A ‘5-10%’ pull back in prices ‘would be a rational expectation’ with the political uncertainty: Troy Gayeski
Troy Gayeski, Skybridge Capital Co-CIO, joins The Final Round to discuss his thoughts on the markets and how the indices will be impacted by the Federal Reserve and the upcoming November election.
Video Transcript
– Let’s talk about how the market is looking at all this. Because uncertainty over the stimulus is, of course, one of the reasons that we’ve seen some of the selling pressure recently in the markets. We had the Dow and S&P both negative for the week, at the fourth week in a row that we’ve seen losses for the Dow and the S&P.
So for more on this, we want to bring in Troy Gayeski. He’s the co-CIO of SkyBridge Capital. And Troy, I’d love to get just your thoughts on what we just heard from Jess. I guess, to what extent do you think the market sell-off and the volatility that we’ve seen over the last couple of weeks is– is because of the prospect of no stimulus from Washington?
TROY GAYESKI: Yeah, we really don’t think the stimulus– the probability of stimulus going close to zero started to impact markets until this week. Up until this week, it was really more about taking out some of the froth. We had a lot of overextended names, you know, money supply growth that ceased expanding the fed balance sheet, it ceased expanding. And we were pushing 23.8 times forward earnings. So healthy correction, removed some of the froth.
This week it took a bit of a darker tone, even including today’s price action. Because clearly we’re going to have a very contested Supreme Court seat. And that greatly reduces the probability of getting further fiscal stimulus. And as your colleague reported, I mean, the Democrats are moving down. But the Republican senators that have commented, think it’s a very unlikely outcome.
So, you know, markets had expected a stimulus by mid-August, and ignored it, ignored it, ignored it. And started to focus on it more this week. And that’s part of the reason, we think, why banks in particular are getting trashed, right. Because bank– banks are going to suffer from higher loan losses without fiscal stimulus, whereas Amazon could keep doing what it’s doing.
– Hey, Troy, do you think we’re going to have to get past the election before the market starts moving on earnings and economic fundamentals again? Or can it return to that before the election?
TROY GAYESKI: Yeah, we really think you will. All right, so to Myles’ point before, in order to make new highs, right, you’re going to need some policy certainty, election outcome certainty, and remember, this could go Bush-Gore style again, right, or be even sloppier. Instead of Florida, this time, it looks like Pennsylvania will probably the key state that, you know, tons of lawyers will descend on.
Now, in the background, though, you do have the fed starting to re-expand their balance sheet. They’re there like clockwork. You know, they hadn’t done anything for a long time, equity sell off, here comes $40 billion to balance the expansion this week, which is the highest pace since June. So we don’t think things are going to get out of control, to the downside. We just expect very choppy to a volatility, at least until the election is called, one way or the other.
– I guess the question is going to be how long that lull is going to be, right, between election day–
TROY GAYESKI: 100%. That’s right. Yeah.
– And when the election results going to come out. And, you know, there’s been a lot of reference made to what happened in 2000. Bush, Gore I think we saw the S&P 500 pull back about 12% or so. What kind of pullback are you anticipating on that front? And how much of that volatility we keep hearing about, that uncertainty post-election, has already been priced into the market?
TROY GAYESKI: Yeah, I think in something Bush-Gore style would even– worse, one would argue, because it might be multiple states, and not just Pennsylvania in particular. You know, your 5% to 10%, given where we are today, would be a rational expectation. The other thing, and not to be, looking too much at history, remember, that was basically close to the top of markets, right, after the– the NASDAQ bubble. And clearly again, coming into September, we are at very elevated multiples.
So, you know, if we were at 16 times forward earnings right now, might not be such a big deal. But we’re still at 21, at 22 times forward earnings. And there’s really only so much the fed can do to protect– to the downside when you have so much political uncertainty, and also, again, fiscal stimulus uncertainty. Because the longer it takes to resolve the election, the longer you’re going to have to wait for the next round of stimulus, which is becoming more and more critical.
– So Troy, just to go back to the Fed for a minute. Some investors seem to think that the Fed has the ability to put an absolute floor underneath stocks, below which they cannot go, because the Fed can ride into the rescue if it really has to. You don’t– you don’t really think so? You think the Fed has limited ability to stop some– some kind of ugly sell off if we got into a crisis situation?
TROY GAYESKI: Oh no, so the Fed is by far and away the most powerful financial institution on the planet. I mean, the key reason that equities reflate as fast as they have, and also corporate credit, and to a lesser extent, other assets, is because of the massive balance sheet expansion. So, you know, if the Fed wanted to, they could clearly expand their balance sheet.
Let’s say we get in a contested election, and markets are down 5% to 10% more, they could expand the balance sheet by $200 to $300 billion, jack up money supply. So they could put a floor. But the point is, is that at these valuations, you have more downside even with the fed stepping in than if you were at much lower valuation levels, right. Just based on, you know, simple relative value versus fixed income and equity.
So the Fed, to call it omnipotent is a stretch, but they’re incredibly powerful in driving asset prices where they want them to go. And if they want to put a floor under, they can. It might not be to the day or the week, but eventually money supply will work its way into markets and start juicing prices again.
