379k jobs added in February

James Liu, Clearnomics Founder & CEO joins the Yahoo Finance Live panel to discuss the latest Jobs report.

Video Transcript

ZACK GUZMAN: I want to break it down a little bit more in terms of what it means for the market and your portfolio. Joining us now, for more on that front, is James Liu, Clearnomics Founder and CEO. James, good to be chatting with you again here. I mean, you just heard Emily breaking all that down. And some people are noting that the report would have been stronger if not for that cold front that really interrupted a lot of things here across the US. So what stands out to you in that report and kind of the reaction we got in the 10-year once again spiking to a new year high?

JAMES LIU: Hey, Zack, good morning good to speak with you. Obviously, it was a really good report. It beat expectations. And it was a reversal of some of the poor numbers that we had seen at the end of last year and during the early winter months. So overall, this confirms that the economy is coming back on track. And this is basically the best upside case one could have imagined just a year ago when all this began. But as far as how it affects the markets, really there are two competing theories in the market right now.

The first is that interest rates are rising because we may see runaway inflation, the economy may overheat, and the Fed may blink and start to take away the punch bowl. The other theory, which we subscribe to, is that interest rates are rising, but overall, that's generally a good thing. That's because the economy is bouncing back strongly. And if you take a look at history, although short term shocks interest rates are disruptive as we're seeing right now, in the long run, that's actually a good thing for equity markets and for the economy.

So there's a lot of disagreement in the market it seems, which is why we're seeing these large swings. But overall, we think these reports are good for the economy and the pace of the recovery.

AKIKO FUJITA: James, this is happening against the backdrop of Washington, the Senate lawmakers, debating that $1.9 trillion stimulus plan right now. When you consider how strong the numbers were that came out today, does that justify some of the concerns that we've seen in the market about overheating? Essentially, we've got an economy that is picking up, at least if you look at the labor market in its recovery, and you've got $1.9 trillion that could potentially now come on line as well.

JAMES LIU: Yeah, that's right, Akiko. I think that speaks to how targeted stimulus measures can or should be. Because it is the case that about half of the economy has already recovered. The 22 plus million jobs that were lost, we've regained over 13 million of that. However, it's the other half where you still have about 42% of those unemployed that have been unemployed for 27 weeks or longer. That's really what the concern is.

Of course, as the vaccine gets rolled out, as the economy comes fully back on line, that hopefully should resolve itself also, but that will take time. So we do think the stimulus measures are still justified at this point. We don't think that they're as inflationary as many might believe them to be, partly just because we still have a ways to go in terms of the economic recovery. Overall, however, that does mean that there is a cushion for those who are still suffering through this crisis. And that should, of course, help to cushion any blow to the economy overall.

ZACK GUZMAN: And James, I mean, when we think about what it means for those inflation expectations and this position that Jay Powell is now caught in, what do you make of his stance there to say, look, we're not going to intervene here, we're going to stay accommodative, but not necessarily maybe to the way that a lot of investors would have wanted to hear from him and maybe going forward with some of these new proposals. And we hear what happened, we'll hear what happens in a couple of weeks once we get that new policy update. But what do you make of the position he's now caught in and how it relates to what we saw years ago with the taper tantrum?

JAMES LIU: Well, Jay Powell is obviously in a tough position. He needs to thread the needle in terms of language, just like his last two predecessors had to. But I do think it's funny though and ironic in that essentially every time the Fed is about to reverse policy, of course markets and investors are highly, highly focused on that initial step. But as we saw over basically the last decade, once that initial step is taken, whether it's to reduce accommodation on the balance sheet, in terms of asset purchases, or to actually begin increasing interest rates, essentially the market is able to take that in stride once it's able to factor that in.

So it's really about communication and it's about the timing of this. Clearly, the long end of the curve, moving as much as it has, that has been a shock in terms of how quickly that's happened. But we are still firm with the belief that the Fed has learned from the last two cycles, including the taper tantrum. And it's unlikely the Fed will blink in this scenario, especially as the economy is still recovering.

AKIKO FUJITA: So James, let's talk about where investors should be putting their money. Right now, we're looking at some of the sectors that are performing, the strongest today energy, no surprise here, up about 2%. Although that's largely on the OPEC decision that came out. I wonder where you see the money flowing to right now. If there are so many who are saying it's no longer, they're no longer keeping their money in bonds. Does it immediately jump to specific equities or are we seeing money flow in other assets?

JAMES LIU: So there certainly is a rotation trade happening right now. So within equities, we tend to believe that the rotation into essentially the reopening trade, the sectors that were hard hit and can start to outperform the rest of this year, that will continue. That's what we've seen so far this year. There is still an open question about whether that's the case, depending on the pace of vaccinations and reopening. But we think that that's probably where the more interesting trade lies on the equity side.

In terms of fixed income, we basically have these twin challenges. Interest rates, of course, are very low. But that's been the case for 12 years at the very least. And in fact, interest rates have been declining for 40 years. And at the same time, the bigger challenge today in the face of that is that interest rate volatility has increased, meaning duration risk is much more pronounced today than it has been in the past. So essentially, on the fixed income side, investors not only need to find greater yields, potentially that means moving into, taking on a little bit more risk, whether that's moving from investment grade to high yield or from high yields into private credit, et cetera.

Or it means reducing duration on the other end of the spectrum, where you can generate some yield but you take on slightly less total return risk when interest rates move. So bond investors are still in a very tricky position here. We still believe in a standard 60-40 portfolio. Maybe there are some adjustments to be made in those percentages. But overall, we think that that portfolio and essentially staying the course in terms of holding onto a balanced portfolio still makes sense in this environment.

ZACK GUZMAN: Interestingly, I mean, when we talk about tech, it was hit in a lot of these reactions to yields rising. But today, only off by about a tenth of a percent. Consumer discretionary off by a wider margin, the biggest loser today, off 1.5%. And I guess kind of the concerns there. We know what tech would suffer there if we see interest rates rise. But a lot of people say we're a couple of years away from that happening. So when you look at maybe the consumer discretionary piece of this right now, people are pointing to energy prices perhaps rising, prices at the pump to maybe impact how we're going to be spending here.

When you look at the underlying health of the consumer, we've been talking a lot about savings rates moving higher here in the pandemic. So talk to me about the strength there and what could happen in the short term if you think about this reopening trade and where they're going to be spending their money.

JAMES LIU: Well, that's right, Zack. In terms of sectors, the immediate impact of the shocks we've seen in markets clearly trickle through to sectors directly. So energy is a good example of that, with energy prices and oil prices rising. You also have financials with the steepening yield curve, potentially poised to benefit from that. But once all the dust settles, really it's what you mention, the consumer is in a strong position. Now maybe they don't spend twice as much as they would have in normal times, but there is some degree of pent up demand.

You saw a significant bounce backs in retail spending, even with elevated levels of savings alongside that, which means that essentially consumers are saving up some ammunition for spending down the road. And overall, we think that the fact that many sectors who have underperformed over the last year due to the crisis, they could be poised to do a bit better here. You also mentioned tech. And tech, it's important to distinguish between the short-term impacts of interest rates versus the long-term secular trends in tech, which are really the key reason why tech is exciting, not because they did well when everyone was stuck at home necessarily.

So overall, there are still several of these key thematic ideas in tech, financials, and consumer sectors that we think are very attractive over the next 12 to 24 months.

ZACK GUZMAN: All right. James Liu, Clearnomics Founder and CEO. Appreciate you joining us for your take on that. Have a great weekend.