on, those performance for the past month, they've both been up about 5%.

We keep talking about this FANG, but I think you're getting less of a divergence between these top names than we had. And I think you could get that big reversal. So if I had to put a trade on right now, I think I'd like to either own small caps or equal weighted Russell, or equal weighted S&P 500 versus NASDAQ. I think that's probably the trade to look for some normalization.

SEANA SMITH: All right, Peter Tchir, always great to have you. Head of Macro Strategy at Academy Securities. Thanks so much for taking the time to join us. We hope to have you back soon.

PETER TCHIR: Thanks very much for having me.