Emily Roland, John Hancock Investment Management Co-Chief Investment Strategist, addresses how U.S. markets have their worst quarter since the 2008 recession and how long it could take for a recovery. Roland joins Yahoo Finance’s On The Move to discuss.

Video Transcript

ADAM SHAPIRO: Let's bring in Emily Roland. She is John Hancock Investment Management's co-chief investment strategist. And Emily, we appreciate your being here with us at Yahoo Finance. I had wanted to start this discussion with you to talk about what signals we're getting from the corporate-- you know, investment grade corporate bonds.

But before we go there, I got to ask you, this economic data we're getting still has not started to incorporate the worst of the coronavirus economic shutdown. So I can't imagine we've hit bottom yet, or have we? Because it's only going to get worse.

Emily, I think you have to unmute. If we've got you on the phone, hit star six. Emily, there you go.

EMILY ROLAND: Yeah, sorry about that. Yes Adam, thanks for having me. I think we're all adjusting to all these new technologies, so pardon the delay there.

But I do think that the data is going to get worse from here. It almost looks like a mistake when you read it, like somebody fat fingered a spreadsheet. The charts look just unbelievable. Certainly, initial jobless claims tomorrow I've seen ranges from our economists anywhere from 800,000 to 3 and 1/2 million. I had not heard that higher figure until just now.

But the data don't reflect all the damage yet. You mentioned PMIs for March. They sort of look a little bit better. The soft data looks a little bit better. But again, it's not reflecting the full extent of this.

And one of the things that we're looking for, in order to kind of pivot to a more risk-on approach to the markets, is a bottoming in the economic data and in the number of COVID-19 cases in the US. And based on some of their rhetoric today, it sounds like we may be further away from that than we thought.

JULIE HYMAN: Hi, Emily. It's Julie here. I do want to ask you about what's being priced into the markets, not just the equity markets, but the corporate bond market, which I know you're watching as well. And you know, the [? old ?] [? saw ?] that the smart money is in the bond market. I don't know if that's true this time, but you say the corporate bond market is pricing in a worse scenario than our stocks. Which [? do you ?] think is getting it more right?

EMILY ROLAND: Yeah, so we look at the credit markets, and we look at the spread of high yield bonds and the spread of investment grade corporate bonds versus treasuries as many investors do. And we saw an environment, a couple of weeks ago, where investment-grade corporate bonds were reaching the maximum levels of volatility they've ever been at, historically. We saw spreads widen and getting closer and closer to 2008-type levels. And we just didn't think that type of spread widening was really warranted.

We do think it's warranted on the high yield bond side. We will see defaults. We haven't seen them yet. And high yield bonds spreads are elevated, right now, around 900 basis points. We got to over 1,000.

We think there could be some further pain there as we do see those defaults. You know, high yield bonds saw a decline of 40% in 2008. We've only gone down to 20% this time, only, so we could see some further pain there.

Now, on the investment-grade side, we have the Fed coming in, supporting that market, now that they set up a facility to purchase corporate bonds, including securities of triple-B quality and higher. That's another catalyst to [? weeping ?] embrace investment grade corporate bonds for that element of participation in this market.

- Emily, I want to go back to something you said earlier, which is, you know, investors are essentially looking for the bottom of the coronavirus cases, you know, the overall number, not continuing to tick up in the way we have. But what we've also seen is that this really does-- it depends from region to region.

You know, you look at a place like Washington state, they're starting to see their curve flatten because they are several weeks out of New York. And I'm wondering how investors should be looking at some of those trends. In other words, we're looking at the economy as a whole right now, but what we're learning is that the opening up of the economy could really differ from region to region.

EMILY ROLAND: Yeah, that's right. And I think, really, that's hard to handicap right now, and I think that that's also just one element to look at in terms of what do you want to think about kind of repositioning portfolios for recovery. I mentioned the number of cases, also the economic data. We want to see investor sentiment get worse, too.

Remember that old emotional roller coaster of investing that we all grew up with? The best [AUDIO OUT] to make money are where sentiment's at its worst, right, when everybody capitulates and investors are talking about despair. We are not seeing that.

Even before this little mini bounce that we've seen in the markets, the advisors that I've been talking with have been looking every day of, where can I put money to work? Where can I put money to work? I haven't seen investors kind of throw their hands up on this. So I'd like to see sentiment get a little bit more fully washed out here in addition to those other catalysts that we're looking for in order to kind of reinvest.

JULIA LA ROCHE: It's Julia La Roche here. I do want to go back to the corporate bond market just for a second. You were mentioning the Fed facility. This is something that we've talked about quite a bit on our air.

I guess my question is, how do you think about where to put money to work within that market? Especially, right now-- I mean, presumably, we could see some downgrades, some ratings downgrades, that could possibly push some into that junk status. So how do you figure out within corporates where to be?

EMILY ROLAND: Well, I do think, you know, active management is absolutely critical in this environment. I would definitely advocate for that. I would also-- if you look under the hood in terms of the triple-B market especially, which is where all the ink has been spilled over the last couple of years in terms of risks, it's actually really highly rated companies that don't scream to me like poster children for default.

So it's things like AT&T, and Comcast, and InBev, and Verizon. And so we actually think that the challenges within that space are more muted than a lot of investors think. Now, moving up to the high yield space, I think that's where you get more challenge.

We're looking at potential defaults of somewhere around 10% or 12%. We really have not seen the worst of it yet. And we think that the high yield markets [? are going to ?] be much more adversely impacted than the investment grade corporates.

Now, I would make one more point. One thing that we looked at was, with spreads at these levels historically, what kind of returns you get out of the investment grade corporate bond market? And right now, we're around 300 basis points. It's come in a little bit. But you're looking at a 10% or 15% return 12 months out from here. So again, an attractive entry point right now in a market that's associated with a lot of risk.

ADAM SHAPIRO: And even with the Fed backstopping a lot of, you know, the credit markets, I've got to ask you, this is April 1. Rent is due. We don't know the complete picture as to who will not be making rent payments, who's going to hold onto cash because they need to get at least to May. So are the markets, perhaps, underestimating the real slowdown that's taking place?

EMILY ROLAND: I think that's possible. You will see markets react. I mean, we've only heard these little anecdotal stories of the Cheesecake Factory and a couple of other companies that have said that they're not going to be able to make rent. But the next couple of days are going to give us more intelligence on that.

And you're absolutely going to see more volatility. Isn't it amazing that the market's down 3% and we're like, oh, remember when the markets cared about volatility? We're going to see a lot more of it.

ADAM SHAPIRO: All right, Emily Roland is John Hancock Investment Management co-chief investment strategist. It's always good to see you. I look forward to when we're all back in studio and we can see you in person. Thank you for joining in.

EMILY ROLAND: [INAUDIBLE] Thank you.