Anyone 'expecting a fast recovery is learning it will be a different story': Expert

Rob Lovelace, Capital Group Vice Chair and Portfolio Manager, joins Yahoo Finance's Alexis Christoforous and Brian Sozzi to discuss the markets' road to recover, Capital Group's short-term and long-term outlook and the potential need for additional support packages in the future.

Video Transcript

BRIAN SOZZI: Let's stay on the markets here with Rob Lovelace. He's Vice Chairman of Capital Group. Rob, good to speak with you this morning. Story of the day, no doubt about it, retail sales-- not a pretty report, the second consecutive really ugly report-- ugly report on retail sales. Clear the consumer, the US consumer continues to struggle.

What's your read on it? My read would be that the US recovery is going to take a lot longer than perhaps a lot of people in the market expect.

ROB LOVELACE: Well, hi, Brian, and hi, Alexis. Yeah, I mean, this is an unprecedented time. And it's hard to take any past examples and really learn from it. I think that anyone that was expecting a fast recovery is learning that it's going to be a different scenario here.

But as you know, aggregated numbers aren't really telling the whole story. There are some retailers that are doing quite well. Those that are connected to online are dealing with consumer requirements.

So it really is a mixed story. You have to get underneath the sector and other analysis to understand what's going on.

ALEXIS CHRISTOFOROUS: Rob, what do you make now of the Trump administration sort of ratcheting up the tensions with China? There might be more tariffs put in place. If you take that scenario on top of this pandemic and all of the economic lockdowns, what does that do to the stock market, which frankly has been pretty resilient in the face of all this negativity?

ROB LOVELACE: Yeah, a couple of things. Obviously the China story was one that began well before the pandemic, and the pandemic is only adding to concerns around it. And we're trying to figure out how to rewire the economy now in two ways. We were rewiring already to think about a world in which China and the US were less interconnected. And now we're rewiring to build around social distancing and other aspects.

So both of those are playing out at the same time. But I don't think it changes the long-term structural benefits that will come from that for certain sectors. But there are winners and losers here.

Overall, the markets have seemed resilient, but I think that makes sense because of three key factors. One is remember, the markets are forward looking. So while the retail sales number you mentioned, or the current economic view may be negative, the market's looking forward and anticipating what the recovery looks like.

The market is represented by bigger companies that tend to be the winners here. It's the smaller private companies and those that are not listed that are really paying the big price. And we've had big policy support pieces come in. So that's-- that support that's coming from central banks in the US and around the world is another aspect that I think is helping the markets stay strong.

BRIAN SOZZI: Rob, what's the-- what's the bigger near-term risk to the market-- fears of another trade war or this situation regarding COVID-19?

ROB LOVELACE: I think people conflate the issue with the health crisis with the economy and the markets. And so oftentimes we use those headlines to drive what's going to be happening in the market. And obviously there's a link. But I think over time, the health crisis will have a smaller and smaller impact on the economy.

Remember, the big economic issue here is because of policy decisions, not necessarily because of the pandemic. So with that policy decision to lock down and make sure people were safe, that's driving the economy. As we open that back up, the economy's recovering. And then the market's doing its own thing.

So I think the markets will respond more to second quarter and third quarter earnings, when people, as you heard in your report this morning, as people realize how severe this crisis was. But analysts, as we get in and look at fundamental research and think about where this is going, we'll pick out the winners and the losers coming on the other side.

INES FERRE: Rob, Ines Ferre here. What about fiscal stimulus, another fiscal stimulus for consumers? If the government gets another $1,200 into the hands of consumers, isn't there concern, though, that consumers will be saving more, and because of so much uncertainty?

ROB LOVELACE: Yeah, it's a great point. And I think there are two key things here. One is if you look at the numbers, it's pretty compelling that the stimulus we have in place, or the support really that we have in place right now, isn't enough to get us through the duration of that recovery phase that we're looking at. So there will need to be additional support packages, both at the individual and at the small business, and even some of the larger corporate levels. So that needs to happen just to make sure we get on to the other side.

Whenever you look at programs like this, a certain amount of that money has to go into savings. So savings rates were already rising because of quantitative easing a decade ago. So savings is already going to be a piece of that.

And in this environment, another support for the market is that with low interest rates, as people save, keeping your money in cash, which some people will do because they're worried, or in bonds is not giving the same return that it used to. So it tends to find its way back into the markets. And not just in the US, as again, we know from quantitative easing, a lot of that money finds its way into other markets, particularly emerging markets.

ALEXIS CHRISTOFOROUS: Rob, we're in the middle of earnings season. Company after company taking off the table their 2020 outlook. With such little clarity going forward, where are you telling clients to see opportunity right now? I mean, is it the value-- or is it the value names? Are you looking at more defensive plays?

ROB LOVELACE: You know, on the one hand, you're right, that the clarity is not there. And so we're all trying to figure out how to deal with the short-term parts of the market. But this crisis is very different than ones in the past. So this is my eighth major bear market. I've been in the business more than 30 years.

And I don't think I've been in a market where we had such clarity, say two years out, what the economy is likely to look like. So while the short-term numbers are uncertain, and as you say, companies are sort of pulling their guidance on 2021, it doesn't mean we don't have a sense that things are going to be pretty good out there in the future.

As a result of that, and the reason that this was a policy-induced down market, it is unusual that the leaders of the bull market are the same leaders here in the bear market, and are likely to continue to be leaders going-- coming out of it. So we haven't seen that traditional rotation into value that you would have had if the cycle had ended normally, either because the economy overheated or the stocks had gotten too far ahead of themselves. So because this is policy-induced, we're seeing a different pattern. And it's why so many growth funds and growth strategies have actually been more defensive here than you would have expected.

So a lot of what we're saying is stay the course. The strategies that we have had continue to work. But it has really changed in terms of specific companies you want to invest in. So long-term investing, focusing on the fundamentals, because even within a sector, within retail, you've got some companies-- Costco, Best Buy, others-- that are fine, and others that are really, really suffering.

So it doesn't really work to operate at the market or the sector level. You really need to go with active managers, and think about how to get down into the fundamentals of the company.

BRIAN SOZZI: All right, well said. Let's leave it there. Rob Lovelace, Vice Chairman of Capital Group. Thanks for taking some time this morning. Have a great weekend.

ROB LOVELACE: Nice to talk to you. Thank you.