Anthony Chan, former JP Morgan Chase Chief Economist, and James McDonald, CEO of Hercules Investments, join Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss what the latest jobs report means for the economy.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, you know, the impact of the pandemic, even if it lasts for a few months, I think it's pretty clear that it is going to stay with the labor market for years. Anthony Chan, when do you think we might even begin to recover from the jobs recession and start adding jobs as opposed to taking jobs away? Is it something we need to look out to as far as 2022, 2023 maybe?

ANTHONY CHAN: Well, I think that that really depends, Alexis, on how deep the number of job losses. You've got to remember that even with this scary number of 10 million people, historically about half of those numbers are actually translated into employment numbers because, again, sometimes people qualify, don't qualify for those numbers.

And remember, we also should not underestimate that when the federal government says if you rehire those workers back into these small businesses and pay them a salary, we'll give you back the money. I think that's going to mean a lot of rehiring.

It doesn't mean the numbers are not going to get ugly. As I said before, 25 million people losing their jobs is not a pretty sight. But if you lose 25, even 30 million jobs, then I think if you see that in the second calendar quarter, you may start to see some jobs being created in the fourth quarter. You're not going to sort of turn that economy-- all the switch and all those people back, but you will start seeing some incremental improvements in the fourth calendar quarter. And my suspicion is that by the fourth calendar quarter we at least have-- at least a little bit of a handle on this terrible pandemic.

ALEXIS CHRISTOFOROUS: James, would you agree with that? Are we going to start to see a bit of a turnaround in the fourth quarter of this year?

JAMES MCDONALD: I agree with Anthony. And while I don't have the trained lens that he does, I have studied this very closely, and I agree with him 100%. I think as we've seen an unprecedented decline in the stock market, an unprecedented shift from the best unemployment to the worst unemployment in 60 days or whatever it is, I think also too we've seen unprecedented support coming from the government in the form of this stimulus bill.

People are going to get loans. Businesses are going to get buttressed. People are going to look past this and figure out how they can recover. Seasonality and all these numbers, I think we're going to have a positive Christmas season. I think people are being smart with their money now.

We're going to be hiring. We're hiring investment advisors all over the country. We're helping people understand the risk in the market. People are putting their money out of harm's way. They're going to survive this. They're going to have their cash on hand when the market does eventually bottom.

Understand even though this is different and even though it's severe, the last great financial crisis we had, we went from November of 2007 to March of 2009. It was a mere 14 months. And so I do believe that in this situation as we force people to stay home, when we let people come back, I think people are going to tear right into it. And I think a fourth quarter beginning of recovery is possible.

I also look at what's happening in other nations affected by this. If you look at the PMI index that came out of China-- we're going to have our own print here later. If you look at the PMI index in China that was released, services and manufacturing, it bottomed last month. And so although it's still declining, the declining rate was slowing down. And so this does have a severe impact, but it's a brief impact in terms of the overall macro picture, and the recovery actually is on its way in China. And so we see we're about eight weeks past that. I think we will have a fourth-quarter recovery.

BRIAN SOZZI: Anthony, isn't the other major problem here is average hourly earnings? A lot of people still on payrolls are now asked to take pay cuts. When these workers come back to work, will they be at the same rates? I don't know about you, but doesn't this just reek of massive deflation in the US economy?

ANTHONY CHAN: Well, there's a lot of factors, Brian, that are causing deflation. Oil prices-- Alexis mentioned oil, oil and these are earnings. You already saw the average-- the length of the average workweek coming down. The length of the average workweek coming down, all this demand push on the negative side, that is not positive for earnings. So yes, earnings will be much lower. The hope and expectation is that all this money that we're throwing into the overall economy will, again, help offset some of this but not all of it.

So, yes, I don't think that, for the moment, inflation is our biggest worry. Our biggest worry is developing a viable antiviral and developing that vaccine. But I can assure you inflation is not at the top of anyone's list.

ALEXIS CHRISTOFOROUS: James, in terms of investors, have they really baked in how bad these job numbers are going to be? I mean, we even see the reaction today to stock futures. You might think things would be a much worse dramatic reaction to the unemployment rate jumping from 3 and 1/2% to 4.4%. So are we going to retest the lows and then even break below that in the coming months as more of this data comes out?

JAMES MCDONALD: Absolutely. I mean, there's no way not to get valuations down. In the past if you look at the last, quote, unquote, correction, in October of 2018 we came off 26% in only one month-- 26%. Where we are now, we're down about 23%, 24%, and there's real economic damage here. And so not only are we going to come down. We're going to blow through the previous lows.

But that's OK because investors, at least the ones we're talking to, are getting educated. Most people don't understand these economic reports, and we're spending a lot of time educating people about how valuations are created, how stock-market prices are created.

And we do think we're going to come back to 2016, 2015 levels, which get us back down to Dow 15,000. I think when we get to that level, I think institutions are going to come in buying. I think we're going to be support.

And while I said earlier that I think we'll be on our way to recovery in Q4 2020, that doesn't necessarily mean that the stock market is going to snap back. We are going to see significantly lower lows.

But our clients and our investors, they're smart. They're putting their money aside, getting out of the way of this, and that cash will come back into buying some huge, huge bargains around the world.

ALEXIS CHRISTOFOROUS: So, James, when you do that bargain hunting, say, later in the year, what is it that you're going to be looking to buy?

JAMES MCDONALD: I'm going to be looking to buy businesses that are extremely strong going into this recession that have been beaten down. I'm going to be looking into federally guaranteed financial-services companies. We've seen different nonconforming loan packages that are trading at $0.29, $0.39 a dollar. We're going to be getting into the energy sector, which has been hammered. We're looking at different energy plays that have lost 70%, 80% of their value, but now their stated dividend is 45%. Those dividends will get slashed by 50%, but then we'll still be peaking up 20%, 25% dividends from some of these energy names.

And these energy firms-- people are still not going to want to be cold in the winter, right? And so if we can get discounts in the energy sector-- we're looking at baskets of airlines. We're looking at robotics. We're looking at cloud computing. We're looking at a number of industries that will persist no matter how bad things get but it has been hammered. And if we can get things for $0.20 on the dollar. $0.22 on the dollar, we're going to scoop those up, and we've been watching them around the world.

BRIAN SOZZI: Anthony, you made a really interesting point there. We need a health solution. So do you think the market can't drive a sustainable rally until we get a sense when we might get a vaccine for coronavirus?

ANTHONY CHAN: I think that a vaccine, Brian, is certainly a prerequisite. But if we get a viable antiviral that somehow can get us over the hump and get us to the point where we can control this, then I think the markets will rally.

I agree with James. That's the path that investors are taking because right now investors are looking at the economy and the markets as a patient that was basically put into a coma so that they can apply the corrective action to improve the patient's health. Once the patient is stabilized and they can take the patient out of the coma, the patient will start to act more normally. That goes true for the equity market. That goes true for the-- certainly for the overall economy.

So yes, we need that vaccine. But as the top medical experts are telling us, the vaccine may not come until 2021, but an antiviral can come a lot sooner. And if that happens, both the economy--

ALEXIS CHRISTOFOROUS: All right, [INAUDIBLE].

ANTHONY CHAN: --and the equity market will benefit from that.