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The challenge with the economy is not uncertainty, but the unknown: Stifel CIO

Michael O'Keeffe, Stifel CIO, joined Yahoo Finance to break down the week's market action including the new unemployment numbers and pending $2 trillion stimulus bill.

Video Transcript

MYLES UDLAND: Let's take a quick look at this market. A huge rally today on Wall Street yet again. We see the Dow and the S&P both up better than 6%. The NASDAQ the relative laggard here, but still up some 5.6%.

Third straight day that we've seen the Dow and the S&P higher. We'll see if it holds. But certainly, I think a lot of people are holding their breath right now, considering the choppy action we've seen over the last couple of weeks.

We're joined now on the phone by Michael O'Keeffe. He's the CIO over at Stifel.

So, Michael, thanks for calling in today. And I guess I just want to get a sense of where your head is at right now, trying to figure out what the economic impacts, what the market impacts are going to be, as we kind of work through, certainly, the most shocking phase of this crisis. But this is just the beginning of what I think will be probably a couple quarters-long process.

MICHAEL O'KEEFFE: Oh, no question about it. You know, interestingly, I think what makes this situation so incredibly challenging is not so much the uncertainty but the unknown.

So you know, as we hear about the coverage, even on your show, as to what's going on with the virus, there's so much unknown. And in our view, that really has contributed quite significantly to the volatility.

As it relates to the economy, I think, you know, a couple weeks ago, people were asking, well, will we have a recession? Will there be much of a drop?

But basically, we're going to see a real hit to the economy in the second quarter, self-imposed, basically, business shut down. It is what it is.

And as we look at it, we're looking through that to the second half and expect recovery then.

JEN ROGERS: So your base case, which you give a 60% probability to, has earnings growth turning negative, but as you just just noted, recovers at the end of the year. Your bull case, you're giving a 50% probability and bear case, 25%.

In all of your cases, though, what I found striking is that you note what's happening with the presidential election.

MICHAEL O'KEEFFE: Yes.

JEN ROGERS: Why is that such a big issue for you? It seems like a concern and something you're actually watching pretty closely are all of these cases.

MICHAEL O'KEEFFE: Well, to be candid, that's a little bit of a carryover to pre-virus framings. But you know, we think it's important in the sense that that's going to define the leadership for the country for the next, you know, cycle, for the next four years.

And so it's something we're watching. But I think you're making a very good point. At the end of the day, what's going to matter most is how we manage our way through this crisis, the idea of, hopefully, selectively putting people back to work and getting through it.

I framed it, in a lot of the work we're doing, as, we're all together working to build a bridge to the other side of this crisis.

ANDY SERWER: One thing that you didn't talk about too much, Michael, in here is liquidity and interest rates. And I'm curious, because I'm concerned about both those things. And you know, we are seeing negative rates coming to our shores for the first time, albeit on the short end of the curve.

But there's a lot of hinky stuff going on there, right?

MICHAEL O'KEEFFE: Oh, there's no question. And I would say that's sort of implicitly built into our bear case. I kind of think of it as, when we're in times of stress, we have to do everything we can to make sure the system's working.

And so obviously, the Fed has really stepped in and provided, you know, obviously, just dramatic cuts in rates, dramatic purchasing of treasuries and mortgage backed securities, and then really, as the lender of last resort, just the number of facilities to step in and really kind of bring more order and liquidity to different segments of the market.

And we think that's very important, and they're watching it carefully. And our bear case would be, hey, something gives a little bit, and we have to be ready for that.

- Michael, I want to go back to what we were talking about at the top of this hour, which is, you know, the moves in the market. I mean, the gains that we've seen over the last three days, how do you interpret that?

Is that optimism on the back of how effective the stimulus bill could be? Is it just positioning, even though the market is still expecting further downside? Just give me a sense of how you view it.

MICHAEL O'KEEFFE: Yeah, I think what we're seeing here is some relief coming from two perspectives. The first is knowing more clearly now that, in addition to the Fed, we do have-- you know, we're close to the goal line as it relates to the stimulus package, and that's going to help.

But I think a second thing is this sense of just continued sort of chipping away at both the science and the plan for the virus. So on one hand, the idea, for example, that the president signals the possibility of getting some people back to work by Easter, that's a big deal. That's calming people down, and then, you know, other things of that nature.

Now I will say, as a result of that, though, we should expect some downdrafts here. I don't think-- the unknown is still with us, and we'll see some volatility from here.

MYLES UDLAND: All right. Michael O'Keeffe is the CIO at Stifel. Really appreciate you calling in, and hopefully we'll talk to you soon.

MICHAEL O'KEEFFE: Thank you.