Markets volatile as COVID-19 cases rise, stimulus hopes fade

Mike Bailey, Director of Research at FBB Capital Partners, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Tuesday’s opening bell.

Video Transcript

BRIAN SOZZI: Mike, going back to the AMD deal, really big deal for Xilinx by AMD at an eye-popping price. The week started off with Inspire Brands potentially nearing a deal for Dunkin' Brands for about $9 billion. What do you think this deal activity is saying about the market?

MIKE BAILEY: Yeah, I think it suggests that investors have been sitting-- sitting on the sidelines, and especially corporate buyers are really just waiting for, you know, possibly a better move. We are getting closer to a bit more certainty in markets, so, you know, whether that's the election coming up, you know, perhaps getting closer to a stimulus. So I think corporate buyers are aware of some of these broad themes, and they're looking at sort of putting different pieces on the chessboard there. And they're looking at chances to really take advantage of some of those.

So we're seeing that in semiconductors now in particular with this area. Some investors have looked at-- Intel is really struggling this year. Perhaps that's the moment where AMD wants to come in opportunistically, buy a competitor, bring a larger sort of force to that, and really crank up the pressure on Intel. So that's some of the themes that we could be seeing here.

ALEXIS CHRISTOFOROUS: Mike, we keep seeing these cases spike in different parts of the country of coronavirus and in Europe as well, and parts of Europe now instituting some new lockdowns. What are the-- what do you think the effects might be on our economy here if we start to see local lockdowns, nothing nationwide or nothing like we saw, you know, at the height of the pandemic in March? But if those lockdown start to happen again-- I mean, this morning just out now-- October consumer confidence fell, coming in below estimates. Is this going to start to chip away at consumer confidence as we near the holidays when we were hoping that people were going to go out and spend?

MIKE BAILEY: Absolutely. I think it's definitely a risk factor as some investors have pointed to Europe as maybe a leading indicator of what we might see here in the US. That certainly is possible that we could get some incremental lockdowns. I think as-- from an investor perspective, I be more concerned about basically travel, leisure, restaurants-- areas where, you know, social distancing is kind of impossible. So those are areas that have been under pressure all year, a little bit of a comeback here. So we could see some of those sectors go back in the doghouse if we see incremental lockdowns at this point. Definitely some themes we will be watching here.

BRIAN SOZZI: Also, the biggest theme of all perhaps is the election. What changes to the portfolio would you make if we do have that contested election?

MIKE BAILEY: Absolutely. So I think part of it is, you know, thinking a little bit longer term. Most investors we speak with and internally, you know, we don't have really an election, you know, portfolio, something we're changing everything into the election, changing it again. I do think you want to think about, you know, risk and reward. Markets are basically 5% shy of all-time highs heading into the election, so we could be getting into basically an information black hole.

Are markets prepared for that? I doubt it. So I think maintaining a little bit more dry powder, a little bit more cash heading into that, if we see some volatility, some unexpected risk, that's a point where you can say, OK. Some high-quality businesses may come down in price because of that uncertainty, and that's what you-- you can jump in and take advantage of some of those opportunities. So those are some of the themes that we're anticipating here really one week ahead of the election and some incremental uncertainty that we may get to see.

ALEXIS CHRISTOFOROUS: And of course the backdrop to all this is earnings. Big week here-- a third of S&P 500 companies out with their numbers this week, including the big FANG stocks. Would you say that guidance from these companies at this particular time is perhaps even more important than ever before as investors sort of are laser focused on what they're going to say about the next quarter?

MIKE BAILEY: Absolutely. You know, guidance is definitely going to be critical. If we look back over the last week to get a sense of what earnings might kind of happen this week, companies are doing pretty well as far as beating expectations. Stocks actually up a little bit into that, so I that's favorable. But absolutely guidance-- I think any company that's basically got the conviction to say, you know, despite what's going on with COVID, despite the election, we still see our business improving, investors are going to pay a big premium for that. So that's certainly going to be a big focus as we head into this week.

[INAUDIBLE] one last nugget here on the FANGs. We did see Snap report last week-- some pretty good results there. So I think on the margin, that's going to be helpful for Google, for Facebook, and any of the companies connected to online advertising.