Stimulus woes have ‘thrown a wrench’ into the expected pre-election volatility: Strategist

As the three major indices closed and suffered losses of over 3%, investors are unsure how to read the market selloff. Sterling Capital Management Managing Director of Fixed Income Strategies Andy Richman joins The Final Round panel to break down if the market selloff was due to rising COVID-19 cases, election uncertainty, stimulus woes or something else.

Video Transcript

SEANA SMITH: I want to get back to the broader market action that we saw today, because again, we had losses across the board. All three of the major averages closing off well over 3%. The Dow off 943 points. S&P off 3 and 1/2%. And the NASDAQ, in terms percentage-wise, is the biggest loser, off 3.7%.

So for more on this, we want to bring in Andy Richman. He's the Managing Director of Fixed Income Strategies at Sterling Capital Management. And Andy, just quick, your first take-- what's your read, I guess, on the selling pressure that we've seen not only today, but going back to the past couple of days?

ANDY RICHMAN: Sure. Well, obviously we're seeing the volatility pre-election, which we anticipated. But also, it looks like any plans for a stimulus-- certainly, before the election, and even after the election now-- are really throwing a wrench into things. So it looks like it's heading for the sidelines now, heading to cash.

And we saw bonds really not do too much today, almost finishing the day flat. A lot of supply came out on the Treasury side. But Treasury bonds today, after a rally last 10 days, have really held their own today and pretty much were flat on the day.

SEANA SMITH: Yeah, Andy. I'm curious what you think the bond market is signaling at this point, because as you said, we didn't really see much action in the bond market today. We have seen at least the 10-year yield come off of its most recent high, right around 77 basis points today. But what do you think the bond market is telling us at this point?

ANDY RICHMAN: We've seen credit spreads widen, obviously. But it was an orderly widening today, probably on high-grade credit anywhere from one to five basis points. So really, still credit spreads are telling us that this isn't a credit problem right now.

I think you're seeing that as far as rates, you know, we have rates almost at record lows. So the rally that's happened in rates leave us really with the problem that we can't go down too much more. The Fed has already said leaving rates at zero. They're buying bonds right now.

They could buy more. They're buying about $80 billion of treasuries a month right now. That could move up to $100 billion. But there's not a lot of room for rates to move substantially down from the levels they are right now.

So what's happening is you're not seeing that rally that we saw back in March, where treasuries really benefited. When the equity market went down over 33%, we saw five-year, 10-year and 30-year bonds rally to the tune of 5%, 10%, even 15% during that one-month sell-off.

So I think from a corporate bond market, we're seeing an orderly sell-off right now. And in fact, spreads held in pretty tight for the first two days of this week, just a little bit of a sell-off now. Obviously, high yield being much more correlated to the equity market. We did see disruptions there.

But what I read from the bond market right now is rates are hanging where they are right now. We may see more of a steepening of the curve. And from a credit perspective, no worries right now from the credit markets.

ANDY SERWER: Hey, Andy. Andy. How's it going?

ANDY RICHMAN: Going well. All right.

ANDY SERWER: Let me ask you this question. When you're talking about stimulus-- and I assume what you're referring to when you're talking about no stimulus after the election, you're referring to the markets anticipating the possibility of a Biden win, and therefore no stimulus coming during a Trump lame duck period. Is that what you're referring to?

ANDY RICHMAN: Yeah. I'm not saying that will happen, but that was what I was referring to. The markets may be anticipating that, a Biden win, and depending on where the Senate goes. But that would be tougher to get something done during that lame duck session, which just pushes things out even more.

So we've talked about the stimulus plan now for it's over two months now, a second wave of stimulus. And we haven't seen that. So it's exactly what we're seeing right now in the market. Exactly what you said, is that if there's a Biden win, that pushes out another stimulus plan at least into January of 2021.

RICK NEWMAN: Hey Andy, Rick Newman here. Is there a buying opportunity in this sell-off?

ANDY RICHMAN: You know, we still like credit. We think-- you know, you've reported some of the earnings that were coming in. You saw tremendously positive earnings right there.

We think credit still looks good. We have the Fed as a backstop still, which really hasn't been needed from the primary and secondary bond purchasing facilities they have up right now. But we think yeah, that probably would be a buying opportunity, if you were certainly underweight credit.

I think more of a sell-off maybe the next few days. But for us longer-term, we would be overweight credit. Obviously, you need to be careful in what you're selecting. We do think M&A activity, which has already been picking up, continues. So you've got to be careful there. But I think you're right about that. I think an opportunity is evolving right now if you've been underweight credit or waiting to get in on that.

SEANA SMITH: Andy Richman, Managing Director of Fixed Income Strategies at Sterling Capital Management. Great to have you on. We'll talk to you soon.

ANDY RICHMAN: Thanks, Seana.