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’Without government intervention, the economy will roll over and decline:’ analyst on need for stimulus

Yahoo Finance’s Kristin Myers and Mike Clarfeld, Portfolio manager and Managing Director with ClearBridge Investments, discuss market volatility amid the coronavirus pandemic.

Video Transcript

KRISTIN MYERS: We're joined now by Mike Clarfeld, portfolio manager and managing director at ClearBridge Investments. So Mike, let's talk about stimulus right now. You just heard some of those headlines from the FOMC minutes yesterday.

Jay Powell saying, look, the Fed can only do so much. We need Congress to step in and to inject some cash into the economy, and saying that the risk of overdoing it was much, much smaller than it was before. Economic recovery continuing, but starting to slow.

So we saw the markets reacting sharply yesterday after the president ended those stimulus negotiations. He has walked back some of those comments. The markets seeming to like that today. But will that be enough going forward, these narrow bills, at least as we look at the economic recovery more broadly?

MIKE CLARFELD: Yeah, I think our view is that, actually, no, that as we learn more about the virus and what the likely trajectory is in terms of sort of ultimately a vaccine and a recovery both in public health and the economy, we think it's likely to be, unfortunately, longer, rather than shorter, in the sense I think if we go back to April, I think all of us thought maybe it would be a couple months, and then life goes back to normal.

And it seems increasingly likely that, really, it'll be deep into next year before that happens. And with the limitations the virus puts on public life and commerce, we think without government intervention to keep spending at levels similar to what we've been seeing, the economy will roll over and decline.

And so we think it's important not just a narrow bill. The airlines, obviously, is pretty unique industry in terms of the experience they're having here. So we can sort of understand why that might make sense as a one-off. But we believe that a more broad stimulus is necessary if we're not going to have a real drop in the economy over the next many months.

KRISTIN MYERS: So, to that point, a broad package-- if we do get one even after the election-- the president says it's going to be after he wins. It's a foregone conclusion that if Biden wins, that there will definitely will be some sort of stimulus that will be passed shortly after he takes office.

I'm wondering if the market reaction might be a little bit more muted, especially if we now get these narrow bills with a lifeline thrown to the airlines, if we get stimulus checks sent out, and we have, of course, the president's executive action, which continues to give an unemployment enhancement, although it is far smaller than the one that had been previously passed as a part of that CARES Act.

MIKE CLARFELD: Yeah, I think it'll continue to be very well received by the markets when there is a broader stimulus package. I'm sort of surprised-- well, let me take that back. I think part of the move you're seeing in the markets today is the markets not just believing that these very narrow packages are going to be passed, but maybe hoping that with Trump walking back what he said yesterday, that there's the possibility for a broader package.

So we don't think that today's move is just about enthusiasm for these narrow packages, but rather, a belief that maybe the tweets portend a broader package is in the offing.

KRISTIN MYERS: As I mentioned the election just a moment ago, I was reading your note, and you're saying the markets, frankly, will do well, regardless of who is in office, echoing what we've heard from other strategists out there that say, listen, you need to stop overplaying politics too much when you consider how the markets are going to be behaving.

I'm wondering if you think, however, a lot of folks still say volatility is to be expected around the elections. Do you think the markets right now are at least baking in a blue wave, so to speak, a Biden victory, especially as the polls seem to indicate a huge lead over President Trump by Joe Biden?

MIKE CLARFELD: I don't think we're seeing it reflected fully in the markets, but certainly before the tweets yesterday, where Trump torpedoed fiscal negotiations, the markets were seeming to discount something of a blue wave and what that would mean in terms of the magnitude of fiscal stimulus and sort of, you know, employment initiatives that would be very positive for the economy.

Going back to the broader question about just, you know, who's better for the markets or who's better for the economy, I think, you know, frequently, with people, there's a knee jerk reaction to believing that Democrats are less constructive for the stock market. And I think if you look back, you know, that's just not the case. There's been plenty of good markets under Democrats. And, you know, there's been good markets under Republicans.

And so we do believe that there different winners and losers at the industry level. Clearly, renewable energy and green initiatives would be much more emphasized under a Biden administration. So that would be a winner, and there will be losers. But we think broadly speaking, the markets overall can do very well under either administration.

KRISTIN MYERS: Mike, I want to ask you about moves investors should be making right now. We are seeing those big name tech companies like Amazon, for example, they've been leading the markets. They don't pay dividends.

And we also have been seeing this rotation into value lately. Some of those value stocks do pay dividends. Is that a move that you would recommend an investor make right now? I saw in your note that you're suggesting investors look towards those high dividend paying stocks.

MIKE CLARFELD: Yes, so it's been a frustrating year to be a dividend investor in the sense that one would normally assume in a volatile market like this, dividends would do well, or dividend paying stocks would do well. And interestingly, while many of the companies that pay dividends have been able to navigate this, the downturn in the economy reasonably well, the stocks have lagged.

And it's actually-- it's not so much because of anything specific to the dividend payers, but rather, the dynamic you referenced at the outset, which is that the current stock market, while the averages overall are actually recovered very nicely, it's a very narrow market. The indices are being driven by really a handful of mega cap companies primarily in technology that coincidentally don't pay dividends.

We think it's a great time to be looking at dividends. We think the sort of enthusiasm around the work-from-home trade and all the implications of that is fully reflected in many of the stocks of companies that benefit from it.

And on the flipside, we think that many of the high quality dividend payers that we emphasized in our portfolio have very conservative assumptions built into them. Additionally, dividends right now offer an attractive yield with growth rates being so low. We think dividend-- most dividend paying companies have the ability to raise dividends at a reasonable rate in the future.

And we think that should volatility come back, whether it's because of the election, or a lack of fiscal stimulus, or whatever the case may be, strong dividend payers can provide good downside support in a period of volatility.

KRISTIN MYERS: All right, Mike Clarfeld, ClearBridge Investments portfolio manager and managing director, thanks so much for joining us today.