Election uncertainty will continue until after November 4th: PNC Chief Investment Strategist
Amanda Agati, PNC Chief Investment Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss what’s moving the markets around Friday’s opening bell.
Video Transcript
ALEXIS CHRISTOFOROUS: All right, let’s get back to the markets now and welcome in Amanda Agati, PNC chief’s investment strategist Amanda, good happy Friday morning to you. Are we in a holding pattern right now as we await the election, do you think, for this market?
AMANDA AGATI: Well, good morning. Thank you so much for having me. It’s great to be here on this Friday. I absolutely believe that we are in a holding pattern if not a very choppy range-bound market environment. You know, and if you think about how far and how fast this market has rallied to relatively all-time highs, we’re pulling back from that, obviously, here.
The market was really pricing for perfection when it got to a forward P/E of about 22 times on the S&P 500. And we know the backdrop is anything but that. And so not at all surprising to see the correction here over the course of September. Obviously, September is notoriously challenging from a seasonality perspective. Why should we think that 2020 would disappoint in that regard?
But when you think about how far this market has moved and the challenges that lie ahead, we are really struggling to find a strong positive catalyst to keep this rally going, especially when you have the election looming, a lot of uncertainty around whether we’ll know the outcome on election night. COVID cases are starting to build again, both outside the US and inside the US. We don’t have clarity on fiscal stimulus.
So there are definitely some challenges here and some concern that perhaps this recovery is starting to slow. It’s certainly showing up in some of the high frequency data we’re tracking. But we haven’t seen a fundamental crack. And so I think that will kind of keep us in this somewhat range-bound holding pattern until we get through at least the election.
BRIAN SOZZI: Amanda, speaking of cracks, I believe it was yesterday, the Russell 2000 was the first major index to break below the 200-day moving average. Do you think that is a signal to your point that things are– might be slowing down right now, that the fourth quarter, we’re back in recession?
AMANDA AGATI: Well, I don’t know that I would necessarily go so far as to say back into recession. But I definitely feel like it is a signal of what we’ve really been talking about all year, which is really this very bifurcated market environment, this big distinction between Wall Street and Main Street, the haves and the have nots, the large and mega cap tech names and smaller and value-oriented names. Just, there’s a big distinction between winners and losers in this environment.
And the longer that COVID lingers and the longer we go without additional stimulus to help kind of bridge the gap, I think it’s just going to continue to be a very, very tough slog for smaller capitalization, and in particular, the value side of the equation. You know, the Fed has done a tremendous amount. Powell put on a superhero cape, we’ve been talking about this all year, you know, swooping in to save the day from a liquidity standpoint.
But the Fed can only do so much. They’re not solving the solvency issue that continues. And with all of the stimulus programs on the fiscal side expiring or rolling off here, you’re starting to see some cracks show up and some signs of stress. And I think that’s really reflected in kind of what we’re seeing in the Russell 2000.
ALEXIS CHRISTOFOROUS: And Amanda, what do you make of sort of the weak market breadth that we’ve been seeing in terms of leadership for this market? You know, the number of companies above their 200-day moving average for the S&P 500 is right at 50%. It’s trending lower. Do you need to start to see leadership widen in this market?
AMANDA AGATI: Absolutely. It’s a key technical metric that we have been tracking all year. And when you think about how far this market has rallied, we hit all-time highs. And yet, breadth didn’t get anywhere near close to pre-COVID levels, which were in the neighborhood of 80% or so. In a normal, or, quote unquote, “normal” environment, anything above 50, from a market breadth perspective, is usually considered fairly healthy.
But I think you’re seeing a very big disconnect in terms of market leadership, and it’s really the usual suspects. It’s that stay-at-home trade that continues to lead the charge, while the go-outside trade, smaller cap value, to Brian’s point earlier, continues to be kind of drug along kicking and screaming here. And so definitely a disconnect as it relates to breadth.
And to really see this continuation of a cyclical rally, we do need to see broader participation. I just am very skeptical that we’re going to get it here in the short run.
BRIAN SOZZI: We just had a strategist on saying the investors that he talked to aren’t paying that much attention to what President Trump has been saying all week with regards to him not agreeing to a peaceful transfer of power. How disturbed have you been and your clients been by this commentary? And are they inclined to move more into cash, based off of comments like this from the president?
AMANDA AGATI: Well, it’s certainly disturbing on a personal note, let me just say that. You know, that’s not the kind of rhetoric that makes anybody feel good or have a high conviction point of view, at least over the short run. I think actually investors, but more likely volatility traders are starting to price in the significant uncertainty and the potential that we’re not going to know the results on election night.
If you look at the volatility or VIX futures curve, we’ve been fixated on the election month, which has been very, very elevated, much more so than in the last two election cycles. So much higher than in 2016 and even 2012. What’s more concerning now is that the following month is even more significantly elevated.
And when you look out to March of 2021 and the VIX futures contracts, it’s all the way above 30. So I don’t know that we’re going to make significant changes for our own client base in terms of portfolio positioning. I think we’re pretty comfortable there. But I think the market and, in particular, volatility traders are starting to price in the significant uncertainty.
And just based on, kind of, the futures curve out through March, pretty high confidence that we’re not going to have a clear result on election night. I think there’s going to be a lot of uncertainty that’s going to linger very much past election day itself. So it’s something we’re definitely watching, keeping an eye on closely, and really why we continue to believe that this is a range-bound market environment. And we’re cautioning our investors and clients to really just buckle up.
JARED BLIKRE: Hey, Amanda, always good to talk the VIX term structure with you. But I want to move onto the dollar. We’ve seen the US dollar index surging higher for over five or six days here. And it’s well above its 50-day moving average. You know, I’m reading from a lot of analysts said it’s kind of a major pain trade right now. How much of a headwind is this for equities, and where do you see the dollar going from here?
AMANDA AGATI: Well, I don’t think that it’s that much of a pain trade necessarily. I mean, if you want to look over a few days, sure. We try not to take that short term of a view. I think the bigger concern is how far over the longer term the dollar is likely to fall. So what is that dollar weakness likely to be going forward?
It’s really reflective of all of the monetary policy stimulus that’s coming into the system, just the flood of liquidity, and certainly questions and concerns around the inflation backdrop, which, by the way, we don’t think are necessarily founded for a number of structural reasons. So it’s something that we’re watching. We don’t want to see wide swings or sharp moves in one direction or the other.
I think, net net, we’re likely to see some stabilization here in the dollar. But just like everything else, it’s such an unprecedented market environment. Everything’s choppy. You know, every aspect of the market is wrestling with this idea of how to price some of the macro issues and the uncertainty that’s sitting out there. Not a lot of binary outcomes.
You know, even with the election, which we would normally think of as a highly binary outcome that goes one way or the other, depends on what happens with Congress. Do we get a Democratic sweep? Do we know the outcome on election night? And so I think it’s a little bit more likely to be choppy, just like the market more broadly until we get a clearer picture of the path forward or we get some resolution around some of these key macro headwinds and issues.
ALEXIS CHRISTOFOROUS: Lots of uncertainty to go around, for sure. Amanda Agati, chief investment strategist at PNC. Thanks for being with us.
AMANDA AGATI: Thank you for having me.
