‘This is a liquidity driven rally’: Zor Capital’s Joe Fahmy on why the market will head higher into the 2020 election

Joe Fahmy, Zor Capital Managing Director, joined The Final Round to discuss the market rally, what’s driving it, and his thoughts on how the 2020 election will impact the market.

Video Transcript

JEN ROGERS: Well, we’ve got a great Yahoo Finance lineup for everyone today– Rick Newman, Akiko Fujita, Jared Blikre. But as Myles said, our friend of the program Joe Fahmy is here from Zor Capital. He’s the managing director there, so let’s bring him in, see what he has to say.

I mean, Joe, I was– before we came up, I was trying to explain the market to a child. And I said something like, this market is crazy. And they’re like, why? And I said, well, it’s just really high, and everything else is going on. And they said, well, why can’t it go higher? And I was like, I guess that’s a really good question. I mean, it– to people, it seems out of whack. Why is it not?

JOE FAHMY: I mean, you have to make adjustments to the conditions we’re in, and this is a liquidity-driven rally where interest rates are low. The Fed is a huge factor along with it. I wrote an article for you guys a couple of weeks ago saying I think we’re heading higher into the election because the Fed is one reason. There’s very little professional selling. And the leaders are acting very, very well. There’s a lot of positives to this market, but the main thing is the liquidity.

JEN ROGERS: OK, so why is it all about liquidity here? Is this– is it a don’t fight the Fed situation? We had Brian Cheung on last hour talking about the changes that the Fed has made, and he said that we could be here for eight to 10 years. Am I– I mean, Myles, you were in the program, right? I got that right– eight to 10 years that we could have–

MYLES UDLAND: I mean, that’s what happened last time, right? I mean, so sure.

JEN ROGERS: It’s– that’s a long time.

JOE FAHMY: I mean, the other thing a lot of people aren’t talking about is that a lot of money managers are underperforming because they got it wrong earlier this year– and I understand that– and they discounted how much the Fed was really helping the markets. So what’s– when you talk about the narrow leadership that you alluded to earlier is that if these big managers that might need to put $100 million or $1 billion into the markets, they have a narrow universe of stocks that they can choose from.

So what they will obviously chase with is the top NASDAQ– you know, top 10, not even NASDAQ 100 stocks. We all know the names and the FANGs and the Microsofts and so forth. Because one, it’s easy to get, as far as liquid, into those names. And two, they’re companies with reliable earnings, so that is also what’s driving the markets higher.

RICK NEWMAN: Hey, just– Joe, just to go back to your idea that stocks could rise into the election, I– number– first of all, it seems to me, the markets have seemed to have decided they can live with Joe Biden. So it doesn’t seem to be likely any kind of slump if Joe Biden really starts to surge ahead. But does that suggest there could be a dip after the election or sell-off?

JOE FAHMY: Yeah, that could be. I mean, there’s a lot of variables. So you know, when I said, we’re running higher into the election, a lot of people have asked me, well, what happens after that? I said, well, we’ll worry about that when we get to it. But there’s a lot of variables. If there’s not a clear winner decided on election day, that could be uncertainty for the markets. I’m sure a lot of people will be hedged for either scenario. If Biden does win, there’ll be a lot of hedging. So that could keep a floor to the markets.

But overall– this isn’t a political statement– I think Trump is going to do everything in his power to get re-elected. That’s just a commonsense statement. Anyone running for re-election wants to get re-elected. So whether it’s keeping pressure on the Fed or some possible, you know, tax cuts, various stimulus, that’s going to continue to keep the markets afloat, of course with dips along the way, but I think they’re going to be shallow over the next couple months.

AKIKO FUJITA: So Joe, shouldn’t that statement alone be considered a risk? If you’re talking about the president doing whatever it takes to win, I mean, we’ve heard everything from him talking about approval for some kind of– one of the vaccine candidates. We’ve seen– I mean, there– the trade issue with China. I mean, what we have seen over the last few months is the president willing to put pressure where he can if he knows that it’s going to resonate coming into November.

JOE FAHMY: Yeah, that’s a great question, and I’m only saying this because Trump is clearly running on an economic platform, especially talks a lot about, you know, one of the few presidents who has ever discussed the stock market so much. It can be a risk, but that’s where people really need to understand whether they’re long-term investors and they’re probably sticking with it longer term or if they’re shorter-term traders where they obviously have to manage their risk.

And I’m not saying, you know, OK, just the teacher’s out of the classroom and, you know, just have fun. I’m just saying that it’s a rare equity-friendly environment. Take advantage of it. But of course, you need to have– you need to manage your risk around that in case– the reasons that I’ve said for why it’s going higher, in case any of those reasons change, such as the big institutions start to show signs of selling. But right now, they’re not.

RICK NEWMAN: Joe, are we going to see at some point, like in our lifetimes, the stock market reconnecting to the real economy, or can this just go on indefinitely?

JOE FAHMY: I mean, that’s a great question. At some point, there will be, you know, some profit taking or if the Fed hints that they are not raising rates, but you know, a change of tone from them. I mean, it’s a great question. Obviously, it can’t go on indefinitely. But it can go on.

One thing I’ve learned from doing this 21 years is moves in the stock market can go on much longer than we expect in both directions. So until I see any major warning signs, I’m sticking with the trend. But I mean, obviously, at some point, this will end with, you know, some sort of bigger correction. But there’ll be warning signs, you know, in the markets before that happens.

MYLES UDLAND: And Joe, I don’t know if you have a very strong view on this, but it seems that most people do, which is the idea of narrow leadership. And we saw– you just mentioned earlier, the 10 names that are doing all the work. Obviously, I think that performance-chasing thesis is a big part of why those names are so relentlessly big. But I’m sure you hear from folks who say, you know, oh, well, financials don’t get involved, this rally can’t continue. But I mean, it just seems that everyone is fixated on that state of play, and I’m just not sure if it is such a requirement of a bull run that each sector have its turn at the front.

JOE FAHMY: I mean, there is a lot of sector Rotation I mean, my wise-guy answer to when they say the market’s only going up on 10 stocks, I say, well, then just be in those 10 stocks. But that does work for people. But I am seeing some sector rotation. I am seeing some financials. They might not be participating big, but they’re stabilizing.

There’s definitely housing stocks that are acting well and a few other sectors outside of tech– you know, the payments space, which is a sign of the economy opening back up. So I am seeing more than just those 10 stocks. If they’re not screaming higher, that’s OK, but at least they are participating somewhat.

RICK NEWMAN: Joe, you said before that if there is some kind of sustained sell-off, we will see signs that it is coming. What would those signs be? What should we be looking for?

JOE FAHMY: I mean, I like to watch the technicals of the market. I’ll give you two really quick. If you start to see, you know, some big volume come into the market consistently, to see any major market top– you know, I wrote about this in the article about a distribution day, meaning a big down day on heavy volume. To see any major market top, you need to see four or five or six of them in a short period of time. So that’s one. And then from a technical point, just a simple 50-day moving average– as long as the market’s holding above that, for the most part, it’s healthy. If we start to break below key moving averages from a technical point of view, that’s when I would get more defensive and more cautious.

JEN ROGERS: Joe Fahmy with Zor Capital, you heard him talk about the article he’s written for us. It’s up on our website right now if you want to read more into what Joe’s talking about. “Why The Stock Market Could Head Higher Into The Presidential Election,” that’s the headline. Joe, fantastic to see you. Have a great weekend. Thank you so much appreciate it.

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