Quincy Krosby, Prudential Financial Chief Market Strategist, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss what's moving the markets following Wednesday’s opening bell.

Video Transcript

BRIAN SOZZI: All right, Quincy Krosby, chief market strategist at Prudential Financial joins us now. Quincy, always good to see you here. So we're digging through these bank earnings results, and I'm not sure about you, but, at least for me, there are warnings here, I think, from a lot of banking executives on the pace of the economic recovery. How concerned are you about these warnings right now?

QUINCY KROSBY: Well, we-- you know, we have to take the-- take it in stride. I mean, we just had a report from the Federal Reserve, the International Monetary Fund meeting is on. And, you know, I think the market is responding to what Vice Chair Clarida just said regarding inflation.

And the fact that the Fed is, you know, going to take into account the pace of the recovery, but that they don't expect-- they don't expect a low unemployment rate to force the Fed to start raising rates. This is a big change for the Fed. But overall, what the CEOs are saying and the CFOs were saying from the banks matches what we're hearing from none other than the chair of the Federal Reserve, that unless we have stimulus, unless a package is delivered, it is going to slow the pace of the recovery.

But one thing that is clear overall is the response to COVID. The cases are increasing. We're seeing it here in the US, we're seeing it over in Europe. And the question, really, is for the market is the effect it has on the economic recovery. That's what the market is most focused on. Is this going to jeopardize the economic recovery?

And take a look yesterday what happened with the market, right? We come in yesterday, and the minute we started to see problems with a potential treatment, well, then we had another Johnson & Johnson with a pause. The market is completely focused on a vaccine or a therapeutic treatment that allows the recovery to unfold at a faster clip.

And that's the issue for the market. The market, you know, basically has to accept this, and I think this is why we're seeing a migration into the tech names again, even though we're in overbought conditions right now. The fact is that is what the market is focused on. Show us where this growth.

ALEXIS CHRISTOFOROUS: OK, so you say the markets overbought. I think a lot of analysts and strategists would agree with you. But you also believe we're in for another substantial pullback. What would the catalyst be for that, Quincy? And when do you see that happening?

QUINCY KROSBY: Well, I think, you know, we're getting to the election. We're probably going to have another pullback. Yesterday, it was actually healthy, even though, ironically, it had to do with health concerns, in that the market responded negatively to these reports of a Eli Lilly, Johnson & Johnson. That was healthy.

The mark-- and you saw what happened. The market moved over to the stay-at-home stocks. What we probably need is to get some more clarity on whether or not the Democrats are going to have a clean sweep. How deep is it going to be? Is there going to be a stimulus package delivered by a Biden administration early on? How hefty will that be?

And the question is whether or not we'll have a contested election. You know, we started to see an unwinding in the options market, but now there are questions as to whether or not there is a closer vote in terms of the electoral college. And that would lead to concerns that we will have a contested election, which, you know, it provides uncertainty, we'll get through it. But it may give the market an excuse to pull back.

BRIAN SOZZI: Quincy, so many folks in the market have now piled into the trade that there will be a blue wave come the presidential election, and that is good for stocks. But let's take the other side of that trade. What if President Trump is re-elected? What happens to the market?

QUINCY KROSBY: Yeah, the market would enjoy that. The only difference is the question will be whether or not, you know, how much more can he deliver on the economy? The fact of the matter is the incumbent typically wins when the economy is doing well, and the stock market is doing well. You'd have to argue that the stock market, despite some of these bouts of selling, has done very well, even since March 23.

The Fed has helped, the government has helped, and the natural course of opening-- reopening has helped. So the question will be, how much can he-- more can he deliver? But one thing we do know is we will not see tax hikes on corporations, and we will not see tax hikes on individuals. And that is helpful because it allows for a stronger bottom line for companies.

ALEXIS CHRISTOFOROUS: Quincy, what's your take on opportunities outside the US equity market right now? And where do bonds play a part in people's portfolios? We saw this morning Goldman Sachs saying that particularly bond trading helped profits nearly double last quarter.

QUINCY KROSBY: Well, yeah, this is the big tug of war, isn't it? Number one, what about inflation? The PPI just came in, producer price index, higher than expectations. The consumer price index came in actually below. But the first question is, I took a look at some of the events going on in China, this is actually very good news for emerging markets.

Emerging markets need a weaker US dollar, which is helpful. But it needs a China that has turned the corner. China seems to be doing everything in its power to push the economy, fuel the economy forward. And this will be very good for emerging markets. You've already seen it start. But the fact of the matter is, a stronger China is good for emerging markets, and a weaker US dollar helps underpin emerging markets.

BRIAN SOZZI: All right, we'll leave it there. Quincy Krosby, Prudential Financial chief market strategist, happy trading, and we'll talk to you soon.

QUINCY KROSBY: Thank you.