Markets volatile as White House, Senate strike $2T stimulus deal

Michael Lee, Chief Strategist at Michael Lee Strategy, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Jared Blikre to discuss the latest market action.

Video Transcript

ALEXIS CHRISTOFOROUS: Another trading day getting underway on Wall Street, and to help us navigate it all is Michael Lee, Chief Strategist at Michael Lee Strategy. Good to see you, Michael. What do you make of a market reaction to a possible stimulus bill being signed into law?

MICHAEL LEE: You know, I think it was really nice to have a relief rally yesterday. I just don't think we're out of the woods yet. There are so many questions that are going to remain for a while. What I like that I'm hearing out of the stimulus bill is not only direct cash to individuals-- the unemployment insurance-- but the government taking equity stakes in the companies that it's bailing out.

For whatever reason, it was very unpopular the way that the governments came in and backstopped the banks in the last crisis. However, what's not widely reported is that the government made a lot of money. I was at Morgan Stanley at the time. I think we paid them back within nine months at a 15% annualized rate of return.

So this model where the government comes in, gives you money, gets an equity stake, and is going to paid back before the company can go back about their business, in terrific times of-- these horrific times-- these black swan events, these once-in-a-lifetime events that seem to keep happening every 10 years-- I like that model. I do not think we're out of the woods yet. I think the S&P 500 gets to sub-2000. And at that point, I'm a buyer.

BRIAN SOZZI: Michael, Brian here-- good to see you. Do you think what we're seeing the markets is simply a sucker's rally?

MICHAEL LEE: Can you repeat that, Brian? It's a what rally?

BRIAN SOZZI: Do you think it's a sucker's rally?

MICHAEL LEE: No, I think this is a bear market rally. And I think this is a good sign that you have some of these kind of rip-your-face-off rallies to really crush the shorts in between. This is healthy. This shows that the bottoming process is in. I don't know that we're here yet at the bottom. I think the market probably has to get closer to, like, a 50% pullback, which puts you in the 1,800 range.

I'm not smart enough to call that bottom. So I'm looking for 2000 in the S&P 500 to deploy all my cash. But just what I need to remind you, and I'll remind investors, is that unemployment in the financial crisis peaked in March 2010. The markets bottomed in March of 2009. So the equity markets are going to move higher and beyond their ascent to the next bull run, far ahead of this coronavirus situation being resolved.

BRIAN SOZZI: And Michael, where do you go from here? Is it time now to look at some of these relief plays that are getting-- I won't call it a bailout. But [AUDIO OUT] relief such as airlines? These stocks have been totally hammered.

MICHAEL LEE: So until you know what the government equity stake is going to be and until you know how they're going to accept these things out, I wouldn't touch there. So what I own right now is, I still-- my biggest possession going into the year-- it's better to be lucky than smart-- was the 30-Year Treasury. After that, I've been defensively positioned with utilities and staples.

Once we kind of see another couple of ugly legs down, I'm going to reverse course and go into very cyclical names-- technology, consumer discretionary, basic materials-- and move sort of in there. What's really interesting to me is these moves in the financials and the banking stocks. I just don't know how that's going to play out.

Like, this has been a wild sector over the last few days with interest rates so low but yet the Fed opening that window to them. So you know, the financial sector is up now. So I'm looking at your screen right now. It's up 1 and 1/4%-- you know, up, like, 12% yesterday. These are huge moves for massive sectors. So this is a really tough market to trade. I'd be looking for longer-term positioning just because I think it's a lot easier to lose money than make money right now.

ALEXIS CHRISTOFOROUS: And Michael, what are you seeing right now in the credit markets? We know the Federal Reserve has done an awful lot to help boost that market right now. And a lot of people were saying it was sort of flying below the radar, that the real threat for investors was that big gap that we were getting-- that huge spread in the credit markets. Are things improving there?

MICHAEL LEE: So what the Fed has done is nothing short of remarkable. So anybody who is investment grade can now go to the Fed window. Anybody who was investment grade before this can now go to the Fed window. So any company can now run 30-, 60-, 90-day debt with the Fed before credit markets normalize.

And what we need to realize is that equity volatility and credit spreads almost have a perfect one correlation. So with the VIX where it is and where credit spreads are, it would lead us to believe that credit spreads have way further to blow out, particularly in the high-yield space, where the VIX is much higher than it was in the financial crisis. And credit spreads are roughly half of where they got to in 2008.

I think the Fed stepping in is going to kind of-- what they're doing is nothing short of remarkable. But I wouldn't be a buyer of credit here. Again, I'm waiting for things to shake out. I think we have a few more ugly sell-offs-- like I said, sub-2000 on the S&P 500 before I'm going to go ahead and get involved in credit to start adding cash there.

BRIAN SOZZI: Michael, what's the trigger point on some of those potentially ugly sell-offs? So we'll have initial jobless claims. That will probably be a shocking number later this week right around the bend here. How do you-- what's the setup into some of these reports?

MICHAEL LEE: You know what, Brian? I think it's important for everyone to realize that the US economy can handle a 20%, 30% down. What we can't handle is 100% stop for an extended period of time. The multiplier effect of the damage being caused by this, I think, is going to cause more loss of life from economic carnage than the virus itself.

So I would expect to see the unemployment claims. If it's not north of three or four million this week, it'll be north of six or seven million next week. These next two weeks are going to be record-setting weeks in terms of initial unemployment claims, which is both good and bad. It's bad because a lot of people are losing their job. But it's good because we get to quantify the damage.

And these people being laid off will now be able to receive unemployment benefits. So if you were making $70,000 or $80,000 a year and you're now going to be able to collect $600 from your state a week and $600 from the federal government with another $1,200-dollar check on the way, hopefully you can get back to work at some time in May or June. We just don't know how that's going to play out.

There's a lot of small businesses that have closed their doors that are never going to open them again. And it's-- only time is going to tell how that's going to play out. So I think from an investor standpoint, we are close to the bottom. From an economic standpoint, this is going to play out worse than the financial crisis.

ALEXIS CHRISTOFOROUS: So do you think, Michael, that that huge spike we are definitely going to see in jobless claims this week and weeks to come have already been baked into this market?

MICHAEL LEE: Yeah, I think depression-like economic scenarios are baked into the equity markets. We've lost something like $25 trillion of global equity worldwide. I don't know how else you describe that other than depression-level being baked in. So what I'm interested to see from these unemployment claims is not so much the number and the shock value of the number.

It's how many people have lost her job, and how do we model them getting back to work and how that will play out the second half of this year. Is it relatively quick in May or June when the bars start opening up, the restaurants start opening up, because I can tell you-- being at home for a few weeks now, we're going to go out to dinner every single night for a week as soon as we can, right? And we can't be the only American family feeling that way.

So once we start getting more data in, you could start to model out what the recovery looks like. But I think absolutely apocalyptic-type bad data is very much baked into the equity market right now.

ALEXIS CHRISTOFOROUS: All right, Michael Lee, chief strategist at Michael Lee Strategy, thank you so much for being with us.