'The economy needs more stimulus': Top U.S. Strategist

Ed Clissold, Chief U.S. Strategist for Ned Davis Research, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss overall markets, the need for more stimulus in the economy as unemployment remains high, the home improvement sector including Lowe's and Home Depot and retailers like Target.

Video Transcript

BRIAN SOZZI: Let's stay on the markets here and bring in Ed Clissold. He is Chief US Strategist for Ned Davis Research. Ed, good to-- good to speak with you again here. Market rally on.

Do you think the US economy is starting to pull itself out of a recession? I'm really mining a lot of these retailer earnings calls. And to me, it sounds like the US consumer is coming back out there. They're shopping. And maybe that the market isn't too crazy for bidding up stock prices.

ED CLISSOLD: Well, I think what you need to do is look at the S&P 500 and dissect it by market cap, by which companies actually have been able to get through the pandemic so far pretty well. So we divided the S&P into winners, losers, and neutrals based on COVID. And only about a third of the stocks are what we call the winners. Of course, no one's a winner in this whole thing. But their businesses are unaffected or even helped.

So they're a third of the stocks, but 58% of the market cap. And those stocks are actually down single digits since February 19 when the S&P peaked. So I think that's part of what's going on, is that investors after the initial waterfall decline have dissected and realized which stocks are going to be able to hold up better during this phase.

ALEXIS CHRISTOFOROUS: Hey Edward, what are-- I think investors' ears perk up when they hear that-- what are some of those stocks that are a part of that basket, that are doing well or perhaps outperforming the rest of the market? I mean, I'd imagine one of them would be Target, which we saw today with its earnings report doing quite well despite the pandemic, or maybe because of it.

ED CLISSOLD: Yeah, unfortunately, I can't talk about individual names. But I think it would probably be a pretty simple exercise to go through, looking at companies that have been able to operate, because people can access them from home, or their businesses are still open, versus those who are not. Or they're susceptible to cap ex spending, or flat yield curve, or something like that.

BRIAN SOZZI: You know, Ed, too, we've also been focusing a lot on the show on FAANG stocks. FAANG stocks are back almost to the highs from late March-- late February. At what point do investors say these stocks are just overvalued? We understand the thesis, but they can't go up in a straight line.

ED CLISSOLD: Yeah, so a lot of those-- we call them FANMAGs that include a couple other names. But yeah, so a lot of those stocks obviously are going to be in the COVID winters group. So this rotation is going to happen when the economy truly starts to open up. And then these other names, the cyclical value areas that are so beaten up, small caps you put in that area as well-- I think you're going to see a massive rotation, which you normally see at the beginning of a bull market, beginning of an economic expansion.

And there's going to be a fantastic opportunity for-- you know, usually it's 6 to 12 months for a rotation into these areas. And on a relative basis, these high flyers are going to are going to give back some of the gains. And so what we can see from an S&P 500 level, instead of everybody wondering how can the market be up this much, they're going to be wondering why isn't the market rallying more?

And the answer is on a cap-weighted basis, the biggest names have already done that. And it's going to be a rotation into other less popular areas that you can really outperform with.

INES FERRE: Ed, this is Ines Ferre. What about the energy sector, which has gotten so beaten up? And now with oil above-- sustaining above $30 a barrel for the time being, what do you make of that sector?

ED CLISSOLD: Well, I think that's right in that category of an area that's gotten hit very hard for various obvious reasons. But when the economy opens, oil is going to rally, continue to rally. And actually, energy probably-- well, definitely more so than some of these other cyclical value areas, have already-- it's already had a pop, because it got beaten up so much when oil went down to crazy levels that nobody would have thought was possible. And that's an area to look at as well.

BRIAN SOZZI: Ed, I've start to see my first round of notes outlining potential election risk. What are you telling folks about election season risk? It's coming into focus. And what could the downside be as we get nearer to the election?

ED CLISSOLD: So in a typical election year-- of course, this is anything but typical-- but the market tends to be weak during the first half, and rallies in the second half. So certainly we've seen it exceptionally weak in the first half. But usually the rally comes when people realize who the winner is. It doesn't really matter so much which party it is, just as long as they know the rules of engagement.

But during a-- when an incumbent is running for re-election, if the economy's in a recession, their odds of getting reelected are much lower. So I think the question from here is does Trump get blamed for this? Or is he-- is it viewed as something that he couldn't have foreseen, and he can manage out of it?

But I think that's going to be a key focus. If the economy comes back, Trump will have a pretty good chance of doing well. And then in turn, the market will have a good chance of having a nice year-end rally. But if not, you can look at the inverse of that.

ALEXIS CHRISTOFOROUS: Ed, how much of what we're seeing in the market is tied to politics at this point? You know, if we don't get the next stimulus package-- there's going to have to be something-- but if we don't get one for quite some time or it doesn't have everything that investors had wanted in it, how much of that is going to dictate what happens in the market? Or is what's happening in the market more closely tied to the coronavirus itself and the timeline of a vaccine?

ED CLISSOLD: I think it's really more about the virus. But if the economy can't open up-- as I think the market is starting to think it's going to, which is going to be slow but steady. If there are setbacks, and then there's not that next wave of fiscal stimulus, that could be a big problem for the market. So you've got to look at the two together.

And our expectation-- which I think the market's expectation is-- that if things start to get tough again, Congress will put aside their differences, like they did last time. And while those bills weren't perfect, I think Congress and the White House deserve credit for getting a lot of money into the economy quickly. And they'll probably do the same this time if it's needed.

BRIAN SOZZI: Ed, do you think this market needs its next round of stimulus to keep it going? More stimulus checks? We've had Fed Chair Jerome Powell this week-- or I'd even say over the past two to three weeks, suggest that they are willing to do more. Does this market need that type of next round stimulus?

ED CLISSOLD: It's going to need more. Does it need the magnitude that it saw in March and early April? Maybe not if the opening up continues. But the unemployment rate's going to remain high for a long time. And there's going to be a lot of people who aren't going to have the income they need to support consumer spending. So there's going to be-- need to be more help from the government.

BRIAN SOZZI: All right, let's leave it there. Ed Clissold, Chief US Strategist for Ned Davis Research, good to see you. Good to see you. Thanks for taking some time.

ED CLISSOLD: Thanks for having me.