Lori Calvasina, Head of U.S. Equity Strategy for RBC Capital Markets, joins The Final Round to discuss how Wall Street can weather intensifying volatility due to the COVID-19 outbreak.

Video Transcript

JEN ROGERS: I want to bring in Lori Calvasina, RBC Capital Markets head of US equity strategy. So Lori, the headlines keep coming out. They are ugly. The jobless numbers today, terrible. We are braced for more ugly headlines, and yet, this market seems to have stabilized. Do you think there is a sense that we, in equities, are still just too complacent? I mean, I know we're far off the highs, but that there is a little bit of, we're not really figuring out what's happening with reality yet?

LORI CALVASINA: I think there there's certainly a component of that. And I'll tell you while I am looking for a buying opportunity in here-- I've got 2,750 as my year-end target-- I'm concerned that we haven't seen the lows yet in the near term. And I think you really hit it on the head, the idea that people are a little bit too complacent. And the way I put it is we haven't seen investor capitulation yet.

And what I mean by that is when you have these major dislocations in the market, you know, I don't typically when I think back over ones we've had in the past, we don't typically see investors talking about their shopping lists or talking about how valuations look good. That's what we're seeing today.

You know, and even when we look at statistical data, things like the AAII Bull Bear Survey or CFTC data on institutional equity future positioning, those things have not gotten back down to their historical lows yet. So I understand the impulse to be bullish and to use this dislocation as a buying opportunity for the longer term. But at the same time, you can't really put in a bottom historically, unless you see sentiment get washed out. And we just haven't seen that yet.

MYLES UDLAND: Well, so Lori, kind of a two-parter here, and you mentioning that people talking about a buying opportunity, it brings back the valuation conversation from the beginning of 2020. And you know, really, when this selloff began, so many commentators were saying, well, we were due for a big move because valuations were so stretched.

I mean, are we, almost in a way, still kind of working off a market that had started to get to a 20 multiple, and only now are investors going to start grappling with the reality of what a recessionary environment could mean?

LORI CALVASINA: You know, I think that the economic expectations are evolving. And we actually just did an investor survey over the past-- late last week, early this week, so really, the past week or so. And what we found was that investors were highly bullish, the most bullish we've seen since we've been doing this survey, which has been about three years.

And when we looked under the hood to try to explain why they were so bullish, we found that about 2/3 of the investors in our survey thought GDP at its worst point was going to contract by 20% or less. Only about 34% saw it contracting by the 20% to 45% range.

Now I'm not an economist. It's not my job to figure out what those numbers are, but I can tell you a lot of economists around the Street are starting to sort of inch towards the lower end of that range. So I think it's at least worth considering the question, do equity investors who are looking to buy this dip right now, do they really have their heads wrapped around the GDP expectations, or are those still evolving? And are they evolving in a worse way than what's reflected in stock prices currently?

JARED BLIKRE: Hi, Jared Blikre. Oh, sorry, Jen.

JEN ROGERS: Go ahead, Jared.

JARED BLIKRE: Jared Blikre here. I-- you mentioned before you kind of expect the markets go to new lows, or at least, test the lows. It seems to be a consensus opinion. What if the market just takes off from here? Where are you currently invested in? How are you positioning yourself for these other eventualities possibly?

LORI CALVASINA: So you know, we know that it's difficult to peg bottoms. And you know, we have a view that we haven't seen the lows yet. But what if we're wrong? And we know that's always a possibility. And the way we want to be positioned in these kinds of dislocations is to have a balance in our portfolio.

So we were lucky enough to be overweight utilities coming into this drawdown. We thought there was turbulence that was going to happen early this year. So we've had that longstanding overweight on utilities. We are keeping that on. The recent upgrade that we made a few weeks ago was that we lifted up health care to an overweight. And we think that has both defensive characteristics, and it also is really a long term secular grower.

I also think, frankly, health care is going to come out as one of the sectors that's really helped shepherd the economy through this crisis. So we like the long-term tailwinds there. And we have said there will be cyclical rallies in here. And you do want to use these kinds of dislocations to get positioned for three to five-year type moves. So we've actually been recommending an overweight on the industrial sector, knowing that it's not going to work, as long as markets are choppy, as long as markets are falling.

But as we saw in the rally that we had in late March, which lasted a few days, but was quite powerful, these kinds of areas can move very, very sharply. Industrials was one of those leader. And when we look at sort of other things that rallied late last month, things like energy, things like financials, we find that industrials really makes the most sense to us longer term. So that's the cyclical play that we want to have in our pocket right now.

JEN ROGERS: Lori Calavsina, RBC Capital Markets head of US equities strategy, great to get a chance to talk with you and hear what you've been thinking here. Thanks a lot.