U.S., China trade tensions escalate, we must be 'be careful about how we view it'

Seema Shah, Principal Global Investors Chief Strategist, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss what she has her eye on around Wednesday's opening bell.

Video Transcript

ALEXIS CHRISTOFOROUS: A couple of headlines here for you. Disney says it's going to require that when its stores reopen face masks will need to be worn by guests ages two and older. So look out for--

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All right, a new trading day underway. We saw the floor of the New York Stock Exchange reopened yesterday without incident after being shut down for more than two months because of the pandemic. Of course, it's now operating with lots of precautious measures in place, including just about a third of the brokers are back on the floor.

The Dow Industrial's up 350 points here to start this Wednesday trading day. Let's bring in Seema Shah. She's Chief Strategist at Principal Global Investors. We're also joined, as usual, by Jared Blikre and Brian Sozzi. Good morning to all of you.

Seema, good to see you again. So look, we had a pretty nice market rally, and in some ways people are saying this market seems a little disjointed from what's really happening in the economy and consumer sentiment, which we know is its lowest in decades. But a lot of this has been driven by just a few companies, mostly tech companies. Are you concerned that we're not seeing breadth in this rally lately, and does it give you some pause?

SEEMA SHAH: Hi. Yeah, I think you're right. I think it does-- it deserves some caution when you don't have a very broad sectoral rally. This is a very, very thin market. You've only got a small percentage of stocks actually trading above their 200-day moving average. So I don't think it's a testament to this idea that there is very positive investor sentiment out there. But at the same time, you know, I think we have to recognize that we continue to get some good news coming through. We have a number of economies reopening. We have economic data starting to improve. And we continue to hear good news in terms of stimulus measures, both fiscal and monetary as well.

BRIAN SOZZI: Seema, JPMorgan's CEO Jamie Dimon making some pretty bullish comments yesterday at a conference. I guess no surprise. He's unlikely to come out here and say his stock stinks and don't buy it.

But when somebody of that stature comes out and makes those comments with the market rallying, does it suggest to you that we might get a next pretty powerful rally in the markets looking out over the next couple months?

SEEMA SHAH: I guess I would still be a bit more cautious about another big leg up. I think you need to have very good news at this stage to see that continuation going up. What I can see is consolidation through towards the end of the year, and that will be because the market continues to be supported by central banks and governments. But the economic recovery's still going to be very, very gradual, so I still find it difficult to say that we're going to be reaching new highs within the next few months.

ALEXIS CHRISTOFOROUS: Seema, could this rally really get tripped up by heightened US-China trade tensions? You know, there's talk now about more-- about tariffs being reimplemented there. Is that perhaps even more of a threat to the market than the pandemic at this point?

SEEMA SHAH: Well, I think-- you know, I think back to what Powell was saying himself about two weeks ago, which is, you know, when we think about the economic risks out there and the things that could trip up markets, he pointed to one of the things being, of course, anything which results in a more negative economic scenario, and certainly the US-China trade tensions are one of those.

I wouldn't necessarily put them above some of the risks around the pandemic around a potential second wave if that were to result in renewed lockdowns. But certainly I think we need to be careful about how we start to view these US-China trade tensions. Do they continue to escalate? Are we looking at a new round of tariffs? And also, how does it affect the various sectors? So yes, absolutely not something to ignore.

BRIAN SOZZI: Seema, where would you-- where's the best place to put money right now? The overseas economies, they're starting to open. We had news out this morning on some pretty-- what could be a pretty sizeable stimulus plan from the EU. US economies are starting to open. Where do you go?

SEEMA SHAH: So my preference is still with the US, and there's a couple of reasons for that. First is to do with the central banks. You know, I think all central banks have been very impressive with unprecedented action, but I think when we think about the Fed, we have more confidence that they can stand behind the market if there is another shutdown, for example. Whereas with the ECB, there's still some concerns that maybe they won't be able to step up as much as they may need to, especially given some of the concerns around the German constitutional court ruling a couple of weeks ago.

The other issue has been about debt mutualization, and you raise a really important point with regards to this new recovery fund that is being suggested. That could be very, very significant. But I have to say, again, you need caution here because you have the frugal four. That's Australia-- sorry, Austria, Sweden, Denmark, and I'm forgetting what the last one is. But those four are very cautious and are still standing-- stepping back against this new recovery fund.

If that were to take place and we have this idea that debt mutualization is possible, which opens the door towards more fiscal spending, then yes, I think Europe has a chance to catch up. But at this stage, my preference is still with US.

ALEXIS CHRISTOFOROUS: So, Seema, within the US, when you start looking at sectors coming back as more economies come back online, where do you see some of the opportunity? Because today we got mortgage-application numbers, and they are higher. I mean, some people are confused by how can this be happening, right? Mortgage applications to buy a new home up for the sixth straight week. So despite the pandemic, it seems as though-- and high unemployment-- people are still going out, looking for homes, seeing it through, and getting that mortgage. So could housing perhaps be the sector that helps get us out of this?

SEEMA SHAH: I think we have to be careful about when we start to see a lot of this data streaming through. You know, we should expect it to be up on the previous month, right? We do think that April was the worst for the pandemic in terms of economics. And because you're starting from such a low base, that May is almost inevitable to show month-to-month gains wherever you look. So, you know, I don't think we should anticipate them continuing to decline, but this is an upward move. It's just a very, very gradual one, and you still have to be cautious.

And for that reason, I still prefer to be in more quality and more defensive sectors. I still like technology. It is expensive, but there is a secular reason to also be in technology given this move towards virtual reality, kind of more working from home, this new emphasis and reliance on social media. These already still continue to work towards the [INAUDIBLE]. And on top of that, technology companies and mega caps, they benefit from strong balance sheets, positive cash flow, and they haven't taken on a lot of leverage.

ALEXIS CHRISTOFOROUS: All right, Jared, I want to head over to you six minutes into the trading day. What do you see moving us right now?

JARED BLIKRE: Yeah, not those big-cap mega stocks that we're looking at right now, but in the Dow we are seeing financials really outperforming. We took a look at them just before the market opened. JPMorgan up about 6%. Goldman Sachs up 3%. Boeing up nearly 3%. Some of the laggards, mainly defensive names in the health-care sector like Merck and Pfizer and Johnson & Johnson.

Let's take a look at the NASDAQ, and we'll sort by performance here and just kind of see a trend that we've seen continuing from the prior day. If you look in the upper left, that's American Airlines followed by United. Both are up 10% and 8%, respectively. Followed by microchip, but the semiconductors largely kind of a mixed bag today, and we can see that here. Really underperforming along with a lot of the software names, which we'll take a look at right now.

Now a lot of these software names have been COVID plays, kind of defensive plays. Activision Blizzard is one. It's down 2 and 1/2% right now. But all in all, we're seeing pretty good breadth outside of the technology sector, but we really need those big-cap names in order to continue this rally. Otherwise we're threatening to roll over.

And just getting back to that Chinese yuan we were looking at before, really want to see that not come under pressure. We want to see that roll back off of those highs from last year because that's indicating escalating tensions between the US and China. Probably one of the bigger threats to the market right now, Alexis.

BRIAN SOZZI: Seema, what areas in tech do you find attractive? Because we have seen over the past week chip stocks and some of these mega-cap stocks with exposure to China, they do react negatively to these negative headlines on China and rising trade tensions.

SEEMA SHAH: Right, which makes sense because those are the areas that are going to be targeted the most when it comes to how the US thinks about how it wants to deal with some of their concerns about China. It's going to be focused on those chipmakers, and I think we could start to see more export controls being applied on a number of those countries-- I'm sorry, a number of those companies.

So yes, there are certainly going to be parts of weakness within the technology sector, but I still-- I still like the [? FANMAGs. ?] I still think those-- as I said, I think there's a secular story there.

But within the technology names as well, you know, we also have to be cognizant, as you said, that they are quite expensive. It still makes sense that, yes, we have a preference for a lot of those mega-cap tech names, but you also need to have a somewhat balanced portfolio. You know, as you said today, this is a recovery trade today, right? Things are back on. It's risk on.

So you still need to have some exposure to some cyclicals. We have a small exposure to financials, for example, for some of the names with discretion because if there is an upturn, if there is a strong recovery, those are the ones that, as you said, are going to outperform.

ALEXIS CHRISTOFOROUS: Seema, how confident are you that we're going to have a strong recovery and that consumers are going to come out and spend big even if they have the money? Because if you look at history as a guide, right after the Great Depression we saw a lot of precautionary savings. Do you think we're going to see the same thing this time around?

SEEMA SHAH: Yeah, I do. I think-- and I think that's one of the main factors which stopped me from forecasting a very strong pickup. You know, as you said, you look back to the Great Depression. After that, there's household caution, a lot of savings. They were concerned about what happened to their finances.

This time around we have additional concerns which is around fear of catching the virus, which really stops people from going about, going back to normal. So we can see that there are a couple of sectors who will continue to struggle, and those ones are namely stuff like restaurants, retail, and things to do the entertainment, that they will continue to be struggling as we look out through the remainder of this year.

ALEXIS CHRISTOFOROUS: All right, Seema Shah, chief strategist at Principal Global investors, always great to see you. Thanks.