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'We've begun to see the outperformance of value and cyclically oriented parts of the market': J.P. Morgan's Patrick Schaffer

Patrick Schaffer, global investment specialist, J.P. Morgan Private Bank, joined Yahoo Finance Live to disucss his outlook for the market and the sectors he's watching.

Video Transcript


SEANA: Stocks getting a boost today on the Moderna vaccine news that we got out this morning. Among the leaders in the market today, the reopening trade, it looks like it's back in favor. Some of those travel names that we've been keeping a close eye on, the cruise lines and airlines, amongst the biggest winners today.

So for more on this rally, we want to bring in Patrick Schaffer. He's a global investment specialist at JP Morgan Private Bank. And Patrick, great to have you on the program. When you take a look, I guess, at today's reactions, it's a little bit more of a muted response from the market than what we saw on the heels of that news from Pfizer last week. But how are you reading this, just in terms of what it means for the market and what it means for future opportunities?

PATRICK SCHAFFER: Seana, thanks for having me. Clearly, the value growth trade is more muted today than it was last Monday. Some of that's already been expressed in the market over the course of the last week. But I think today shows that there is further legs to the value rotation that we've seen, certainly over the last week. But really, it's been in the market since, I would say, September. And so it hasn't necessarily been a tech selloff. But we have begun to see the outperformance of some value in cyclically-oriented parts of the market.

ADAM: Would you include energy in that? Because you point out that last week, the energy sector was up dramatically. And today it's leading the sectors higher. And yet we saw the news this morning. Saudi Aramco is cash strapped, needs some cash. So why is the energy sector doing so well, it would appear, today.

PATRICK SCHAFFER: Yeah, Adam, that's a great point. Last week, energy was up, I think, 17%, really a dramatic move. And while you mentioned Saudi Aramco a moment ago, we definitely have the OPEC Plus meeting on our agenda to pay attention to this week. But mobility statistics have been one of the area of the economy that has really shown that the pandemic remains very much on consumers' minds. And we're seeing this in the form of public transportation statistics, TSA statistics, et cetera.

And so until those numbers begin to turn, we're not going to see energy have legs. But the vaccine optimism that we've experienced over the last two Mondays brings that forward a little bit. And so I would say, yes, energy is part of the value cyclical rotation trade that has legs.

SEANA: And how about-- where do financials fit into all this? Clearly that's part of that cyclical rotation. It's one of the outperformers today. We can see from some of those big bank stocks, Citi amongst the leaders there, also some of those regional names coming back into favor. What is your perspective, just in terms of some of the opportunity in financials right now?

PATRICK SCHAFFER: Yeah, financials benefit in a number of ways, Seana. One, we've seen the yield curve steepen over the last couple of weeks. That obviously is supportive to net interest margins. As the vaccine optimism takes hold and we go into next year, there will begin to be people repricing capital return data from the Fed. And then obviously, the provisions that banks took in the first and second quarters of this year may be unwound if we see a return to normalcy sooner. So there are a number of tailwinds benefiting financials right now. We're bullish on banks in the next year.

ADAM: So when you talk about the volatility that could still be ahead of us, you point out that building a goal-aligned portfolio and being thoughtful about diversifying your exposure is key. What does that look like in the real world, for those of us who don't have the benefit of using someone like you or your team?

PATRICK SCHAFFER: I think diversification matters right now. And it matters a lot when you think about the dispersion of sector returns this calendar year. Hopefully, the vaccine optimism is rooted in what's going to be reality and that increases the breadth of sector returns for 2021 and into 2022. But I think maintaining a diversified portfolio right now is really important.

SEANA: Patrick, going off of what you just said there, just in terms of hopefully that vaccine excitement proves to be true-- but my question, though, is, what is priced in at this point. Because it seems like you could almost make the argument that all of that good news is priced in. So then at least the question that's what's going to happen in 2021 once we started seeing that the potential vaccine being administered, I mean, how do you think the market's going to react to that?

PATRICK SCHAFFER: Seana, you're exactly right. A lot of it is priced in. And in fact, therapeutic response in the first half of 2021 was our base case. And the data that we've seen confirms that our base case is playing out. But what it does do-- and this is really important-- is it removes some of the left tail risk that was embedded in markets before we got the vaccine news. Until we had it, we didn't have it. And as it continues to come to market, that left tail risk event, i.e. wholesale shutdowns of the economy similar to what we saw in March, April, and May, continue to recede.

Now, Seana, as you were saying a moment ago in the session before we began speaking, we're seeing some of re-enter the market, whether that's in Philadelphia, New Jersey, California, some of the states in the Midwest. But the-- so far-- policymakers are not talking about wholesale shutdowns in a manner consistent with what we saw in March and April. And importantly, the vaccines give us a window to the other side of that, even if it does get worse before it gets better.

SEANA: Yeah, it seems like investors are suddenly deciding to focus on 2021 instead of what's right in front of us. But Patrick Schaffer, great to have you on, global investment specialist at JP Morgan Private Bank.