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Markets are pricing in 'a recovery' not 'the recovery': Strategist

Over the past two months, more than 36 million Americans have filed unemployment insurance claims. Ben Mandel, J.P. Morgan Asset Management Multi-Asset Global Strategist joins Yahoo Finance’s On The Move to discuss the latest jobless claims.

Video Transcript

- Ben Mandel, he is JP Morgan Asset Management, multi-asset global strategist. Ben, if you can hit star 6 on your phone, then we should be able to hear you. Thank you for joining us. So there has been this view that seems to have been building that the worst of it is past us, that we will start to see sort of diminishing effects of the coronavirus pandemic and the shutdowns. And the market perhaps has reflected that, although not in the last couple of days. What's your view on this front?

BEN MANDEL: Well, first of all, thank you very much for having me. Can you hear me all right?

- Yes, we can.

BEN MANDEL: Excellent. So to your point, I think there are two things that we're watching. One is the direction of the economy, in general. And the other is what's priced into markets at this time.

I think you could-- you can-- you can safely say that the economy hit a trough, or we are going through a right now. The jobless claims number hints at that effect in the sense that the second derivative on those numbers is positive. So it's getting less negative every week, but it joins a broader constellation of data that suggests that we probably troughed as an aggregate about two weeks ago.

Part of that we're seeing in upstream industries, like electricity production. Part of that is in the consumption data with some credit card spending measures show trough in mid-April. You have mortgage application data, which is up over the last four weeks.

And you know, thinking about just broad mobility things, you know, different measures that show that that's up as well. I think the difficult part is, obviously, forecasting the future and what's priced in. But even there I think a lot of bad news has already been priced. It's fair to say markets are pricing a recovery, not the recovery.

So I don't think it's overly aggressive in terms of what's priced in. A good example of that is the bottom-up consensus earnings estimates for S&P companies, which fell record pace. So at the beginning of April, those looked like 5% up for 2020. And those moved with alacrity to negative 15% for the year. And so I think a lot of that contour of a very difficult year for growth has already been incorporated and might not be necessarily a constraint on equities and other risk assets doing OK here.

ADAM SHAPIRO: Ben, you talk about hitting the trough, and then you point to some things that the market might be using to price out into the future. We have 36 million Americans who are unemployed. More than 50% of those people come from leisure, hospitality, travel. And those jobs are expected to come back in mass. So isn't the market way ahead of itself? I mean, what kind of true growth would be realistic?

BEN MANDEL: Well, our expectation is that you'll see a staggered growth recovery, because when the economy does start to reopen, and we're just at the incipient stages of that, you are going to see a lot of those service jobs materialize. And so far, as you know, those-- those many millions of services jobs are oftentimes flexible in nature. And so they're easy to lay off, but also easy to hire as things start again.

I don't think we're going to see a full recovery in the level of GDP for a couple of years now. But that doesn't preclude a very rapid pace of growth in the second half of this year. So if 40-- you know, if we're looking at 2-2 as a negative 40 on an annualized rate for real GDP growth, it would absolutely not be surprising to see a couple of positive trends in Q3 and Q4 as-- as you go from a very low level to something-- something less dire.

And so I think that's the important thing. The direction is important. I think market's already understanding the contour of-- of the level which is going to take a while to recover.

- Hey, Ben, I just want to ask about consumer confidence, because, you know, you have these people being laid off. They don't know when they're going to be getting their jobs back. I mean, you know, 36 some odd million folks don't have jobs. And a lot of people are questioning whether or not if they have jobs now they'll continue to have jobs going forward. So where does that leave consumer confidence going forward?

BEN MANDEL: You know, the consumer is a key part of the picture here, but it's important to think about the different elements of the consumer population. So you know, as you're saying, the people who are laid off and the people who have increased job insecurity are going to have much less propensity to spend in the future, but that's not everyone.

You know, there's still a broad swath of the population that's-- that's gainfully employed. And for that part of the population, you've actually seen a build up in savings that was actually forced savings. So this is different from a usual recession, where people who still have jobs are saving for precautionary reasons.

That's happening to some extent, but there's another segment here, which is building pent-up demand for, you know, I would have liked to go to a restaurant, you know, over the past four weeks, but I have not and resumption of demand. And that pent up demand, I think is a bit of an offset for both the precautionary savings and the direct hit to the unemployed that you're talking about here. And so I think-- you know, I think that's an important thing to keep in mind. When things resume, you're going to get a pop in growth.

- And, Ben, it's been interesting. We've been talking a lot about individual cities and counties kind of going rogue, even going against their state's orders, in some cases, but I think with these-- these initial jobless claims looking at which states actually are hardest hit and that's been an evolving picture. Of course, this past week thought large research came from Connecticut. When you think about state borders and how often they were very fluid, at least here, how do you anticipate that post-pandemic as things quote unquote, "revert back to normal," do you anticipate more business travel? Do you think the opportunities will still be there for, you know, cross-border transactions, or do you think that our country will become more isolationist, even among the 50 states?

BEN MANDEL: I think that's an excellent question. And it speaks to the importance of a more centralized response in terms of the policy itself. You know, you can you simply can't have either a closure of the borders or a very heterogeneous opening measures in an environment where people are moving around, which is something that characterizes a lot of commerce in this economy.

And so you know, the limiting cases, all suggests that we're going to have to head towards the slightly more uniform approach. And the risk, of course, is that-- and the risk of the outlook and everything is that there's a false [INAUDIBLE] here, because, you know, inherently cases are going to go up when-- when measures are relaxed. And if they're done so in an uneven way, and so we might be back to square one. Obviously, that's-- that's-- that's the risk here, but not part of our base case.

- So, Ben, just quick question to finish us out here. What's your strategy given all of this? I know you're somewhat neutral on the markets right now.

BEN MANDEL: Yeah, we've been neutral I'd say at the margin. We've been adding risk on weakness. And we've been doing so in a fairly diversified manner across both asset classes, so thinking about, you know, credit as being useful, because as an explicit or implicit backing from-- from policymakers and the Fed, but equities are obviously geared towards the good sections of the economy, which are going to pick up first before the services as we've been discussing-- so diversifying across credit and equity for those marginal risk dollars.

And I think an important principle here is that we're not-- we're not making huge bets in terms of which regions do the best here. So our standing kind of going into this and maybe at the beginning of the year before we had any inkling of it was like the US equity market over the rest of the world. And in particular, you know, underweights in Europe, underweight in Japan, and elsewhere and somewhat in emerging markets.

We're much more evenly divided now, because when the economy does get its footing, you might have very significant style rotations, either whether that's value catching up or deep cyclicals catching up, which makes big idiosyncratic bets on regions very difficult. And so we're balancing that out a little bit as well.

As we know, the predictability factor has been lowered these days. Ben Mandel, good to get some time with you. J.P. Morgan Asset Management, multi-asset global strategist. Thank up, Ben.