Why ‘bad news’ may be actually be ‘good news’ as it relates to economic data: Strategist

Matt Miskin, John Hancock Investment Management Co-Chief Investment Strategist, joins Yahoo Finance to discuss the U.S. economic recovery.

Video Transcript

ZACK GUZMAN: I want to broaden out the market conversation here to as, of course, we have been watching as I said the weakest consumer confidence number that we've seen since February-- surprising some people there when you dig into maybe some of the reasons as to why we saw that dip down to 113.8. That was revised lower than the 125.1 reading we got in July.

A few different factors-- I mean, we've been talking about a lot of them for a while here, especially the COVID rise across the US, an increase in hospitalizations there, but also rising gas and food prices. And for more on all of that, I want to bring on Matt Miskin, John Hancock Investment Management co-Chief Investment Strategist joins us right now.

And, Matt, of course, you know, as we learned last year, the underlying economy and the markets can be detached-- so just kind of quick caveat there. But it is important in thinking about this recovery, what that confidence number may be says about where we're at. So I mean, when you dig into softer economic data we've been getting right now, I mean, what does it say to you?

MATT MISKIN: Yeah, Augustina overall has been disappointing. There's no way of sugarcoating that-- whether it's consumer sentiment, manufacturing data, business surveys. Across the board, really, August has been a tough month. And a lot of it is Delta driven and, really, a flare-up of COVID again.

But what we're seeing is the Fed is pivoting. And you just talked about this with Jackson Hole, but the Fed was more hawkish at the June meeting. And over the summer, you just heard more and more FOMC members talk about tapering and wanting to raise rates. And we really think that's going to be pulled back here post this Jackson Hole meeting, and meaning that bad news may be actually good news as it relates to economic data, because it pushes out Fed hiking.

And the longer the Fed is on the sidelines, the longer this cycle likely lasts. And that's one of the reasons why the market probably is taking some of this worse than expected economic data in stride.

ZACK GUZMAN: Yeah, I mean, it doesn't look like it's expected to really stop when we get the jobs report on Friday. Looking at your jobs estimate, 740,000, and that's going to be a step down here in terms of what we've seen. I mean, when you think about the recovery here and maybe some of that happening, it does remind me of what we saw play out before-- the market started to rebound before the economic data started to prove that we were recovering. I mean, when you project out, if we are expecting maybe a bit more dovish tone from the Fed, how does that maybe change your investment thesis among growth and cyclicals in a year, two years out?

MATT MISKIN: Yeah, so the value run has been pretty impressive given that interest rates have stalled out. And you know, you talked about financials being the best performer in August even though rates haven't really gone much higher, you know, I think that shows some strength in the underlying earnings ability of the financial sector-- whether it's M&A, whether it's the IPOs, whether it's all that other places that they can make money instead of net interest margins. But as we look out into 2022, we would lean more into the quality factor.

And the quality factor's one that screens on things like return on equity, margins, better balance sheets. From here, it's going to be harder to just have beta do all the work for you in terms of cyclicality. We're going to have to find the companies that run better businesses that become the industry leaders into next year, because you're not going to just get a tide lifts all ships.

So it's going to be an active management type environment. It's going to be one where you got to be more selective on the cyclical side. And we would look for quality growth to gain more traction into next year.

ZACK GUZMAN: I mean, when you look at those, it had been maybe some of those sectors that people were leaning in on in that rotation, as I said, into cyclicals-- the ones that have been beaten down, because they were expecting a strong bounce back. I would think about maybe the cruise lines as an example there, the airlines catching a boost as well in the hope that travel would come back. But we've seen fits, stops, and starts around those names. I mean, if you're looking ahead, maybe you need to dig a little bit deeper into which companies might be able to, as you said, beat the tide here, which ones are you looking at?

MATT MISKIN: So the industrials space more broadly is a place we would look. And aerospace and defense is a part of that. What we're seeing is in industrials, you're seeing just good global growth demand, you're seeing shipping that has a lot of demand and prices are going up. If you're the shipper and you're able to increase prices, that's a good thing for you.

And so industrials is the one place we would look at. Industrials as a sector has some of the highest return on equity and quality metrics out of all the cyclicals whether it's energy, financials, et cetera. And capex is still likely to improve in the next 12 months, even though it might, as you said, fits and starts as it relates to that capex recovery story. So industrials is the place we would go.

We would look at some of the conglomerates, some of the mid-cap industrial companies. And you know, we do have infrastructure as a potential catalyst for some industrial companies as well-- whether it's aggregates, cranes, those that are helping build these bridges, roads, et cetera. So that's some of the pockets of opportunity on the cyclical side we would take advantage of.

ZACK GUZMAN: All right, Matt Miskin, appreciate you coming on here to chat with us today-- John Hancock Investment Management co-Chief Investment Strategist. Thanks again for the time.