It's the setup to a perfect storm as the major averages (^DJI, ^IXIC, ^GSPC) are off to a slow start this week and JOLTS data (Job Openings and Labor Turnover Survey) and the ISM's manufacturing Purchasing Managers' Index (PMI) print both disappoint. Are these really signs of an economy the Federal Reserve is ready to cut interest rates for? And what kind of opportunities are there in the market within this sort of environment?
John Hanco*ck Investment Management Co-Chief Investment Strategist Emily Roland sits down with Yahoo Finance's Market Domination Overtime team to sort through the data.
"There's a feeling out there that cyclicality is not going to get rewarded in an environment where growth is slowing down pretty, pretty notably here," Roland notes, later addressing the opportunities in the bond market (^TYX, ^TNX, ^FVX): "We do think this deceleration in economic growth is the real deal. It might not come... it'll probably come in pretty choppy fashion in terms of the rates backdrop. But ultimately we think that rates will fall into an economic contraction here."
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Luke Carberry Mogan.
Video Transcript
Job openings fell in April to the lowest level since February 2021 showing further signs of the labor market cooling off.
Joining us.
Now is Emily Roland, Co Chief Investment strategist from John Hanco*ck Investment Management.
Emily, always good to have you on the show.
So stock market relatively muted today, Emily bond market climb.
What what do we, what do we make of this US?
Stock market, Emily uh where we are and where you think we're headed?
Yeah, it's pretty notable.
It's starting to feel a little bit like bad news might just be bad news.
Um We've talked already about uh the myth on job openings lowest level since 2021.
We also saw the ISM manufacturing index, disappoint here, new orders in particular, slowing down the Atlanta fed GDP.
Uh now measure as high as 4% for Q two at one point and we're down to 1.8%.
And I think it's pretty notable that you have seen the reaction across treasury markets 10 year treasury yield down seven basis points today, but yet small cap equities are down over 1%.
So I think there's a feeling out there that cyclicality is not going to get rewarded, an environment where growth is, is slowing down pretty uh pretty notably here.
And is the perception also Emily, hey, it's Julie here um is the perception also that the fed is not necessarily gonna come riding to the rescue, at least in the sort of short to medium term that even with these numbers that are rolling over, maybe we're still not gonna get a cut for a while.
Well, that's the challenge here.
I mean, we've got an environment in which, you know, growth is slowing, but inflation still remaining pretty stubborn.
It all started when the fed just suggested that rate cuts were coming back in the fall, financial conditions loosened.
You saw this bounce in the housing market.
Um And so the challenge now that is that growth did pick up in the first quarter, of course, that's slowing now as we talked about, but the kind of nasty side effect of growth reeler is that in comes with it.
So the fed still has a bit of an inflation problem to deal with here.
We'll look at the non farm payrolls report on Friday to see how that's showing up in terms of wages, but they could be backed into a corner here if inflation doesn't come down enough for them to justify cutting rates in the back half of this year.
Emily having said all that uh for viewers who are listening right now, I I'm gonna guess you, you know, you know, suggest I still own stocks which stocks Emily, what, what looks attractive to you here by sure.
What we've been doing is, is trimming uh riskier assets here.
You know, we've seen a big surge in momentum, sentiments been elevated.
Um We wanna avoid things like uh meme stocks which have been coming back into the mix here.
We wanna uh avoid um you know, deep value type sectors.
Um We're looking to increase quality in the portfolio leaning into companies with great balance sheets, lots of cash and just finding quality at a reasonable price is really the name of the game.
So looking for those strong fundamental stories where businesses can have lower interest burdens great uh profitability and just the ability to navigate this late cycle environment.
Is it hard to find those names right now?
Emily, you know, there has really been some increased breadth across the market.
So we're not just finding it in tech, tech was kind of the poster child for great earnings results, but we're seeing areas like communications services participate, utility sectors participating.
I know there's been some discussion around utilities this afternoon on your programming.
Um So there has been some other opportunities.
We're even find, you know, we're finding some quality on the value side as well.
He health care, for example, has some of the best return lot of equity uh metrics that we're seeing across the S and P 500 sector.
So there are places to find it.
And I think it can be a more idiosyncratic stock specific story here where active managers should really be able to capitalize on some of these strong fundamental stories.
Emily, what about utilities?
I asked just because you know, uh in today's show, we were talking to some smart folks who, who, who like that sector.
Uh One of them kind of described as the Iron Man sector, you get to play offense and defense.
What do you think?
Yeah, we like utilities in this environment.
Of course, uh the yields, they are going to be more attractive as bond yields come down.
I think that's one big part of the story, but there's also a lot of investment in utilities in terms of modern, modernizing the grid and seeing a lot of the, the um the fiscal spending that's going on being funneled into these projects which are more long lived.
Um We also see a big change happening right now as the consumer comes under pressure.
Um we are seeing cracks in this consumer as people are sort of protesting higher prices, especially that lower end consumer.
But we look at that as an opportunity people are going to continue to buy the stuff they need, you know, pay their electric bill, pay their utilities even if they're not necessarily buying the stuff they want.
So I think there's a number of different catalysts in place that should support the sector.
Well, and then outside of stock Emily, is it finally time to go back to bonds or, or do you, do you stay out?
I know Julie, you know, we love bonds.
Um I would say, you know, we just love the income potential there.
Um We've had a lot of volatility in the bond market as of late yields have come down uh significantly here over the last few weeks, 10 year treasury that was sitting at, you know, 470 not too long ago here.
So we would be looking at any backups and bond yields here.
Opportunistically.
I do think this deceleration and economic growth is the real deal.
Um It might not come, you know, it'll probably come in pretty choppy fashion in terms of the rates backdrop.
But ultimately, we think that rates will fall into an economic contraction here.
It may take some time, but the good news is that you can get paid to wait here, 5% to 6% income and high quality bonds.
We still like it.
And Emily, in terms of us, you know, stocks, do you want to stay us centric or are there opportunities overseas internationally?
Yeah, we have been overweight US versus international indices and a couple of key reasons for that.
We've seen better relative economic growth here in the United States.
It's not a huge differential, but we're holding in better here and that's translated into better earnings growth in the US analysts are penciling 11% earnings growth for the S and P 500 this year, almost 15% next year.
That is the best earnings growth that we're seeing across global indices.
We also because we like technology companies, you sort of automatically have an overweight to us equities, given the fact that we have a much bigger sector composition focused on tech companies here in the United States and there is international.
So a few things going a stronger dollar I would say would be sort of the cherry on top.
Uh We continue to believe that the dollar will strengthen into this year as the fed remains the last central bank standing with restrictive rates from all those things pointing to an emphasis on, on domestic equities.
Good to see Emily.
Thank you.
You too.
Take care.
