Tom Essaye, Sevens Report Research Founder, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets on Monday morning.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, let's get to this rally on Wall Street now, and Tom Essaye of the Sevens Report. Good morning, Tom. So when you look at market action, I guess on Friday, late Friday into the close and then early this morning, do you think that the recent sell-off we've seen on the Street was a little overdone?

TOM ESSAYE: Good morning, guys. Yeah, maybe in the very short term, but I'll caution everybody about the optimism around Friday's rally and then this morning's rally. Nothing really happened to cause it, right? So there wasn't any great headline that we saw on Friday. There were a couple incremental things, but, you know, was it worth a couple percentage points in the S&P 500?

I think that's a bit of a stretch. I think more broadly, we have a market that was very optimistic at the beginning of September. Things have changed a little bit for the negative, and now the market is trying to find that equilibrium as we go into what will be a very action packed fourth quarter, and I think we can expect more volatility around these levels.

BRIAN SOZZI: Tom, are your clients positioned, or are more your client positioned long or short into the debate tomorrow?

TOM ESSAYE: I would say long, because I think most of our clients are long term, medium and longer term focus, and I think that that's still the right way to be, even with so much uncertainty. The debate's going to be interesting. I mean, there are certainly some-- I don't know how many people in the country have not yet made up their mind, but I think certainly tomorrow's debate will go a long way towards making that number even smaller. Although from a market standpoint, there's going to have to be a pretty big bombshell during the debate to really get markets to move. I don't think that's going to happen.

ALEXIS CHRISTOFOROUS: Tom, we keep hearing about this going to be a very volatile election. President Trump already saying he'll contest it if he's if he's not declared the winner. How are you positioning your portfolio to protect investors during what is expected to be an unprecedented election?

TOM ESSAYE: Yeah, I think that the most important thing to do is to look and see if you have any sort of exposure that's really out there on the risk curve that could really get hurt. And if there is, perhaps, you know, bring that in and get more into line with what your overall portfolio allocation should be. We all know that diversifying for the longer term is the right way to do it in the market over the years, and that's important even now.

So it's-- look, we have six weeks until the election. Use that time to do a checkup on your portfolio. Make sure you're comfortable with risk, because look, we do know it's going to get volatile after the election. The chances of this being settled the night of the third are unfortunately extremely low. So just be ready for that volatility. If you can't stomach it, make sure you've got some options or something else to help you on the downside.

BRIAN SOZZI: Tom, the strong rally we saw into the close on Friday, the strong rally we're seeing out of the gates today, is this the fiscal stimulus [? hoping ?] [? them ?] rally?

TOM ESSAYE: Yeah, it is. I mean, as I said, there weren't any really great headlines on Friday or this morning. There were some peripherally good ones. Over the weekend, Pelosi remained optimistic that there might be a stimulus deal before the election. That doesn't solve the $1.5 trillion gap they have in the negotiations, but at least it's positive. Florida, down here where we are, reopened the state fully, but, you know, we'll have to see what happens with the virus, because certainly it's going to go back up, so we'll see what happens there.

And Europe is also considering more strategic and surgical lockdowns rather than the wholesale lockdowns we saw back in March and April. Are these good headlines? No, not really, but are they better than nothing? You know, OK. And since the market was a little bit oversold, I think you're seeing a bounce.

JARED BLIKRE: Hey, Tom, I want to get your take on the banking sector right now. And we're seeing some headers from HSBC kind of lead financial stocks higher, but we're also seeing the KBW Regional Bank Index, that's leading today, but that's after having not the best use of performance, and especially underperforming mostly over the last month or so. How do you see banks shaping up right now?

TOM ESSAYE: I think if you're a long term investor, banks are extremely attractive right now. And simply because as we look around the different sectors of the market, the valuation you get in banks, it's so cheap historically, it's very attractive. The only thing that's to a point I think cheaper than banks is energy. And energy, you have sort of a very large existential question what's going to happen with that industry over the next five, 10 years. Banks, we don't, right? Banks, really, what we need is we need interest rates to go up, right? Because credit quality is fine.

The banks are much more sort of regulated and in better financial shape than they were out of the financial crisis, but they need a growth catalyst to start to outperform in the near term, and that's rates moving higher, that's yields moving up. We don't really see what makes that happen right now, and that's why banks are lagging. But there is long term value, and in an IRA, a very sort of longer time horizon account, I think banks are attractive here.

BRIAN SOZZI: Tom, within the big tech sell-off, we've continued to see pressure in this space, but there are potentially two catalysts for two names coming up. Amazon, certainly with Prime Day in the middle October. But then Netflix, I just wrote a story this morning looking at the potential impact of a price increase for Netflix's sales next year could be up to a billion dollars. If you had a choice, which stock do you buy?

TOM ESSAYE: Amazon, you know, and that's probably just out of personal preference. I'm a Prime member, and I subscribe to Netflix, and I find myself using Amazon a lot more than I turn on Netflix, because there's so many other competing platforms. I love the content on Netflix, wonderful company, but I have like 10 apps, you know, on my TV that we watch content from. Amazon, you know, when we need to buy pretty much anything, I go on Prime, and I go in my app, and we buy it. And I think that between also what they have going on with the Cloud, they're a much more diversified business than it would appear in Amazon. And so for me, my money goes to Amazon.

JARED BLIKRE: Hey, Tom, want to get your take on the dollar now versus the euro. Now, the dollar had been strengthening for five out of six sessions, but it's down quite a bit, you know, only half a percent right now, but still in currency terms, that's substantial. What's your take on where the US dollar is going, and what implications does that have for the general market?

TOM ESSAYE: Yeah, so the dollar was sort of range bound, right, for a couple of weeks. Really from a low of 92 to a high of about 93.44 in the dollar index. It broke out of that range last week, and the reason why is clear. I mean, if you have coronavirus surging in Europe and in England, and they're going to have to lock down their economies at least partially again, then that's obviously negative for the euro and the pound. It's impossible for the dollar index to go down if the euro and the pound are worse, right? And that's sort of exactly what's happened.

I think that the downtrend of the dollar as has ended for now. I think that over the longer term, you could still see dollar weakness. But between now and year end, unless you get a big rollover in the US economic data, I think it's going to be tough for that dollar to get down into the 92 range. That's a negative for US corporate earnings. Not for this quarter, right, where we're going to hear in October, because that's looking back three months, but for really Q4 of 2020. So we've got to look at that impact on earnings.

ALEXIS CHRISTOFOROUS: Tom, is there any sector you've recently gotten out of or you're just simply staying away from at the moment?

TOM ESSAYE: I did reduce some of my holdings in tech. Not at the top, but after it broke a little bit, simply because it was too much overweight. Now, I probably should have done it earlier, but at the same time, you know, you kind of got to let these things run while they do. But now, does that mean I'm not, you know, incredibly long term positive on tech? Of course not. As I've said many times, tech is the winner, you know, quote unquote, "winner" out of this whole pandemic saga. But at the same time, it's important to keep that diversification intact even when something's working very well.

ALEXIS CHRISTOFOROUS: All right, thanks so much Tom Essaye of Sevens Report.