The stimulus bill is setting up to be a positive surprise if we get something before the election: Strategist

Dan Russo, Chaikin Analytics Chief Market Strategist joins the On the Move panel to discuss the impact of stimulus bill failure on the markets.

Video Transcript

- Not too much reaction in the markets to these comments from the president, nor for that matter, to the back and forth on stimulus in Washington. Let's talk more about all of this with Dan Russo. He is Chaikin Analytics Chief Market Strategist. He's joining us from Manhasset, New York. Dan, you just need to unmute yourself so we can chat.

I have-- I don't know that I would say I've been surprised, but it's been interesting to see the lack of reaction in the market to the sort of political jockeying here. Yes, I know we're seeing it sort of being priced in at the VIX curve, right, in terms of the election. But especially when it comes to stimulus, I mean, you've got the likes of JP Morgan and Goldman Sachs cutting their GDP forecasts because this stimulus bill isn't likely to get through. It doesn't seem like market participants are that worried.

DAN RUSSO: Well, I think you can look at it a couple of different ways. I think, you know, originally there was this expectation that we would have an added stimulus bill, that combined with some other technical factors led to a big rally in the market through August. And then when it started to become clear that the stimulus bill was going to be pushed out, the market was extended to the upside, and we got a bit of a catalyst to the downside, and the fact that the stimulus bill was being pushed out.

In my mind, it's starting to become kind of the base case, the lack of stimulus is starting to become the base case. You know, we've seen the S&P 500 fall into, quote unquote, correction territory, down about 10% from its highs. The NASDAQ, which was really extended to the upside, has fallen further. So in my mind, the stimulus bill was actually potentially setting up to be a positive surprise should we get something in front of the election.

- Dan, I'm curious, when we look at the flow out of equities, we talked in the last hour with a guest about this, almost $23 billion. It's the greatest flow out since March. Either way, no matter who wins, we're going to get some form of stimulus. There's going to be a tremendous amount of money coming back in. So wouldn't now, when you're getting these dips, be the time that you should be taking advantage of the lower prices?

DAN RUSSO: You know, it's kind of interesting because we started to change our tune in that regard earlier this week. You know, at the end of August we were looking at some of the relationships in the market, in particular growth stocks relative to value stocks. And we were writing and commenting that it was extremely extended to the upside. Myself and Mark Chaikin, the founder of Chaikin Analytics, were of the same view that it probably made sense to throttle it back a little bit as it related to the growth trade starting to take some money off the table.

I tend to think in terms of roadmaps and probabilities, so for me the key level on the S&P 500 was 3,400. I said that if we went below 3,400 you have to start to recalibrate your odds and start thinking about some downside in the near term to 3,250, which is where we find ourselves today. I think to your point, yeah, if we get a stimulus bill, I'm starting to factor that in as a potential positive surprise that would likely lead to cash coming back into the market.

So earlier this week we started writing about the fact that we thought it made sense for especially longer term investors to begin redeploying capital into the market, in particular focusing on the areas of the market that have been leadership and are likely to continue to be leadership. So we've been really focused now in the technology space after this pullback. Certain areas of consumer discretionary in particular, those levered to the homebuilders, and the homebuilder supply chain.

And another area the market that I think is really interesting that's somewhat under the radar are equities that are levered to rising prices for the consumer, in particular in their shopping cart. I've been paying a lot of attention across asset classes to some of the agricultural commodities, things like corn, soybeans, and wheat, and those all appear to be in confirmed up trends or in the early stages of confirmed up trends. So we've been talking about ways to gain exposure to that theme via the equity market.

- Dan, if we do see some kind of stimulus after the election, regardless of who wins, what does that look like, and what are the chances that it also has significant pushback? I mean, we don't know where the Senate's going to end up. We don't know where the House is going to end up. What are the odds that we really do get some kind of significant stimulus, similar to what maybe the Democrats are looking at now?

DAN RUSSO: Hard to handicap at this point. Obviously the stimulus bill has become a bit of a political football. I think the timing is more important, because like I said, I think investors have adjusted their expectations to this continuing to be pushed out, and likely being smaller than anticipated. So I'm framing it as a potentially positive catalyst.

The question is, what does that do for the market, in particular different areas of the market? I think it would be bullish for the market. I also think it has the prospect of being inflationary, which is why we're paying attention to areas like commodities, in particular agricultural commodities.

- I want to pick up on that theme for just a moment, because if there is going to be inflation of those commodities, on the one hand, I know you like stocks like Mosaic, which play into that theme, but does that also mean you would avoid, for example, food companies or grocery companies, things that are going to be potentially margin squeezed by that inflation?

DAN RUSSO: Yeah, I think that makes-- I think that makes sense. So you kind of have to suss it out. You can look within the agricultural commodity, at levered equities for potential upside. And you'll start-- you should in theory start to see relative weakness in certain areas of the staples, like the areas that you mentioned, such as the food companies, maybe the grocers.

I think the grocers are a little bit of an interesting dynamic, because maybe they will view the stimulus as an opportunity to try to pass increased costs on to the consumer. I think if anybody's in a position to do that, they are likely more in a position to do that than, say, a kind of a specialty retailer is in a position to pass higher prices onto the consumer. So I think it's a case by case basis. But certainly something to be keeping an eye on.

- Yeah, it does feel like eating at home is getting a greater share and priority of the wallet these days. Dan Russo, thank you so much. Chaikin Analytics Market Strategist. Good to see you. Thank you.

DAN RUSSO: You as well. Thank you.