Second stimulus package ‘probably won’t have a significant long-term impact on markets’: Annandale Capital CEO

Annandale Capital CEO George Seay joins Yahoo Finance’s Zack Guzman to break down the latest market action, as stocks rise on hopes of second stimulus package deal.

Video Transcript

ZACK GUZMAN: I want to start off the show with a focus on what we did hear out of Washington, DC, as, again, stocks are jumping on renewed optimism that we could get an agreement here between Republicans and Democrats.

Still around the big question, even though Nancy Pelosi is optimistic that she could get a deal in principle with Secretary Mnuchin. Still a big question of what Republicans in the Senate might do. Nancy Pelosi saying a few moments ago that she believes President Trump when he says the Senate will come along with whatever both sides agree to.

And clearly, that optimism is getting more attention today than the rise in case counts, coronavirus case counts, we're seeing across the pond. That is particularly worrisome when you look at how big the explosion has been in terms of case counts there, 140,000 in Europe, or more than three times the level we're seeing here daily in the US. It's been an exponential rise. We're going to check that in a second.

But first, I want to bring on our first guest to discuss the optimism on the stimulus front. Joining us now is George Seay, Annandale Capital's CEO. And George, first, your reaction, because we knew when the deadline was set, when Nancy Pelosi said, I'm going to give you 48 hours to come to the table and get a deal, that that's where investors were going to be focusing in terms of short-term catalysts.

So what do you make of the optimism you're hearing now? And do you believe that this boost is just the beginning in what could be a renewed surge here in stocks if we do actually get full news of an agreement later this afternoon?

GEORGE SEAY: Hi, Zack. Well, it's funny. We were pessimistic yesterday, and the Dow dropped 400. And now we're optimistic today, and the Dow is up, and the NASDAQ and the S&P a little bit. It's day-to-day gyrations, and I think it's people kind of grasping at optimistic straws to keep the market going up.

But any stimulus package this time around is going to be smaller. It's going to be a sugar high for Main Street and Wall Street for a couple of months. But it probably won't have a significant long-term impact on markets. It will help people most in need of federal government assistance right now. But I think there's bigger trends in the markets right now investors should be looking at as we go into the year end in 2021 ahead.

ZACK GUZMAN: Yeah, it's interesting you should say that because I mean, there's been this back and forth about whether or not if we get a deal now. It doesn't necessarily preclude getting another one once we get to the results of this presidential election. Some people saying if it is Joe Biden, the package that could come or a follow-on package might be even larger.

But when you think about the short-term, you say it's a sugar high here. There are a lot of questions right now about a slowing recovery and that this could be the shot in the arm that's needed when we see some of those things trending in the wrong direction. We've gotten the job unemployment updates, showing a slowing in the recovery on the labor front.

So what do you think might be those sectors now if we do get this? We're seeing some of those travel stocks catching a boost here. What do you see as maybe those companies that might be more levered to a big boost if we do get this in the short-term?

GEORGE SEAY: Yeah, that's a great question. And I would say this is going to be a very targeted stimulus, and it will provide limited assistance. And I think, as to your point, if the former vice president wins the presidency and the Democrats take the Senate, we're likely to get a much larger relief package, and then you'd want to look to more cyclical industries that have been really hurt by this pandemic.

You mentioned travel. You also should mention restaurants and leisure. And I'd say real estate and construction and some of these things that really need the stimulus a lot more than technology companies.

But it's yet to be seen if Biden does push through as president a much larger package, whether that will be mitigated by the ginormous, as I like to make up a word, tax increases he's proposing as well, which will be a massive brake on the growth of the economy in 2021. I think that might have a longer term, larger impact than short-term stimulus.

ZACK GUZMAN: Yeah, and when we talk about that, I mean, obviously, there are question marks around those taxes. And we talked to some policy experts there, again noting that those making more-- or less than $400,000 might not see necessarily those boosts.

But they do-- they would see it on capital gains. That seems to be something that Joe Biden has talked about quite a bit moving forward. Does that throw maybe a wrench in terms of plans for how people should be rebalancing portfolios or planning for year end and into 2021?

GEORGE SEAY: They're a bit frozen until they get the election results because if if the Republicans hold the Senate or Trump holds the presidency, there's much less concern that a really larger tax package could make it through the Congress and be signed by the president. So you kind of have to wait for results because you might not need to make any dramatic changes if the Republicans hold the Senate or Trump holds the presidency.

But if the Democrats sweep everything, you will have to make some changes. And you might want to be considering taking some gains off the table at short-term capital gains rates this year. Because it seems pretty likely that if the Democrats sweep-- run the table, that capital gains, long-term capital gains tax rates will be much higher. And that will be a brake on capital formation and capital velocity and will change the game considerably. 43% long-term capital gains is a far cry from 23%.

ZACK GUZMAN: Yeah, I also want to ask you about some of the other things we're seeing, too, just in terms of where the market's at right now. Because a lot of people have been pointing out maybe some of these runs in the commodities market. I know you have your eyes on natural gas, looking at what it might be saying about the strength of this recovery and where we go from here.

What are you looking at right now in terms of kind of maybe trying to tease some points out to tell clients or investors out there about what you're seeing in this recovery and how it, I guess, falls into the historical line of recoveries we've seen in the past?

GEORGE SEAY: Well, it's unprecedented, right? We really haven't had a pandemic and a recession of this magnitude in the modern era. So it's-- you have to explore it as a unique event that doesn't have a whole lot of historical precedent.

You mentioned natural gas. So you go back to the summer, and natural gas trade as low as around $1.50. And now it's pushing $3 on the spot and over $3 in the futures curve. And that's really, really good for upstream natural gas companies and midstream natural gas companies. And they're so out of favor, they're in the worst bear market they've ever been in. They really haven't moved all that much.

So for investors looking to find complements to the big winners of this year, which are almost all technology related, that's a good place to look at the best of breed companies in that space and get some exposure there to offset the growth part of your portfolio and get a little more into the value side.

ZACK GUZMAN: Yeah, and lastly, when we think about trying to rotate this, it is interesting that you bring up some of those travel companies and some of the other cyclicals. Because today, as we're seeing this news on the stimulus front out, those are the companies that are catching the bigger boosts.

But when we think about that being maybe a short-term thing, if you want to call it a sugar high, how that might balance out when we think about balancing these things for next year. Because we've seen continued growth from the growth companies, those big tech companies. We're going to get earnings reports here from Netflix after the bell.

So talk to me about maybe expectations there since we are continuing here with Q3 earnings season. Which companies might have the lowest propensity, or the lowest bar, to really impress investors when we think about analysts and where their expectations are here in Q3?

GEORGE SEAY: If I were an investor, I certainly wouldn't want to abandon the tech sector. It's got all the momentum, the earnings growth. They get stronger and stronger every single year. But I would also take about 10% to 20% of my portfolio, especially if you're holding significant cash reserves, and look at investment grade companies that had been beaten to death this year and on favorite industries that are going to see tax loss selling through the end of the year.

Positioning 10% to 20% of our portfolio in those strong companies and out of favor industries that will probably get a significant bounce in the new year after the tax loss selling is over and could win on the fundamentals, too, as the economy bounces back significantly in 2021 and 2022. They're good all by themselves, but they're even better because they're seeing tax loss selling.

ZACK GUZMAN: Yeah, and who you got there in that kind of-- in the sectors and names you're watching?

GEORGE SEAY: I would look hard at the best of breed players and the industries that are most out of favor-- hotels, real estate, retail. Only best of breed, though. You don't buy weak companies that might not make it to the other side. And also midstream natural gas pipeline companies that are toll roads that move natural gas around because the price of natural gas stays high, so they're going to catch a bid, and probably pretty strongly next year.

ZACK GUZMAN: All right, there you go, the latest in thinking and what we're trying to watch play out here about the short-term catalysts and the longer term ones as well. George Seay, Annandale Capital CEO, I appreciate you taking the time to chat.

GEORGE SEAY: Thank you, Zack.