'This is a liquidity driven market': Strategist

Kathryn Rooney Vera, Bulltick's Chief Global Markets Strategist, joined Yahoo Finance's Myles Udland, Jen Rogers, Dan Roberts, and Melody Hahm to discuss the state of the markets and her outlook for the U.S. economy amid COVID-19.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance, Myles Udland with you in New York. We are joined now by Kathryn Rooney Vera, and she is the chief global market strategist at Bulltick Research. Kathryn, thanks for joining us.

And I guess let's just kind of start with what you make of what we've seen in the market over the last couple of weeks, what the key factors are or have been driving this market, and as we head into the summer and a reopening, a period where we expect that case counts will go up, testing is increasing. Is that really the market's biggest potential slip up here, would be a resurgence, I guess, of the virus, not just in a couple of spots, but more broadly through the country?

KATHRYN ROONEY VERA: I couldn't agree more with you, Myles. I think that that is the biggest risk going into the summer or fall here. The market is clearly forward pricing a strong recovery, V-shaped recovery, something that is going to improve in the very near term, bolstered by, of course, massive government intervention and a Fed that has almost doubled the size of its balance sheet.

So I would say that combination of variables is what has taken the S&P 500 up 30%, the NASDAQ year-to-date positive up 2%, and risk appetite surging, despite the US economy being in the throes of what I think is the best case scenario, recession, and maybe even very close to, you know, a depression.

MYLES UDLAND: And I guess the question would be, if you're looking at this market skeptically, as I think many are, are there any bull cases right now, I guess, that you are actually sympathetic to and that you look at and you say, you know what? They might have a point there. I mean, you think about the way people talk about the profitability of the FANGs, the dominates in their various markets. I mean, it's very much back-fitting what's happening to justify the rally we've seen. But does that kind of challenge start to make you say, you know what, maybe this time really is different, in terms of which companies are part of the market and how the market behaves on that basis?

KATHRYN ROONEY VERA: Yeah, I think the decoupling of the markets and the economy is something that one has to consider if the investor wants to, you know, follow the Fed, which has been historically, for the past more than one decade, been a winning strategy. And the Fed has never disappointed and has been a winning one. Liquidity has certainly trumped fundamentals.

And so if the Fed continues to act in the way that surprises the market-- as we know, they're now buying, you know, high-yield fallen angel ETF-- anything could happen at this point. My understanding was that they couldn't actually buy government non-back-- non-government-backed securities, as per the Federal Reserve Act, but there's ways to get around it.

So this is a liquidity-driven market. So if one thinks that this decoupling can continue, then you're bullish. I'm skeptical. I think that if you have-- over the past two months, you've seen the fiscal deficit-- what? Quadruple for fiscal year 2020 and you've seen the Fed almost double its balance sheet. Really, can we continue at that pace? So I think that we-- you're going to-- you're more likely than not to see authorities kind of back off a little bit, see how the economy evolves, and keep some of its arsenal for the potential risk of a second bout or a mutated virus, causing the economy to shudder again in the fall.

JEN ROGERS: So as you've shaped out the picture here, you know, even with the word depression but then also saying that, like, the Fed has been a good trade to follow. If we're a middle ground where you can look at any sectors, I know you've written, like, you like tech and you like health care, but do you like them here? Like--

KATHRYN ROONEY VERA: We had--

JEN ROGERS: --right now? Because we get that, you know, when we're on the other side of this, sure, these big tech names are going to be OK. But is it OK to step in right now if you've been nervous and waiting?

KATHRYN ROONEY VERA: That's right. That's exactly the point, Jen. And the fact is that we did like tech, and we did like health care. I do think that structurally, those are the good sectors to be in but not right now. I mean, with the S&P at 30% up, multiples at 22 times earnings, something has to give here. Either it's consumer confidence skyrockets in a way we've never seen, you know, or it's that PE multiples collapse, driven by a collapse in prices.

So something has to give. You can't have this insane divergence between the consumer, in a consumer-driven economy, and PE multiple surging through the roof. So something has to give. I do think that once you do get a drop off, if you get that downdraft that I am expecting, then you would want to step into the broad market. I wouldn't be picking sectors right here.

I think the market is prematurely discounting a V-shaped recovery. It's not going to be that. I think a W is even more possible than a simple V. So look, I think that you should be actually protecting now, you know? Look at-- over the next few months, look at buying tips. I've never heard anyone else say this.

But hey, the combination that we see that is so potent right now, fiscal monetary stimulus and an event-driven shock, which is turning into a fundamental issue will cause, I think, inflation to come to the fore over the course of the next one to two years. So look at tips. Look at buying puts. Look at building cash. If you bought tech and if you bought health care, you know, at that at the bottom, 30%-- after the 30% rise, I think you should take profits.