U.S. markets closed
  • S&P 500

    -27.29 (-0.72%)
  • Dow 30

    -177.26 (-0.57%)
  • Nasdaq

    -114.14 (-0.87%)
  • Russell 2000

    -32.15 (-1.49%)
  • Crude Oil

    -1.53 (-2.86%)
  • Gold

    -23.70 (-1.28%)
  • Silver

    -0.97 (-3.77%)

    -0.0071 (-0.58%)
  • 10-Yr Bond

    -0.0320 (-2.83%)

    -0.0108 (-0.79%)

    -0.0160 (-0.02%)

    +96.50 (+0.28%)
  • CMC Crypto 200

    -33.21 (-4.52%)
  • FTSE 100

    -66.25 (-0.97%)
  • Nikkei 225

    -179.08 (-0.62%)

Now is the time to expect returns that are a little slower: Economist

Frances Donald, Manulife Investment Management Global Chief Economist & Global Head of Macroeconomic Strategy joins the Yahoo Finance panel to discuss the latest market action.

Video Transcript

AKIKO FUJITA: Let's bring in our guest Frances Donald, Manulife Investment management Global Chief Economist and Global Head of Macroeconomic Strategy. And, Frances, you heard Emily there talking about the concerns around this deal. Certainly, regardless of the price here, there seems to be a doubling down on this work from home trade, especially given that we've seen a fundamental shift here. How are you looking at the moves overall as we look to the vaccine coming to market now? But this notion here that even if we do get the vaccine, things aren't just going to dramatically shift back to where we were pre-pandemic.

FRANCES DONALD: That is the money question. How do we differentiate between the tactical trade, what's moving markets, Powell talking to Congress, moves in rates, and what the long term economy really looks like? And our view has been, don't try to make bets on what consumer behavior is going to do. I know that I want to go back to the office desperately, but I don't know what everyone else wants to do.

What I do know is that interest rates are going to stay extraordinarily low for a long time. What I do know is that governments have spent huge amounts of money, and there is no immediate possibility of near-term austerity. And what I know is that the de-globalization trend is one that's going to continue. Just news on the wire today, just right now I'm sitting here, that Biden is not going to take off those phase one tariffs applied to China. So these are the types of themes that I'm trying to stay focused on throughout all the noise and the volatility-- not making bets on what consumer preferences are going to do, but. What fundamentally changed underneath the surface in this past year. And those are the three things that I think are here to stay.

ZACK GUZMAN: When we think about kind of the difference between the underlying economy and the stock market right now, I mean, it's kind of reminiscent of what we saw earlier this year, because we do have the vaccine news. Everyone knows it's coming. It seems to be way beyond where the efficacy threshold was in terms of the FDA's looking at it. Now, I'd be curious to get your take on what the jobs report might indicate here since we got the update from ADP showing 307,000 for the month of November. That was a decline.

Of course, we've seen a weakening recovery, but what does it mean to you if investors are already looking ahead to this return to normal? You had Jefferies upping their S&P 500 price target for next year as well, indicating a 15% rally ahead once we get there. So talk to me about why investors might already be looking past this short term chop, and what do you see as the right way to play it?

FRANCES DONALD: This is the way to frame it. I mean, I'm nervous about the November non-farm payrolls number. I'm nervous because a lot of the high frequency data tells us that the job momentum slowed pretty substantially, that the economy's really slowed down pretty aggressively in November. And my view is that we are going to be in this very challenging soft patch for a lot of the economic data between that November data all the way to January and February.

But guess what? It might not be tradable, because we're even hearing from Powell today he's got his eye on the end of the tunnel. He may not react to a downward drift in jobs. We know that even if fiscal wants to move forward with additional spending, there's going to be a lag. And this equity market cares about 2021 and the other side.

So my worry is that we can have this very sort of negative and concerned and bearish outlook for the economy, but it isn't actually going to translate into something that's meaningfully market moving right now. So disaggregating between your economic outlook and the market outlook is becoming extremely important, and I think is going to be even more challenging in the next couple of months as we see that data start to surprise to the downside and wonder why isn't the market responding to this. It was hard back earlier this year, it's going to be even harder in the next couple of months.

AKIKO FUJITA: So with that said, how do you think investors position themselves on that right now? I mean, it sounds like you're saying that there is a risk that's being overlooked in a significant way, largely because what we're seeing right now as it relates to the coronavirus is no question going to lead to a hit for some of these businesses. How do you think investors can get ahead of the news here that you're talking about? Where should they be positioned?

FRANCES DONALD: Well, I've come in every morning the past couple of weeks really nervous, but still long. There have been some nice trends in this market that are really difficult to move against. We still have extraordinarily low interest rates. We have a vaccine coming back online. And the medium term outlook is very, very positive. So it's hard to short this market.

And yet, as you're looking in [INAUDIBLE] for fundamentals, you're seeing sentiment pretty extended, you're seeing a lot of positioning that's pretty extended underneath. So now might be the time to expect returns that are a little bit slower. The easy money has been made up until this moment, and we might want to get a little bit more sector-focused as we look forward to the next one to three months as we start to dissect that.

I'm a big believer in finding under-owned asset classes that give you additional yield. That might be places like EM debt, infrastructure, even agriculture are places that are going to play well in this reflation trade that maybe haven't come into the traditional psyche just yet. My view is this-- there's going to be a ton of noise in the next couple of months.

We've got Georgia runoffs, expiration of CARES some, bad data ahead. Focus on the long term trends, find places to build your portfolio that are going to provide you with that yield, and try to sift through that noise. Unless you're really a day trader, now's not the time to try to play for those 2% to 3% moves in the S&P. It is really, really hard.

ZACK GUZMAN: Yeah, I mean, 2% to 3% moves in the S&P-- we were talking yesterday about kind of the note from FundStrat highlighting the fact that once you're up 10% to 15% year to date on the S&P through November, you'd expect about a 3.3% return for the month of December. That's not nothing to scoff at here. But you mentioned the highlighted-- the opportunities there in agriculture along those lines. I mean, where are some of those on a specific basis?

I think a lot of people might have been caught off guard by this move in energy specifically here, with that up about 30% after the election. Specifically in agriculture, though, what kind of opportunities there do you see?

FRANCES DONALD: Well, look, this underlying market is telling you. It's saying that there are buckets of price pressures that are rising-- price level increases. The agricultural space, the food price space has been really driven by this k-shaped recovery that has driven manufacturing higher. It's also been disrupted by supply chains that are likely to remain fairly disrupted over the next year.

So watch this market. What did gold tell us? Gold was one of the first places that we saw there was going to be a move higher in real rates. Copper is falling off, because there is this very aggressive recovery happening out of Asia. Underlying the surfaces, we do have asset classes that are telling us a story of a very divided economy that's happening globally and places where you need to be focused. And to me, it is in some very sinister price level increases that are happening in that agriculture food space and in this massive divergence between Asia and the rest of the world.

AKIKO FUJITA: Frances Donald, Manulife Investment Management Global Chief Economist and Global Head of Macroeconomic Strategy, it's good to talk to you today.

FRANCES DONALD: Thanks for having me.