Doug Flynn, Chief Investment Officer at Flynn Zito Capital Management, joined Closing Bell to recap Tuesday’s trading action as investors hope for a divided government. 

Closing Bell

Stocks Close Higher for Second Straight Day as Americans Head to the Polls

But let's turn back now to the major indexes. So joining me is Doug Flynn co founder of Flynn Zito Capital Management, which specializes in investment management and financial planning. Doug. It's good to see you, thanks for coming on the show. Good to see you Kristen so busy day across America with these midterm elections, ongoing earnings reports still coming in including this key report from Disney ahead of the inflation read that will get on thursday, but back to back days of games in the stock market. What's your current polls on the state of things in the stock market? Well, you've got a couple. I mean there's positives and negatives as usual. But the positives now are you have the november to may seasonality, which is the best time of the year, the best six months of the year. So you have that as a backdrop, you have the prospects for divided government which no matter who's in power when the other side is not. Um, when the other side is also in power, you have that mix. It tends to bode well for for the markets and you have tech really oversold. It's been way overdone. That doesn't mean it can't suffer some more. But there there's some oversold nature to that. So that's, that's on the positives and the negatives. Of course you have inflation, the prospects of that staying higher for longer. You have the volatility and you have the fears of recession as the backdrop. So, so that's what's going on and the balance of that is happening as we speak. So I guess maybe a relief rally to some extent. Doug is what we would consider these past few days of this week. Generally speaking, the third quarter results, they've been coming in a bit better than expected. Not as many companies beating per usual, but still actually showing growth here in the third quarter. What is the overall health of corporate America that we can gauge from these reports in the stock market? Yeah, it's interesting. The current numbers are almost not as important as the future guidance that each one is going to give you because the likelihood of us going into recession next year is getting higher and higher because the Fed is probably gonna have to keep rates higher for longer than they want to uh to try to keep pushing down inflation. And so you really have to look at if we go into a recession next year, when do we, how deep is it? And what kind of layoffs might there be? Because those are coming and you start to see a little bit of that with tech, but right now it's being offset by gains in the hospitality and travel in other areas which are booming with from an employment standpoint while other parts are laying off. So we're not seeing it across the board. So I'm really looking at almost not even what we're doing now. Um but what's the future guidance from each of these companies? How do they see the future? That's really the key on what, where you can get your, your cue from what to do from here. Okay, so for americans watching, they might have money in the stock market, but they also dug to your point might be concerned that they could lose their job as the price of everyday items across the board continue to rise quite dramatically at the fastest pace that we've seen in nearly four decades, what kind of industries sectors could see the most layoffs and what should americans know? And thinking about how to manage their own balance sheet, their own budget here into the new year. Well, that's a great question because right now the Fed is really when they're pushing interest rates higher, they're really focusing in on the 20% of GDP, which they can control and that's the goods sector. So if you're in the area of delivering goods or manufacturing goods in that area, that's the area that's going to come under pressure. They really don't have as much control in the services area, They really don't uh you know, have a lot of sway in terms of that. So you're layoffs aren't really gonna come from those areas as people in the beginning right now look, a lot people decided they didn't travel for a long time, they're gonna travel no matter what. So they're making up for some lost time now, eventually as people have less money, they spend whatever money they have and maybe they lose their jobs and have less, those things will go by the wayside. And so you're really, it's, it's your kind of navigating the tale of two different things at the moment And what you have going on right now might look very differently in about 6 to 12 months. And so that's, that's really the problem is what kind of financial cushion do you still have left over from when things were pretty good? Are you still in good shape or do you have a little bit less? Because you kept spending like thinking that right now there might be three jobs for every one person. You know what if we go to three people for everyone job, how are you going to fare? Okay, let's talk about the midterms because we discussed it a bit off the top, but obviously it's keenly in focus for Americans and investors today, we've seen since Biden's been president for just under two years now, some major policies, right, get pushed through worth trillions of dollars, even though they've said the deficit has been reduced over time, at least in these past 12 months or so, what does gridlock in Washington truly mean for the stock market? So if you take a look at all the previous midterm elections and that's really what you have right now, you have a midterm election. It's it's really quite interesting. Um If you look at six months later, on average, the market's up about 14% a year later off the low and the low might have been june, we don't know that, we'll know that the further we go. But if the low was june, the typical one year uh return on the, on the market from that low whenever it's achieved is over 30%. Now when you have divided government, when you have one party in power and either one or both houses, um the opposite, those numbers are higher. When they retain all the power, those numbers are lower. But those are the averages. And so right now it sets us up pretty good for an equity market and the stock market run. And that's when I get fearful if we do get this nice rally here because all of the factors we're talking about, then we're look looking at a pending recession when equities may not do as well. And that's when you really want to give some serious consideration to fixed income to bonds. And for the younger people bonds, bonds is a four letter word to young people. They don't even know what it is and they haven't invested in it because it's not, it's not exciting. But you want to look at that after the next run. Maybe taking some profits off the table there because that's, that's the way we see it right now, what's the best way doug that you would advise investors to add some exposure in the bond market. Yes. So right now, if there's two types, right, if you have your retirement accounts, you're gonna do more traditional fixed income and, and typical corporate and government bonds, those yields are quite high compared to where they were before and their pricing is way down. You're buying it cheap because as rates keep going up, those prices are coming down. That's how that works in taxable accounts, more liquid accounts. There is an unbelievable opportunity in tax free municipal bonds. And quite honestly, the states, which are always a concern whether or not they're going to be able to pay back are in probably some of the best financial shape they've been in decades because they still have all that covid money and a lot of the other money that was pushed down from the government. So there's a lot less fear of those not being able to pay. And so when you look with your more liquid and taxable dollars, you're looking at tax free municipal bonds where right now you can get a rated or double A or triple A with a five plus percent yield and their trading below their face value. That when you go into recession and bonds actually do what they're supposed to do, that could be quite a good year in the bond market the next couple years. So look to that if you don't have any, if you haven't, you know, your next dollar does your next dollar chase something that did well three years ago, was it to chase something that might do well in the upcoming year and that's the way you have to think when you're investing for the next couple of years. My final question to you is again, getting back to this political theme as it is the day of midterm elections with voters heading to the polls. One other major political event that could be on the horizon is an official 2020 for presidential run announcement by former President Trump coming next week. What impact might that have on the stock market? Well, and that's an interesting point. Now again, we're gonna have, we're gonna have the Republicans win in 24 and have both houses. Then you're back to non divided government. I much prefer divided government regardless of of how it shakes out. But I think what you have to look at is that this government is trying to sort of stamp down growth to to um you quell inflation and previously they were really sort of accelerating growth to try to grow us out of it. Two different philosophies we can argue whether one is better than the other but you may resume more of a pro growth type of a policy situation. Neither. Honestly, in all the years I'm doing this, I realized a long time ago, no one cares about the deficit. I don't care what they say. They don't, it's just which party in power wants to spend on what they want to spend on. So really what it comes down to is keeping the reins on that with divided government, but maybe get a little bit of a different type of a growth pa policy. You just have to know how to invest in trade through that in the current situation or in that situation slightly different. But we can all make money in those situations no matter what they are. All right. Doug Flynn, co founder of Flynn Zito Capital Management. Doug thank you so much for coming on the show.