Stocks touch session lows amid stimulus uncertainty

Yahoo Finance’s Akiko Fujita and Ryan Detrick, LPL Financial Chief Market Strategist, discuss market reaction as stimulus negotiations continue.

Video Transcript

AKIKO FUJITA: Let's bring in Ryan Detrick. He is the chief market strategist at LPL Financial. And Ryan, we have seen really huge swings in the session today, when you think about where the Dow was early on this morning. Why are we seeing these losses accelerate, and what do you make of the moves?

RYAN DETRICK: Well, I guess welcome to October. I mean, historically, October is the most volatile month. Like you said, six hours ago, everybody's feeling pretty good. And now the exact opposite.

I mean, clearly, the stimulus, that gets the headlines, right? Are they getting closer? Are they not? At LPL Research, we still think it's very unlikely we get a stimulus deal done ahead of the election. But the market's kind of taken that in stride, because I think it's realizing we'll probably get a bigger deal if we're willing to wait a little bit longer.

But, you know, for just one day, I mean, look under the surface, right? Small caps are actually doing really well, all things considered. Semiconductors also, growth is doing a little bit better. So yes, it's getting a little bit ugly out there, obviously. But under the surface, after a three-week win streak, I'm not getting too concerned right here.

AKIKO FUJITA: Is this just a one-day blip or you think the start of a broader pullback we're seeing, what we're expecting going into election day?

RYAN DETRICK: Yeah, we wouldn't be shocked-- great question there. We wouldn't be shocked at all if it's maybe the start of a little more weakness. You know, if you look historically, what markets tend to do in election year, October seems to be a little rough, and you get a little bit of a pullback until the election's over.

So after the big rally that we've seen the last couple of weeks-- last week was more kind of sideways consolidation. But we had a big bounce there. We wouldn't be shocked at all if a little bit more of a correction took place here.

But let's be honest. Again, under the surface, we've had a lot of participation, various groups having leadership. Materials and industrials were doing well. Look at credit spreads. Keep it real simple. The bond markets are not nearly worried right here. They're comfortable.

So any pullbacks, like that 10% pullback we saw in September-- a real quick one, and then it bounced right back-- we think it'd still be an opportunity. It doesn't seem like it's a major structural change, just maybe normal volatility ahead of a election-- a very highly contested election, obviously.

AKIKO FUJITA: To your point, Ryan, the stimulus and the election uncertainty has certainly taken the headlines here. But of course, this is all happening against the backdrop of earnings and companies reporting this week. We've got some big names on tap.

What surprised you so far about the companies that have reported? What's your takeaway in terms of where we are in the recovery, just given the reports that have come out so far?

RYAN DETRICK: Well, we're early in the recovery. I mean, LPL Research, we do think the recession is over. So this expansion is, like, maybe a month or two old. But what surprised so far is how strong it's been, right? Look at facts that only 10% of companies have reported, but 86% of companies in the S&P 500 beat.

And that's on the heels of some really solid increases to earnings leading up to this earnings season. So it's impressive. I mean, you think about the economy. The jobs employment picture still is stubbornly just not improving. But other parts of the economy are.

And if you think earnings drive long-term stock gains-- we're still going have negative earnings this quarter, don't get me wrong. But they're going to come in a lot better than expected. And what companies have to say about the future, that's the one we're watching closely, but most of the economy is sure coming back online. And so far, so good, as it pertains to earnings season.

AKIKO FUJITA: Yeah, it sounds like you're a little more optimistic than some other guests that we've had on. But what do you position yourself on that optimism? Is it the value plays that we've seen the dips? Is there an opportunity there? Is it really about tech where, largely, that growth story has remained intact?

RYAN DETRICK: Yeah, I mean, would you believe if I said both? Here's what I mean by that. We're looking at, like, a barbell approach. If you look at who got us to the party, right-- technology, health care-- those groups are still where a lot of the earnings were coming from. Earnings growth is coming from health care and tech. We don't think that's changing.

But if the economy opens up a little bit more on the other side of things, those industrials and materials-- look at, like, aluminum. Aluminum [INAUDIBLE] two-year highs. Copper is breaking out to multi-year highs. Those are saying to us, the global economy is actually improving a lot more than people give it credit for.

That Chinese GDP data that came out this morning, a little weaker than expected, but there are some real positives around the globe. So we think kind of a barbell approach to those areas, who got you there on the growth side of things, but also on the cyclical value, industrials materials-- and small caps.

We've really warmed to small caps a lot the last two months or so. And we're seeing more participation. To put a bow on this, small caps go by how the economy is going. If the US economy is better next year, that's going to help small caps. They're going to see a big improvement in earnings next year. And small caps do a lot better as the economy starts to expand off the lows. And that's one group we've definitely warmed to here for, say, the next 6 to 12 months.

AKIKO FUJITA: And Ryan, you've pointed out that you advise investors to stay away from what would typically be, or traditionally be, defensive plays. You've talked about financials, REITs, utilities, some areas that you're trying to avoid. What are you seeing in those sectors that's concerning you?

RYAN DETRICK: Well, with financials, I mean, look at just last week, right? Banks had really good earnings for the most part. What was the reaction? Financials didn't do all that well. I mean, you've got the yields that stubbornly never seemed to go higher.

The bottom line, though, is if we think we're in a new expansion, which we absolutely do-- we think it's a new economic expansion. The recession is over. You want to be in some of those more kind of risk-on types areas like the cyclical value and like the growth names, which is where all the earnings growth is going to come from.

And you don't want to be in the defensive areas. You wanted those defensive areas during that bear-- bull market-- I'm sorry, the bear market that we had earlier this year. That's not what we're seeing right here. And we still think those areas you probably want to avoid and stick with the names that are going to grow into next-- into 2021.

AKIKO FUJITA: And finally, Ryan, you've only got two more weeks to answer this question, right? We've got the election coming up. Uncertainty, who's going to win, which party is going to be in power-- how are you positioning yourself on that issue?

RYAN DETRICK: Oh, I mean, the bottom line there is, we think the race a little bit closer than probably what most people think. If you look historically, a little bit of a weak ish dollar and a strengthening stock market, actually, the incumbent president's won every single time under that scenario.

Now I get 2020 is unlike any year, but the thing we've really been telling our 17,000 LPL advisors is this. If the economy is improving next year, which it will be, I hate to say it doesn't matter who's in the White House, but stocks will do just fine, OK? I mean, that's historically what we see when the economy is expanding.

A lot of people didn't like President Obama for eight years. A lot of people didn't like President Trump for four years. The reality is they missed a lot of big gains. So just separate who you vote for with your investments. And if the economy avoids a recession next year and grows, which is our base case, whoever is in the White House, we should see some more gains next year.

AKIKO FUJITA: OK. We'll continue to watch. Ryan Detrick, always good to talk to you. He is the chief market strategist at LPL Financial.