Optimal Capital Director of Strategy Frances Newton Stacy joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss how the markets are reacting to the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: Taking a look at stock futures, not looking pretty here at all to kick off the second quarter-- sharply lower across the board. We want to bring in Frances Newton Stacy. She's Director of Strategy at Optimal Capital. Good morning, Frances. Good to see you.

We have got a bunch of economic data coming out today and in the coming days, including the monthly jobs report. It's not expected to look good for weeks and months. Do you think that this market, and even today's early selling, is this market trying to [INAUDIBLE] bad numbers?

FRANCES NEWTON STACY: Well, the thing-- the thing that the market-- sort of the big question mark in the market, going forward, we have a lack of data, certainly. And the bullish case would be that this latest sort of uptick in the market is going to pull off about 50%. Which if it holds 2,500 on the S&P, that's going to be very strong, unlikely. 2,375 is kind of a little more than 50% of the move up from the low. And that's sort of the bullish sense.

OK, so the Fed's throwing the kitchen sink. The government's throwing the kitchen sink. But the problem with that is that the VIX is still very high. And the VIX has got to get below 50 before this market is in any way investable for the long-term investor.

And the reason that the VIX remains high is because we have such uncertainty. The massive risks right now is that this coronavirus thing, instead of being a blip in an otherwise good economy, is that this coronavirus is going to conflate with the big end of cycle, you know, the big end of the bull run. And then you're really going to have some issues.

And what's going to determine that is how many defaults we have in the credit market, which are yet to be seen. But I did see something on Twitter yesterday, people who took out 10, 20, 30 mortgages to be super hosts on Airbnb, particularly, are going to end up defaulting on those loans. And then you're going to conflate the coronavirus with issues in the real estate, as well as many other things, retail companies.

The other kind of unfortunate thing is that earnings per share-- you know, earnings growth was slowing coming into this virus. So that's a little bit of an unfortunate thing that may exacerbate the situation.

BRIAN SOZZI: So Frances, do you think this market is in fact uninvestable? And if that is the case, should you be all in cash?

FRANCES NEWTON STACY: Well, I have to say that if you're for the super, super long term, and you can withstand the volatility, that's great. Invest things that you don't-- don't invest your entire retirement. Invest things that you can lose.

Basically this market right now with the volatility is for short-term traders. And I actually do-- we have large positions in cash for that very reason. The market is going to start getting investable for longer-term or retail, and moving away from the pros, when the VIX definitely has to close consistently above 50. But really only going to start to see the fear waning and interest coming back in below 30.

Now that's not going to correlate with the bottom, particularly because the pros are going to hit the bottom. And long-term investors, you know, we don't-- we try not to time bottoms, et cetera. But personally, I'm in-- I'm in a lot of cash. And definitely we are increasing our cash positions regularly with our portfolio.

ALEXIS CHRISTOFOROUS: Have you pulled out of any positions recently? Any particular sectors that you were invested in prior to the pandemic that you now are no longer invested in, Frances?

FRANCES NEWTON STACY: Well, fortunately, when we started this, we expected some end to the bull run. So we only had 10% US equity exposure at optimal. For me personally, you know, I dumped a lot of my stock weeks ago. The minute that the Dow-- I mean, the minute that the S&P 500 started penetrating below 2,500, I just knew that there wasn't any real support there.

And so, yes, I sold off utilities, REITs, energy. And because I'd had those positions for so long, I was still in profit on those positions, though some of my profit had eroded. But I had started kind of selling at Thanksgiving last year, because I was realizing that this market was looking a little frothy. And it usually gets very, very frothy toward the end of the cycle.

And then we sort of had whoops, surprise, coronavirus. And then the other surprising thing was the reaction-- the speed of the reaction from the Fed and the government that maybe said, OK, maybe this is a blip, and then we have a re-acceleration, and we don't actually see the end of the bull market. But the longer this gets drawn out with more uncertainty, the fear is, from my perspective, that it's going to conflate with the end of the cycle. And then that's going to be kind of-- that's a much larger, more protracted situation, for sure.

ALEXIS CHRISTOFOROUS: Frances, my ears perked up when you said that your firm, Optimal Capital, just had 10% in US equities. I mean, you look like a genius now, having pulled what you pulled around Thanksgiving. But where else was your money, is your money right now outside of US equities?

FRANCES NEWTON STACY: Yeah, so we were very overweight in treasury bonds all along the curve. And so we did very well with that. We did very well in gold, actually.

But when the volatility got so high in that market, we took some weight off. We've been kind of-- we took some weight off. We let it sell off. We kind of reentered with gold.

We definitely had a little bit of a loser in oil. But we took it off very soon as oil prices started to plummet. And, you know, oil is a bellwether for economic demand in any case. So preparing for the end of-- end of the cycle, you know, we were looking at that very carefully.

So we look pretty good. You know, our downside capture was about 8%. And obviously the market fell 30 plus. So that's very good. Our clients are very happy.

At this point, the only reentry points that we have are in some of our long-short stuff. We have a long-short sector strategy, because we definitely want to get people, if they're investing, in an instrument that goes both directions because of the uncertainty.

And otherwise, you know, I have a couple of clients who are pretty happy to sit in large cash positions at the moment. And the portfolio, we're being very conservative.

BRIAN SOZZI: Frances, seemingly every person I talk to on the Street suggests we will go out-- we will go back and retest the lows. Look, we had Jeffrey Gundlach, AKA The Bond King, Or The New Age Bond King, suggesting we might break through the lows. Where do you fall on that debate?

FRANCES NEWTON STACY: So it's always the quintessential technical debate. Do we go down 50% of this up move, which is about-- it's a little more than 50%. 2,375 is good support in the S&P-- and make a slightly higher low? That's more of a bullish case.

It's gonna to depend on some of these economic numbers. I mean, obviously the jobs number this morning wasn't as bad as expected. But, of course, the whole cake hasn't been yet baked in for the coronavirus.

Or you go down and you make a double bottom. Or you go down and make a new low. I mean, if we-- you know, if we go down and make a new low, you could see 1,750 on the S&P 500, which is-- which is pretty extreme.

ALEXIS CHRISTOFOROUS: All right, we're going to check back with you in a few days and see about that estimate. Frances Newton Stacy, thanks-- Frances Newton Stacy, thanks so much for joining us. She is the Director of Strategy at Optimal Capital. Good to see you.

FRANCES NEWTON STACY: Thanks, guys.