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The other black swan is a potential for a second wave here in the U.S.: Strategist

Jeff Schulze, ClearBridge Investment Strategist joins the On the Move panel to discuss earnings season and the impact of COVID on the markets.

Video Transcript

JULIE HYMAN: Jeff Schulze is joining us now. He's ClearBridge investment strategist. He's joining us from New Jersey. So Jeff, as we hear Devon talk about the banks and provisioning and as we look ahead to the rest of the earnings season, what do you think we're going to continue to see from-- from companies, if-- if, indee-- I mean, the results so far have been mixed, I think we could say.

JEFF SCHULZE: Yeah. Thanks for having me on. And if you look forward to this earnings season, the bogey only went up by about 4% overall. So I do think it's a relatively low bar for beating, but I don't think we're going to beat at the 84% clip that we saw in Q2. But the one difference between this earnings season and last earnings season is that investors were underweight going into last earnings season. And obviously, that propelled the market substantially higher.

This time around, I think, you know, markets are a little bit more fully valued. And in order to really see a move higher in the equity prices of the underlying stock that's putting those earnings out, I think you need to see not only a strong beat, but also they need to provide forward guidance that's positive, as well. But nonetheless, I do think we-- it's a low bar that we're going to be able to beat this quarter.

ADAM SHAPIRO: Jeff, I know that you disagree with economists, some of whom might be calling for a double-dip recession. You think that what we've witnessed is just a slight pullback. But are you concerned in any way about a potential rising tide of bankruptcies and the effect that could have? And the only way I can-- you know, my concern is that the woman who cuts my hair is going to renegotiate the chair she rents with the salon, which needs to pay the rent. This is going to escalate up. And we haven't seen that happen yet. Or have we?

JEFF SCHULZE: No. You're just starting to see it happen. And it's most evident probably in the initial jobless claims numbers that we're getting. The last print that we had was 840,000. Now that's dramatically lower than the peak that you saw during the crisis of 6.9 million job losses. But pre-COVID, 840,000 weekly jobless claims is by far and away the record, surpassing the-- what we saw in 1982 at 695,000. So there certainly is weakness on Main Street.

I do think as inve-- as consumers don't re-engage with the economy and face-to-face types of interactions, I think you are going to continue to see rising bankruptcies. But I don't think that it's going to cause the US economy to lose steam. Because if you look at a number of different measures, the economy is still going strong at this point. Retail sales from August was positive 0.6%. And this is an important data point, because the federal unemployment benefits of $600 per week expired on August 1.

But you did see people continuing to spend. If you look at the credit card data here in September, that looks to be strong, as well. So I think, yes, you're going to see rising bankruptcies until we get a vaccine. But if we do get another stimulus package sometime after the elections, I'm really looking for money to be earmarked with the Paycheck Protection Program for grants, not loans, to a lot of these small businesses that are being most affected.

MELODY HAHM: Jeff, overall, your note reads extremely optimistic, I would classify it as. And even with this polarizing political environment, you essentially say that the market will weather whatever storm may come. What is one potential catalyst related to the election or perhaps the political landscape that you feel as though perhaps the markets have not priced in or are perhaps not prepared for?

JEFF SCHULZE: Well, if you look at the price action over the last couple of weeks, I think the markets are starting to price in a Democratic sweep. You're seeing higher inflation break-evens. You're seeing higher treasury yields. You're seeing small outperform large. And until just recently, it was value outperforming growth. So I think investors are starting to sniff that out. But one scenario that I think would take investors by surprise is the potential of a Biden victory with a Republican Senate.

In that type of scenario, even though I do think stimulus would be forthcoming, there's a pretty wide big bid ask between what the Republicans want as a package from a fiscal perspective and also what Joe Biden would want for a package. So the kind of the Black swan, if you will, that could disrupt financial markets would be no stimulus after the elections. But I think from a probability standpoint, that's probably less than t-- 35%.

RICK NEWMAN: Hey, Jeff. Rick Newman here. Putting politics aside, what could go wrong? If you were to red team your own analysis and try to poke holes in it, what are some other possible black swans?

JEFF SCHULZE: Yeah. The other black swan that keeps me up at night, outside of my newly born three-month-old, is the potential for a second wave here in the US. Now the wave that we saw in summer was much different than the wave that we saw in March in the sense that the mortality rates were relatively low because of better treatment protocols. It affected the younger population much more. And you protected the older population in nursing homes. And also hospital systems aren't overbear-- overburdened right now.

But if you look in the southern hemisphere, there are three different countries that saw not only rising cases, but a rise in the mortality rates, which is Argentina, South Africa, and then also Australia. So my concern is that when we have COVID-19 outbreaks here in the US, maybe the cold weather does something from a mortality rate perspective that we just didn't see over the summer. Again, I really do think it's idiosyncratic factors of those three countries why you didn't see an increase of the mortality rates. But that could really, you know, tear apart the bull case, if you will, on the economy continuing to-- to move forward.

JULIE HYMAN: Jeff, thank you. Congrats, by the way, on the birth of your son. Jeff Schulze is ClearBridge investment strategist. Good to see you.

JEFF SCHULZE: Good to see you.