The economic outlook is still fairly grim: JPMorgan strategist

[00:00:00] Speaker 1: How do you look toward everything that's happening on the health front, on the policy support front, on the economic front, and determine whether we've hit bottom? [00:00:10] Samantha: Well, it all comes back to the COVID data, as you've been alluding to, and I thought that was a really good point about, you know, cures and all the other pieces, not just the data peaking. But I would say this, I think it's very apparent that there's a pretty big disconnect between the economic outlook and then what the market was doing last week. And that's not anything different than what we've seen over the last 10 years. There's been pretty big dislocations between what the economic or real side's been doing and then what asset prices have been doing. Because, yes, while a bunch of the data is getting better with respect to the virus, and yes, we have fiscal stimulus and a Fed that, you know, effectively has everyone in the market has their back in terms of the support with the facilities, I would just say the economic picture is still really grim. And it's not very clear how we put, you know, 15 or 20 or 25 million people back to work in a smooth way when this is all said and done. And at the heart of it, the consumer is the heart of the economy. So even if markets are up because the direction has changed and for the positive, right, the delta, that's, I guess, good. But I would say it comes back to the economy healing. And to me, that's the consumer and the unemployment numbers. [00:01:18] Speaker 1: What is actually baked in, would you say, Samantha, in terms of 2020 economic growth and earnings growth? And we're about to go into earnings season pretty much flying blind. I'm not sure any of the numbers are going to matter. But where is the market on the outlook? [00:01:33] Samantha: I would say right now, the market is basically priced in a scenario, which is earnings growth isn't that bad. You've already seen earnings growth estimates. They were negative 15 percent. They've come. They've gone back up a little bit to negative 8 percent for the quarter. So slight improvement. I would say the market's effectively pricing in that in the second half of the year, we're all back at it. The economy's reopened and those unemployment numbers are trending, trending down. What the market is definitely not pricing in is if we get a second wave, right, if we have to shut down again. It's also not pricing in if this weakness spreads into credit markets. Yes, the Fed is there. But at the same time, you mentioned leverage. There's a lot of leverage and everything right now is just on pause. But that debt hasn't gone away. So I think that second scenario, which is it's a lot more dire and it's very grim. That's what's being ignored right now [00:02:23] Speaker 1: by the market, I would argue. I want to also welcome UBS Wealth Management Ali McCartney into the conversation. Ali, Samantha was just talking about how she doesn't seem convinced that the market's seen bottom and the economic data is going to just snap back in the second half of the year. You have so many clients. I know you've been doing so many calls and webcasts. Thank you for inviting me to some of them. What have you been hearing as far as the level of concerns and where the market's going? [00:02:51] Ali McCartney: Sure. First of all, Sarah, it's really lovely to see you. Feels a little bit normal. Look, I think that last week was a very significant and abrupt move up in the market. I think that we're all for a whole lot of personal and market reasons trying very hard to be optimistic. And it all really does go back to you can't fight the Fed, right? We are on track to have maybe an $8 trillion balance sheet with the Fed at the end of this year. That is two to three times where we got in the aftermath of the financial crisis. So this is significant, right? And we have seen that materialized in terms of the liquidity and the pricing within markets. But there is a long way to go. And over this three-day weekend, as much as we heard positive on the virus front, we also heard a lot of caution as it relates to the labor market and getting back up to full running. What I will tell you is, when I talk to my clients who are in the economy, in the supply chain, they all say the same thing to me, which is that they're feeling cautiously optimistic. They are getting supplies where they need to be, their communications, everything that they have said technologically. But [00:04:14] Speaker 1: Ali, we'll work on your shot. You were freezing a bit at home technology. Samantha, why don't you also bring in energy to this conversation? It's the only group that's actually positive leading the market today after, you know, another historic agreement, well, what we think should be an agreement, or at least a commitment from OPEC+, including the United States, to cut production. How much of a lasting impact do you think that's going to make? [00:04:38] Samantha: So, for right here, right now, I thought it was very good news that they were able to come to a deal. I mean, this doesn't fix structural oversupply issues in the long run. But right now, if we can reduce some volatility in that piece, I think that's actually supportive for the rest of the market and for the economy. In the U.S., just in oil and gas extraction, we employ about 100,000 people. But I would argue there's a lot of spending that's done from a CapEx perspective. So it's not a long run fix, but it was a step in the right direction. It doesn't seem the most sustainable that Saudi Arabia and Russia would continually cut their production. But they made some agreements for two years out. So at least as far as the eye can see, it looks like there could be at least a floor on the oil price, [00:05:22] Speaker 1: which is a good thing right now. I mean, would you then take it a step further and recommend to your clients to be buying those energy stocks because they've been the hardest hit during all of this? [00:05:33] Samantha: I mean, I know energy stocks have been moving a lot. Our big overarching question has always been, is energy a value trap? Because it had been cheap from a valuation perspective for a very long time. I think where we would focus right now, to be honest, is a quality theme. So if there's going to be good quality companies with good quality balance sheets within energy, that would be a yes, in our view right now. But the oil price is just a little bit too volatile. And if anything, there's downward pressure over the long run. So I think oil companies and big energy companies need to obviously rethink what they're doing. Are they going to be involved in green energy? If they want to take a sustainability theme to their operations, I would actually be bullish on the energy sector in the longer run. But that remains to be seen.