Chief Investment Strategist on why the market will stay 'focused on elevated COVID cases'

Jim McDonald, Chief Investment Strategist at Northern Trust, joins The Final Round to discuss the primary drivers for recent market action and the state of the U.S. consumer.

Video Transcript

SEANA SMITH: Jim, just, I guess, first, what's your take on the selling pressure that we've seen play out over the last couple of days? Because we talk about all that uncertainty out there in the markets right now. Coronavirus cases continuing to climb. We still don't have a stimulus deal. We're a week away from the election. I guess, what do you make of the selling pressure, and what's the most important thing to the market right now?

JIM MCDONALD: I think that over the last couple of months, the two biggest catalysts for selling were concerns over fiscal and concerns over the election. Those are both really getting towards the backend of the calendar as far as when they really could be a problem. But the new risk case that's really developing is the coronavirus.

I think you can even look at the nature of what was working in the last day or two. And the resurgence of technology stocks is additional evidence of that. That's where investors go when they're looking for some relative safety during the COVID outbreaks. And you also will probably see some reassurance from the Microsoft earnings that were discussed earlier.

The SAP warning earlier in the week or the earnings miss brought some concern over whether cloud revenues were starting to slow or not. Microsoft's strong beat on overall revenue and the smaller beat on cloud revenue should be some evidence that what happened with the SAP is maybe company specific.

SEANA SMITH: And that's interesting because going off of that, I think that was a big concern going into Microsoft's report whether or not what we saw of the SAP, if that was company specific, or is it indicative of some weakness there in the sector.

As we take a look at Microsoft's results and kind of extrapolate that to what we could expect from some of those bigger tech names that we have reporting on Thursday after the bell, I know in your notes you went on to say that the products and services, that they have been in high demand from this current work from home environment. Is this a trade that you think is going to continue to be an outperformer here, at least over the next couple of months?

JIM MCDONALD: I do because I think the market is going to be focused really on continued elevated COVID cases Europe is ahead of the US. US cases are spiking now. This is likely to continue for several months. In that environment, it's a lower risk play to go with where the momentum is.

And the beneficiaries of work from home versus taking a bit of a leap of faith that the economy is going to start to reopen and you want to play those more cyclical stocks. Just looking at the action and some of the industrial stocks, those reported earnings weren't that bad. The stocks didn't behave very well, another little piece of evidence that that might be premature.

SEANA SMITH: Yeah, we've seen that happen a few times this earnings season where companies have met, or even in certain cases, beat expectations, yet the stock under a significant amount of pressure on the heels of those results.

Jim, I want to ask you what you think just about the consumer at this point. Because we've got consumer confidence dipping a bit in October. We got that reading out this morning. Of course, there might be less optimism out there about what we're seeing in the jobs market, also just about the economic recovery overall.

But it was contrasted, I guess, what we got from consumer sentiment earlier this month, which improved on a monthly basis. How would you characterize the consumer right now? And how important is it to the market, do you think?

JIM MCDONALD: I think it's very important, but what's interesting is that consumer sentiment and spending actually tends to follow the market. So if we have a good fourth quarter in the stock market, consumer confidence will be good, and spending will be good. The current level of unemployment is clearly unsatisfactory.

But from a market standpoint, focusing on what the 92% or so of people who are employed are doing with their money is really going to be the bigger driver of economic activity. So I would say that the consumer confidence picture here is reasonably good. And certainly what they're seeing in the housing market is not making them feel too grumpy.

RICK NEWMAN: Hey, Jim, Rick Newman here. So it's clear to the market, obviously, we're not going to have a stimulus bill before the election. So what is the new market expectation on stimulus? Is it something measured shortly after the election? Or is it maybe the bigger bill we would get if Democrats win the House, the White House, and the Senate?

JIM MCDONALD: Yeah, the way I would characterize it is, it's not a question of if, it's a question of when. And so with the polls being pretty significantly in the Democrats' favor, the market expectation is the Democrats are going to win.

What will be really important, though, is if we win the presidency, the Democratic Party wins the presidency, what happens with the Senate, and if they win the Senate, will they have a significant enough majority that they really can afford a couple of defectors to get stuff passed?

And they're going to have to do it through the reconciliation process. So it could get a little bit messy during the lame duck period if President Trump does not get re-elected. So that could provide a little bit of turbulence in the markets. But if there is a Democratic win, the market's comfortable that there will be stimulus, likely bigger under the Democrats than under the Republicans.

SEANA SMITH: All right, Jim McDonald, chief investment strategist at Northern Trust, great to have you on the show. We look forward to talking to you soon.

JIM MCDONALD: Thanks a lot.