Epoch Investment Partners Managing Director, Portfolio Manager, and Senior Equity Research Analyst John Tobin joins Yahoo Finance Live to discuss the September jobs report, the outlook for the stock market, defensive stocks like Walmart, mega cap tech stocks, and slowing consumer demand.
- Well, let's continue our conversation on the jobs report and the market implications. Joining us now, John Tobin, Epoch Investment Partners Managing Director and Senior Equity Research Analyst. John, it's good to see you. So as we look at this good news is bad news kind of jobs day, I mean, is that just very simply how we should look at it here, that the Fed is going to be raising rates for the foreseeable future?
JOHN TOBIN: I think that's right. I think, you know, the market, it seems-- certainly, in the past few days, we've seen evidence of it-- it's looking for some reason, something to latch on to justify a rally. They're hoping for some evidence that the Fed's about to pivot.
The Reserve Bank of Australia's move early in the week ignited that hope. And even though the Fed speakers all week long pushed back on that pretty hard, I think the evidence today is, from the jobs report, the jobs market still remains strong, and the Fed still has work to do.
Now, as we've talked about it in our shop this morning on our morning call, there is clearly evidence of deceleration here. So if you're trying to find some good news here, the numbers are moving in the right direction. This is a 263k increase in jobs. But it shows continual deceleration over time.
Average hourly earnings are up, but again, evidence of deceleration. So I think the main takeaway is things are moving in the right direction, but the Fed still has a lot of work to do. Rates are still going higher.
- So John, the other takeaway here, just looking at the market action in the early going, is for investors to fade any rallies.
JOHN TOBIN: Well, I think that's-- I mean, that would be my personal view. With each attempt to rally into this, I've continued to make the case that I don't see what the foundation is for a strong rally, for a sustainable rally. I mean, if you think about what the drivers of equity market returns are, it's earnings growth, it's dividends, and it's multiple expansion. And if rates are going higher, that's a headwind for multiple expansion.
And if the economy is slowing down and maybe headed for a recession, that's a headwind for earnings growth. So the main underpinnings that would support a sustainable rally just aren't there. I think, to me, this is a market environment where investors need to keep some defensive exposure in their asset allocation.
- We've had a conversation, especially around the shift in the types of jobs, the employment situation really lays out kind of sector by sector here. But for some of those businesses that are looking at the amount of people that, post-pandemic, they've realized they actually need to run the business, it also becomes a question of where some of those employees will find employment elsewhere and in different sectors, as well as many people have upskilled over the course of the pandemic. I mean, does that drastically shape everything from wages all the way to what a solid baseline, sector by sector, actually looks like?
JOHN TOBIN: Well, you're absolutely right. There are some sector trends that we're noticing here, where there's strength, where there's weakness. There's strength in leisure and hospitality. There's weakness in other sectors. There's weakness in energy. There's weakness in things related to building and construction, of course.
And it's disruptive for the economy, as you point out, that people are looking for jobs and looking to move, perhaps, into new areas where there is job growth. So there's that friction, but that's not really something new or necessarily a post-pandemic phenomenon. I think that's historically been the case. There's always a friction as people move and try to direct themselves into the areas where there's greater employment opportunities.
- John, bottom line when it comes to these markets, I think people are trying to figure out what the heck to do right now. And you have some interesting stuff in your portfolio, including consumer staples, things like Home Depot and Walmart. Do you think that a company like Walmart, for example, has gotten past its inventory troubles and is still going to be able to benefit as we head towards the holiday season?
JOHN TOBIN: So it's absolutely true that as-- the retailers have inventory issues to grapple with. And I wouldn't want to say that for Walmart that it's all said and done, and they're behind it. I think our view on Walmart is more of a basic fundamental view that this is a business that historically is resilient in economic downturns.
And if we're looking at a slower economic environment, and we're looking at the possibility of a recession, and we think about where are we most likely to have the stocks and the companies that are most likely to hold up best in that environment, it is some of the defensive sectors, the traditional defensive sectors like staples-- the Walmarts, health care for example. Utilities-- another area where we have exposure.
But at the same time, even some financials will hold up better. Regional banks-- there will probably be some evidence of weakening loan demand and some pickup in credit quality issues. But we think that they're in a very strong position with good credit statistics today and with very strong capital positions today.
So there are several defensive sectors that we have exposure to, and we think these are sectors-- it won't mean that they won't feel any pressure from a slowing economy but rather that they will be more resilient in the face of a challenging market environment.
- Just trying to tie both inflation and employment together because one of that is an input cost into the prices that consumers are having to pay as well. For consumers, and of course, everybody who's in this economy and is working, there's still money that is going out the door, out of your pockets both on a necessity basis or on a discretionary basis. So with that in mind, where then are we going to expect to see kind of wages stabilized at the same time that the Fed is trying to see inflation stabilize?
JOHN TOBIN: Well, the Fed is clearly trying to get inflation down and trying to get wage growth down. And what that really means, even though they don't like to say it so much out loud, is they need the unemployment rate to go up, and they need jobs growth to slow pretty dramatically. But you're right, this implies pressure on the consumer.
So they'll be pressure on the consumer in terms of weaker jobs growth. There'll be people-- more people unemployed. There's more pressure on consumer pocketbooks because of inflationary pressures, what people are paying at the pump for gasoline, what they're paying for their energy bill when they get their Con Ed bill every month. So there's pressure on the consumer. This is all part of the narrative of an economy that is being forced to slow down by Fed policy.
- John, if I'm correct, you have some exposures to some big-cap tech names in Apple, Microsoft, and IBM, even a Broadcom. But in light of this AMD warning, which is pretty shocking-- I mean, it missed their expectations by a billion dollars on sales-- are you inclined to rotate out of big-cap tech, or are you going to just try to just survive this volatility?
JOHN TOBIN: Well, you know, the truth is, in the strategy that I help run, tech is a significant underweight for us. We actually have a hard time finding tech names that fit the characteristics that we see. We're looking for companies that have growing cash flow, pay attractive growing dividends, and otherwise use cash to distribute to shareholders through share buybacks.
So we do have exposure to some of those tech names that you mentioned, but we are underweight. We're underweight those names-- we're kind of by definition underweight Apple. Apple's over 4% of the index. So while we have Apple in the portfolio, it's an underweight to Apple. And while we have tech in the portfolio, it's an underweight to the tech sector. I'm sure there'd be some names that we look at, and we'll probably trim them and maybe even exit them, but there's nothing that we're thinking about doing right this minute.