Markets volatile amid growing civil unrest

Yahoo Finance’s Brian Sozzi and Alexis Christoforous discuss today’s market action with Heritage Capital President Paul Schatz

Video Transcript

ALEXIS CHRISTOFOROUS: NASA is ringing the NASDAQ opening bell today remotely from the International Space Station to commemorate the first commercial crew launch. Pretty incredible.

[BELL RINGING]

And there you have it from space and from Earth, a new trading day underway. We've got the Dow Industrials starting the day up 130 points.

Let's welcome in Paul Schatz now of Heritage Capital. He is the president there. We've also got Jared Blikre with us and Brian Sozzi. Good morning to you all. Paul, good to see you again.

I'm going to ask you something that's been a head scratcher for us here at Yahoo Finance, trying to understand why the market is so disconnected from what we're seeing happening in our world right now. I mean, we've got these violent protests going on. The pandemic continues to be a backdrop, even though economies are starting to reopen. Why is this market rallying in the face of all of that, Paul?

PAUL SCHATZ: And good morning to you guys. That's the single-most-asked question I've gotten since probably early April. Why? Why? Why? Why are things doing this when we've got a pandemic, when we've got an economic crisis, and now we've got clearly rioting in the streets and civil unrest?

One, as I've said for almost ever, it's not so much-- regarding investing, it's not so much what the news is. It's how things react, how markets react. So the most bullish thing the market can do is go up in the face of bad news. Why is the market going up?

So first, the market is certainly discounting economic activity three to nine months down the road. It used to be 6 to 9, 6 to 12. Things have become more compressed. Market is saying three to nine months down the road, the economy is going to almost go up at almost a vertical clip.

I am a little skeptical of that, but my opinion is irrelevant. Market doesn't care what I think. That's why.

And regarding the looting and the rioting, the reason the market's not paying attention yet is because the market doesn't believe it's going to impact the economy nor earnings. If that changes, you'll see a very swift change in market reaction. It's just not right now.

BRIAN SOZZI: Well, Paul, do you think the market is setting itself up to be clobbered? If we're looking at three to nine months from now, I don't see how the economy is going to come roaring back enough to justify these valuations. And the fact that the market is ignoring what's happening in this country is absurd.

PAUL SCHATZ: So you have to be very careful with words like absurd. And I don't want to compare the human plight of the rioting and the pandemic to a financial crisis, but remember, stocks bottomed in early March of '09 and began to go up very sharply. And at the same time, things were really still spiraling until June, July of '09. So do I think the market's in to be clobbered is kind of a relative word. I think this is a new bull market. It's a bit of a head-scratcher.

I think whatever decline we're going to get, it certainly seems like it's in June. I don't think we're looking at a 15% to 20% decline anytime soon, but you take-- you take everything, you know, one day at a time.

I'm a little concerned that sentiment, which is one piece of the overall market puzzle-- sentiment is certainly no longer despondent and panicky, and it's not even neutral. If you look at, you know, some of the option numbers, people are certainly getting a bit out over their skis on the options side. However, you look at the BofA institutional survey, and those money managers are still in their bunkers with oodles and oodles and oodles of cash. So you certainly got some crosscurrents, and price is the final arbiter. Price hasn't done enough wrong yet to get anything more than a very mild pullback.

ALEXIS CHRISTOFOROUS: All right, guys, we're seeing some big moves in commodities today, and I want to get Jared's take on this. Jared, oil and copper, highest since March. We've got the dollar now down for the fourth straight day. What's happening there?

JARED BLIKRE: That's right. Energy today is the leading sector. We can see that here as Exxon Mobil up 1.8%. Over the last five days, going back to last week, up 2.6%.

But let's take a look at crude oil. And as you noted, multimonth highs right now. We can see it hit over $36 a barrel, and we'll see that in the intranight-- intraday price action here.

Just going to a year-to-date chart, this is quite a breakout that we're seeing here, testing these levels that we didn't see until early in March, and this is based on a couple of factors. OPEC, maybe OPEC plus maybe meeting a little bit earlier this week to extend production cuts into September 1. That would be a big development. They'd set a meeting presumably before then to see if they're going to cut further.

But also on the demand side, China really heating things up here, and we can see that reflected in copper futures as well. They are up about half a percent, and we can see this nice trend line that we have going. Also lots of talk about the refining of crude oil. So there's a lot of demand for that product as well.

And we can also take a look at soybean futures because we were talking yesterday that China had ordered its state-owned companies to not actually buy any soybean futures for the time being, but that's exactly what they did yesterday. So those fears may be over-- may have been overblown.

And just kind of showing what the situation with China is, US dollar, as you noted, down for the fourth day straight to multimonth lows. And versus the yuan, the dollar is weaker-- importantly coming off of those highs that we saw from last week the week before. So things are pointing in the right direction here, Alexis.

ALEXIS CHRISTOFOROUS: All right. Thanks, Jared.

I want to talk about China in a moment, but first, I want to get Paul and Brian's take on retail because, guys, we're seeing a lot of the big-box stores and even some small mom-and-pop shops being looted during these protests in a number of cities. These are stores that were just starting to reopen, and I'm wondering what the impact-- Brian, I'll start with you. What is the impact so far been on stocks like Target, Walmart, Macy's, all of those stores with some of them being looted?

BRIAN SOZZI: I'm surprised a lot of these retail stocks have held up as well as they have, Alexis. Just talking to a lot of these retail executives via email, I think they've been shell shocked by the situation, first and foremost.

But then secondarily, this has added more uncertainty into a business that has already had a lot of uncertainty in its business for months on end. You know, a Target spokesperson wouldn't even tell me yesterday via email-- they closed 200 stores over the weekend. He would not tell me whether those stores reopened. They just don't know. And from an investor standpoint, that adds a lot of uncertainty into a business moving forward.

ALEXIS CHRISTOFOROUS: So, Paul, what do you do if you hold Target right now? What do you do if you hold a Macy's right now? Well, they have-- they have problems of their own outside of this pandemic and the unrest, but what do you do with retail at the moment?

PAUL SCHATZ: So retail, in my view, is dichotomous, if that's even a word. You have the have and the have-nots within the retail space. You've got the Costcos, the Targets, the Walmarts that are clearly going to survive and thrive both the pandemic and probably-- and they've got the deep pockets to withstand the looting and the rioting.

I'm not a retail bull. I haven't been one in a while. But those stocks, given what's going on, are still trading fairly well. You can't just dismiss and say, well, it's rioting. It's looting. Let's sell those stocks. You know, Target, Walmart are trading fairly well, and they certainly have the look as if they're going to continue to be somewhat supported by the institutional market.

BRIAN SOZZI: You know, Paul, you mentioned down before there is a lot of money on the sidelines. By my estimation, what I've seen out there, $1.2 trillion in money-market mutual funds. Do you think that money starts to come back into the market? What's the trigger point where those longer-term investors say, you know what? The market continues to avoid-- just to overlook a lot of the social unrest and COVID-19, and we're going to put some money to work?

PAUL SCHATZ: I love the question about money on the sidelines. Money on the sidelines is not all earmarked for markets. So you mentioned money in money-market mutual funds. When you look at cash and other things, some people say it's $3 trillion or $5 trillion. So, one, you have to remember not all that money is potential firepower for the market. You've got to figure out how much is out there that investors pulled out and are looking to get back in.

I weighed-- after the election of '16 I said, jeez, I wonder how long it's going to take. Is it Dow 20,000, 22,000? Well, the true retail investor didn't really flood in until after the Dow hit 25,000 on the way up, and clearly there's a lot of money back [INAUDIBLE]. I don't think you're going to see a flood of money, of that cash powder-keg money on the side [AUDIO OUT] back towards the old highs.

ALEXIS CHRISTOFOROUS: Paul, what are you doing with your portfolio with regards to China? So much uncertainty. Just throw that into the mix now that we might have tariffs imposed by the US, although the president seemed to back off that the other day. Are you making any changes right now in your portfolio?

PAUL SCHATZ: Well, I like to think we're always making some kind of changes and trying to improve our position, prune here, add there. I mean, I added some biotech yesterday, which clearly as I look-- as they open today, not so smart of a move.

Regarding China, we own a China ETF until recently. We sold it, and we bought Russia.

I think the big picture for China is this. I think it's just saber rattling from the president to energize his base as the election season gets into full swing. I view it as a lot more bark than bite, and I don't think we'll see any serious significant policy changes at least until we get to the election.

ALEXIS CHRISTOFOROUS: All right, Paul Schatz of Heritage Capital, always good to see you. Thanks.

PAUL SCHATZ: You guys too. Take--