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There are a 'number of risks on the horizon' for investors amid economic pressures: Strategist

State Street Global Advisors Chief Investment Strategist Michael Arone joins Yahoo Finance’s On The Move to weigh in on why the markets may not reflect the economy.

Video Transcript

ADAM SHAPIRO: I want to turn our attention to these markets. And as we pointed out coming into the hour, the Dow is up more than 100 points. How much more can this go? Michael Arone is the Chief Investment Strategist at State Street Global Advisors.

And we appreciate your being here, Michael. Got to ask you-- you point out that the risk is that some of the temporary impacts from the pandemic become more permanent. For people who are buying into this market right now, help us see those risks and why we might want to be cautious.

MICHAEL ARONE: Well, I think that from my perspective, this incredible market rally that we've had in the face of an economic recession while corporate profits are plummeting and job losses are mounting is a head-scratcher for many. And I think investors are looking beyond the current environment, and they're looking at the fact that policymakers have put forward a firm commitment to do what it takes. They're looking at some economic data that seems to be coming off of the bottom, and they're expecting a recovery.

I think the real risk to this, Adam, is that if this isn't temporary-- if the unemployment figure remains elevated, if consumers don't come out and spend aggressively-- I do think that poses a risk to this rally. But it's going to take a little while to determine if that's going to happen or not.

JULIE HYMAN: Michael, it's Julie here. Good to hear you. You said in your note to us that essentially, what is being priced into the market now is a near-perfect resolution of this pandemic. And you of course not only have the pandemic. You have rising tensions between the US and China. And now you have all this unrest going on in the United States. So do you think that investors really need to be positioned defensively right now, given those various factors?

MICHAEL ARONE: I don't think investors need to be positioned defensively. I think the way that we're thinking about the current environment is kind of balancing off those risk and return tradeoffs. So for example, one of the things we think is as an opportunity are businesses who can adapt to the current environment through innovative approaches and really thrive.

So if you think about it, things like remote access, cloud storage, the internet-based solutions were all trends prior to the pandemic and the current tension that's that exists between the US and China and even here with the social unrest. And I think many of those same trends remain in place. So for example, we continue to like technology companies that are on the forefront with good organic growth rates and with software solutions for the current environment. And so growth within software continues to be an area that we think is attractive in this environment.

BRIAN CHEUNG: Hey, Michael. It's Brian Cheung here. So amid all the political risk here in the United States too, a lot of investors might be saying, maybe I should take my money outside the borders of the US. Do you think that's a good play? And if so, where do you go?

MICHAEL ARONE: So it's interesting in that if you do adhere to this idea that once we're past the pandemic you will begin to see a recovery in the economy-- and numbers even outside the US suggest that this is the case, whether it's China or even in segments of Europe. So from a relative value perspective, Brian, some of these places remain attractive, if we can get that recovery.

So for example, China was the most impacted early on and seems to be at the forefront of recovery, although it has been in fits and starts. And if you do anticipate manufacturing to continue to pick up, what's missing, the key ingredient is that demand. So if we do start to see global demand pick up, China provides an interesting opportunity, as does Europe in some way in that places like Germany, for example, if that manufacturing kind of improvement that we're starting to see is met by some element of demand during recovery, we think there is some relative value opportunities in Europe and in China.

ADAM SHAPIRO: But if an investor listening to our discussion right now is also factoring in what the CBO is predicting, that it could take as many as 10 years to get back to the kind of GDP growth we saw going into the pandemic, you point out that there is disinflation. There is a deflationary pressure on asset prices across the board. Wouldn't it be risky right now to be buying in?

MICHAEL ARONE: Well, it could potentially. There are a lot of risks on the horizon, as was mentioned before, whether it's rising tensions between the US and China, whether it's social unrest at home. The political landscape is heating up. The segment before just had the likely back and forth between President Trump and Biden that's likely forthcoming here. So there are a number of risks on the horizon.

But I think the key here is if you believe that on the other side of the pandemic we will return to some element of economic growth with very low rates, benign inflation-- and you have incredible support, both fiscal and monetary policy-- that historically has been a very strong backdrop for holders of financial assets. So almost regardless of what's gone on elsewhere, that kind of mixture tends to be positive for stocks.

And so I do think there's a lot of big ifs in that scenario. But it seems as though the market is expecting the economy and corporate profits to rebound later this year. And I would say I agree with that as well.

ADAM SHAPIRO: And that's a good point for us to say thank you. Michael Arone is State Street Global Advisors Chief Investment Strategist. Good to have you here. Stay healthy, sir.

MICHAEL ARONE: Thank you.

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