Markets are 'worried about intensifying the U.S., China dialogue': Expert

Quincy Krosby, Prudential Financial Chief Market Strategist, joins Yahoo Finance to discuss the overall markets around Friday's opening bell. Krosby also weighs in on what companies she's keeping an eye on, including Disney, Carnival Cruise Lines and more.

Video Transcript

BRIAN SOZZI: Let's stay on the markets here and bring in Quincy Krosby, a friend of the show, also Chief Market Strategist at Prudential Financial. Quincy, always good to see you, and happy Friday here.

Are you surprised by how resilient the market has been today? I woke up this morning. I thought, when I saw that Hong Kong news and I saw China pull its growth forecast, we would have been down a lot more today on the Dow, and we're not seeing it yet.

QUINCY KROSBY: Thank you, Dr. Fauci, because the futures eased quite a bit when he was on NPR this morning, talking about the possibility of a vaccine earlier than the overall market thinks is possible. So when he started going in that direction, we started to see the futures ease markedly.

ALEXIS CHRISTOFOROUS: Hey Quincy, what do you make of-- we had on earlier Charles Schwab's Chief Investment Strategist, Jeffrey Kleintop. He was talking about how defensive stocks seem to be leading the way right now versus cyclical stocks. What do you make of that? Is that odd to you? And why aren't we seeing a rotation into cyclicals the way we normally would coming off of a bear market?

QUINCY KROSBY: Well, I think that the market is still cautious. I think today, for example, the market is now worried about the possibility of intensifying the US-China dialogue. And it's not just about trade. This has gone into that military gray area, especially as China makes it very clear their intentions in Hong Kong.

This is something that the market-- you could see gold. You could see the US dollar get a bit-- when the dollar is strong, the gold usually pulls back, not when there are concerns that this could have any kind of move, once you start going back and forth with increasing direct rhetoric. And I think that's the reason. Right now, the market is I think being very cautious.

And also, one other thing-- the market has had a terrible time going up to 3,000, pulling back, up to 3,000 on the S&P 500, pulling back. What we want to be able to see is can this market hold with the growth stocks there? The cyclicals are going to take a while. They have to be sure that we can actually move to the other side, perhaps more quickly than many of the pessimists believe.

BRIAN SOZZI: Quincy, what's the biggest risk to the market in the near term? Is it the lack of not much progress on the vaccine front, or these bubbling in trade tensions with China?

QUINCY KROSBY: I think both. I mean, it depends on whether or not both sides kind of ease off. But I think it is about the opening. It is about the opening of the economy, and whether it can be done safely, and whether or not we see a surge in cases. That's crucial for the market right now.

And again, one of the things we are looking for is to see whether or not we can see a continuation of a broadening of the market, which we see every so often. You'll see whether we get the consumer discretionary, whether we get the XLF, the financials starting to join the recovery in the market. And then suddenly, a headline hits, and we go back to a market that is just very careful.

We're also watching the semiconductors, because they have been a very important bellwether for the tech sector, but particularly the chips, obviously. And I'm also watching a Disney, by the way, because that is a consummate, consummate consumer discretionary name. And when people feel more comfortable about going out, when the surveys start to pull back, right now, it's over 50% of Americans saying we don't want to go out now.

When that starts to pull back-- maybe it is the therapies. Over the next six weeks, we should get one report after another on therapies, and move towards a vaccine. We may see Americans starting to say I'm willing to go out and engage the way I did, at least partially, before the virus. Disney will be I think a bellwether for that.

So there's a lot to the market to digest. But you start moving this rhetoric back and forth, I think China believes that right now they can move into Hong Kong. And, by the way, this is not the first. They have had their troops in there, by the way, the police in there during the demonstrations, but they didn't move on them. They were there, but they didn't move.

But that was a first move. We hadn't seen that before, what we saw during the winter demonstrations.

ALEXIS CHRISTOFOROUS: So Quincy, you're optimistic on Disney, thinking that--

QUINCY KROSBY: No, no, no, only-- only if we move in a certain direction. Disney will be a bellwether.

ALEXIS CHRISTOFOROUS: OK, what about cruise lines? What about airlines? How are you feeling? I mean, is it going to take a lot more for people to feel confident enough to go on an airplane versus walking into Disney's theme park? Or do they kind of go hand in hand?

QUINCY KROSBY: They go hand in hand, and that's the point. For the average person, you have to take a plane to get to one of the Disney facilities. And that's why they encompass-- I mean, they own 80% of ESPN. You need to have live sports events. You need to have people in the stadium screaming.

They have their own cruise line. They have a film studio. That's why I see it as a consummate-- consummate consumer discretionary.

But, you know, one thing about the cruise lines in general-- we saw two of the most important sovereign wealth funds take positions in Carnival early on. First was Saudi Sovereign Wealth Fund, and then came the Norwegian Sovereign Wealth Fund-- which, by the way, is the largest of the sovereign wealth funds-- take a position there. They are long-term investors.

So they're saying, by the way, many of the cruise ships, we're ready to sail August 1, August 15. We're ready to sail. And we have people lining up to buy those tickets.

BRIAN SOZZI: Quincy, are you-- are you starting to get worried that we might see a pretty severe selloff in the markets in the summer? And I just jotted down on my notepad-- fears of a potential second wave in the coronavirus? Also, too, we have Vice President, former Vice President Joe Biden in an interview this morning suggesting he might raise corporate taxes to 28%.

If the market is, in fact, forward looking, at some point, those things would have to get potentially priced into the market, and potentially the summer.

QUINCY KROSBY: Well, you know what? In the options market-- right, in the options market right now, take a look. As we get closer to the election, take a look at the put buying for technology, banks, a number of the-- health care, all looking at the potential for perhaps a clean sweep from the Democrats. You would normally have put buying hedging going into an election. But this is more than usual, by the way.

So what it's doing is it's picking up on some of the-- some of the betting sites. It's picking up on the polling data that we have. But the thing is, I do think there are concerns that there's going to be a second wave. And the president says he's keeping America open, but that doesn't mean that the states are going to keep America open if there's a second wave.

There will be a shutdown. And a shutdown will probably last longer if there is, in fact, a second wave. And I'm worried about that. I think most investors are worried about that.

But there's also the other side of it, and that is if we don't have a second wave, it means that the restrictions can be lifted more forcefully, even from the most conservative states.

BRIAN SOZZI: All right, let's leave it there. Quincy Krosby, Chief Market Strategist at Prudential Financial, always good to see you. Have a great, long weekend.

QUINCY KROSBY: Thank you.