Matt Orton, Portfolio Strategist at Carillon Tower Advisers, joins Yahoo Finance’s Alexis Christoforous, Brian Sozzi and Heidi Chung to discuss how the markets are being impacted by the coronavirus outbreak.

Video Transcript

BRIAN SOZZI: I want to keep the market talk going. I want to bring in Matthew Orton, portfolio strategist at Carillon Tower Advisers. Matthew, good to see you here.

Market is rallying hard out of the gate. I appreciate the market's optimism on the coronavirus potentially nearing a peak in the US. Do you share that optimism? Or do you think the market is a little ahead of its skis here?

MATT ORTON: Well, it's great to be here, Brian. And I think it's very encouraging that we're seeing the market react positively to some of this news. But what I've been saying to all of our clients whenever we see these sorts of-- I'll call them relief rallies-- are very, very optimistic starts.

I like to remind everyone that I don't think we're there yet. And there are some good encouraging green shoots when you look technically at the market. It's nice to see, you know, across the board, all sectors working well.

But until we can get a better sense of what the hit ultimately is going to be to earnings, and how bad the unemployment is actually going to hurt the US consumer, and how the path to resumption of their previous consumption habits take place, we're not really going to be able to say, this is the absolute bottom. I think we'll still see some ups and downs until we can really get a sense of where earnings are going to go.

ALEXIS CHRISTOFOROUS: Hi, Matt. Alexis here. Good to see you. But having said that, would you say that the worst of the volatility is behind us in this market?

MATT ORTON: Absolutely. I think that's a good point, Alexis, is that we saw extremes in volatility. I mean, at the height of this crisis, realized five-day volatility on the S&P 500 hit 177%.

That exceeds what we saw even during the financial crisis, during 2008 and 2009. So there were certainly extreme moves that we had. And I think that is going to be behind us.

I think the market now is trying to react to headlines and try and find a bottom. Bottoming is always a process. I think we're going to still see some ups and downs. But that extreme level of volatility, I think, is going to be past us, for sure.

HEIDI CHUNG: Hi, Matt. It's Heidi Chung here. Looking at other aspects of the market, I want to talk about the small caps and get your thoughts on that group.

We are seeing a meaningful rally today. But the group has been underperforming for quite some time. Specifically, last week, the IWM was down 7% for the week. And a lot of people look to the small caps for some sort of indication of which direction the economy is going. So if that is, in fact, the case, should investors be worried that the group is underperforming so significantly?

MATT ORTON: You know, Heidi, I think it's a great point to look at small caps. Because until we can say the markets are going to meaningfully take off, I think small caps, historically speaking, tend to be the first place it starts to work, because they are more levered to the domestic economy, and because they are the most dependent on having proper functioning of the credit systems in the economy in order to do well. And just like you said, small caps were down 7% last week versus large caps that were down about 2%.

Year-to-date, small caps are down 13 and 1/4% relative to large caps. And if we blow that out to the past-- from the start of 2018, where you really saw meaningful small cap underperformance, over 21%. So there are extreme gaps in small cap performance.

I think part of that is related to risk sentiment. I think investors last year-- for a large part of last year, even though it was a positive year-- tended to be risk-off until the very end of the year. You saw IT. But along with that, utilities, consumer staples, real estate were your top performing sectors.

So I think small caps will benefit as we start to get a little bit more clarity, in terms of where-- you know, how big the impact of the sudden stop is actually going to be and how effective some of these government measures that have to be put in place to protect smaller businesses to unlock the credit markets are going to function. And I think, so far, it's been fairly optimistic. But there's still more data to be seen before we can really say we're out of the woods.

BRIAN SOZZI: Matt, I was surprised to see that you still like growth over value. One, I think I'm surprised because growth-- there really is no growth in the US. The US economy is shut down. And then secondarily, these stocks are still pretty richly valued. And I'm guessing, over the next couple of weeks-- earnings season kicks into gear-- those growth estimates for these companies-- we might not get any growth estimates.

MATT ORTON: Yeah. Earnings estimates right now, I think, are dislocated from where the market is as a whole. I mean, right now, I think consensus estimates for the S&P 500 are down 7.3%. To see a decline of 7.3%, I still think we've got to ratchet those estimates much further down based on where this economy has stopped.

But I like to draw the distinction. When we think about growth and what a growth index is, it's largely based on the composition of sector. So growth tends to favor and have higher weight for information technology, health care, consumer discretionary. But it's largely an IT differential.

And when you look at value indices, it tends to be more financials and energy. And the financials certainly have some headwinds. Outside of the mega-cap banks in the S&P 500-- your large cap banks that have trading, investment banking, ancillary credit card revenues that can come with it-- it's really hard to grow your earnings or really move the needle when you don't have net interest margin. Where interest rates are right now, it's going to be incredibly tough, as you go down the market cap spectrum, for regional banks and a lot of insurance companies.

But when you think about growth, we were trading at fairly lofty valuations for a huge part of last year, and the market really didn't seem to mind, because that's where demand was going. So I think about the tailwinds for growth, and information technology specifically, I think about secular long-term growth tailwinds. The conversion of companies using cloud-based software-- that certainly is probably even being accelerated by this working-from-home trend. The need for more network capacity, broadband capacity, all of that is going to favor into the tailwinds to a number of IT companies.

So again, you've got to pick and choose your places. And that's why I think active management, in this sort of environment, provides some really good opportunities. But overall, I think growth-- the secular tailwinds behind it are likely going to continue going forward.

BRIAN SOZZI: All right. Well, I appreciate the pitch there on this Monday morning. Matthew Orton, portfolio strategist at Carillon Tower Advisers. Thanks so much.

MATT ORTON: Great. Thank you.