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‘The absolute level doesn’t matter as much as the change of direction or rate of change’: strategist

Jack Manley, JPM Asset Management Global Market Strategist, joins The Final Round to discuss his thoughts on what’s driving the markets and where investors should be investing.

Video Transcript

MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Myles Udland with you in New York. We're joined now by Jack Manly. He's a global market strategist over at JPMorgan Asset Management.

And Jack, we've talked to you a few times through this crisis period. I think last time we spoke, we said would second quarter earnings trip up the market? That hasn't come to fruition.

We have a jobs report tomorrow. I would ask if that's going to trip up the market, but at this point, it seems that everything investors are focusing on is always the more positive spin on any piece of incremental news. Is that kind of how you see the environment?

JACK MANLEY: I think that's part of what's going on, sure. I think the other part is that we have just collectively set our expectations so extraordinarily low for the second quarter, whether it is from an earnings perspective, from an economic data perspective-- that includes even some of those employment numbers-- that the numbers that are coming out are actually beating those. They're surprising to the upside.

And what I think we've learned over the last few months is at the absolute level of these metrics, whether it's markets or macro related, they don't matter as much as the direction of travel and the rate of change. And things have been improving. Expectations have been beaten. And that, I think, is what's really helping to drive markets higher, at least through right now.

DAN ROBERTS: Jack, Dan Roberts here. Let's stick with that about the expectations have gotten so low. That's so interesting, because when we apply that to earnings, I mean, I think just yesterday or two days ago with Disney, where a loss was expected, and then non-GAAP, Disney came out with a surprise profit, $0.08 of profit. Now, there was some wizardry there, deferred payments to leagues.

But just one example of a lot of what we're seeing-- companies being able to beat expectations because the expectations were so low. The question now is for how long will that be the case? I mean, how much longer will the expectations be low, especially because as we're seeing some of these beats, some of these companies, A, are bouncing back quickly, and then some really weren't hit so hard, because, of course, I'm talking about tech giants like the FAANG names. They've soared.

JACK MANLEY: Since March, maybe April, I think everyone's been talking about the third quarter as the start of that recovery period. And so you're right, Dan. I mean, this is not really the time when we're going to be setting expectations extraordinarily low. I think now we are looking for some genuinely good news, rather than news that isn't just awful.

And I think that makes it a more challenging environment for markets. I mean, I look at where we stand today and how far we've come. I think it is easy enough, maybe with a little bit of magic, to justify being reasonably flat for the year on the S&P 500, especially when you look at the composition of the returns recently.

But what I think is a lot harder to justify is moving forward, what could possibly make the market close higher at the end of this year than where we started, all things considered, everything that's going on right now? I think that hurdle is really being encapsulated in the third quarter and beyond. And I think we're going to start to see, perhaps, a slowdown or an easing in sentiment as people realize that we're really in this rut for longer than I think a lot of folks were anticipating.

MYLES UDLAND: Yeah, Jack, we look at what happened in yesterday's trading session, and we've seen it a couple of times in the last few months, where you get these-- especially financials, but materials and industrials along with them-- these huge, cyclical trades. And everyone says great, we're betting on the economy going forward. It sounds like you're a little more cautious on that.

What do you think the risk is here for folks who want to make this wholesale don't-worry-about-growth, focus-on-value kind of bet that we've seen so many investors want to tee up for a long time, but it's just been the wrong trade for a long time?

JACK MANLEY: Yeah, the cyclical story, the value story, they sort of operate hand-in-hand. And there are, I think, a couple of problems with really embracing those wholesale. I mean, on one hand-- and I think this is a big point-- is that that means that you have to discredit the continued strength, the continued viability of the technology sector and some of the tech-adjacent sectors. So think e-commerce within consumer discretionary, think some of the interactive media names within communication services.

If you embrace that wholesale rotation into cyclicality, that wholesale rotation into value, you're going to be missing a lot of those opportunities that we think are longer-term and more secular. And then when you look at the composition of some of these value names, the composition of some of these cyclical names, sure, I think you can, perhaps, make the case for something like financials really having a one-time hit this year thanks to cash flow problems, but with fortress balance sheets kind of coming out reasonably unscathed on the other side.

But things like industrials, things like materials, things like energy-- I think there are going to be long-term structural headwinds for these sectors that really are a result, not just of the virus that we're dealing with right now, but of the hangover effects that are going to be associated with it, even once we get the vaccine. How comfortable are people going to be sitting in a middle seat on an airplane, even once they got that COVID vaccine? I don't think they're going to be very comfortable. I think that's an issue that we're going to have to deal with moving forward.

MYLES UDLAND: All right, we'll do the election next time, Jack. I know we'll talk to you before we get to November 3. Jack Manley is a global market strategist over at JPMorgan Asset Management. Jack, appreciate the time.