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Excess savings could fuel the markets: strategist

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First American Trust chief investment officer Jerry Braakman tells Reuters' Fred Katayama investors should buy on the dips amid this spike in market volatility. He sees consumers' excess savings making their way into the markets.

Video Transcript

FRED KATAYAMA: Wild ride on Wall Street Friday, with the jobs report coming out. Stocks now staging a broad rally. Let's get inside the markets with Jerry Braakman. He's Chief Investment Officer at First American Trust, joining us from Santa Ana, California. Welcome back and good afternoon, Jerry.

JERRY BRAAKMAN: Thanks for having me, Fred.

FRED KATAYAMA: Good to see you again. Now stocks, they rose sharply after the release of that much stronger than expected jobs report, but then the nosedived, with the NASDAQ falling more than 2 and 1/2%. Now the markets are strongly up again. So what's behind the volatility today?

JERRY BRAAKMAN: Well, I think there's been a lot of volatility when we look back over the last two months. And part of that is the economy is shifting a little bit. What we came from, and I think the key driver was the vaccine rollout. Ever since then, we've seen a big shift in the market from those companies that really benefit from a stay at home COVID lockdown environment.

So we have tech really, really strong performance last year. Companies like Zoom and so forth. And then once those vaccines came out, and we now have light at the end of the tunnel, and when we look through the unemployment numbers today and the pickup in all those new jobs, the big driver of that was the leisure and hospitality space. And that is probably the most impacted sector through COVID.

And it's a very, very good sign that we are not just on the COVID stats where they're coming down and declining in a lot of places because of the vaccine rollout, but also because we see pickup of jobs in those sectors most affected. And we all know if we get back to normal, get back outside, we can go shop and go travel. There's a lot of pent up demand. I think a lot of people, probably you and myself included, that love to spend some more time outside with friends and so forth.

FRED KATAYAMA: And Jerry, that jobs report. It's 397,000 jobs created last month, twice what economists had expected. And January's modest gains were revised sharply upward. So is it also case possibly where good news is bad news?

JERRY BRAAKMAN: Yeah. Obviously, there was a lot of hope when those vaccine rollouts happened, and we struggle getting enough out. And there's always going to be a check between that hope and expectation and then the reality. But if we take a step back and not look at the volatility this week necessarily, but we look at that progress and the sectors that have worked over those last two, three months, we're really looking at cyclicals taking a strength.

And those cyclicals do well as they're named, cyclicals, when the economy is a recovering economy. So between the great job news today, the continued stimulus, both from Congress, as well as low rates helped there by the Fed, all this is fuel. And then when we look through the consumer picture, which obviously drives our economy, there's still a lot of excess savings compared to where we were last year out there in checking supply, into money supply, checking balances and so forth. So that pent up demand I was talking about before, you know, has one or two places to go. It can go drive more consumption or it can go buy assets, like the market.

FRED KATAYAMA: So do you anticipate, is this a good time, should investors, your clients be picking up stocks on these dips, if you're saying that based on your scenario?

JERRY BRAAKMAN: I believe so. I think when you look to three quarters ahead at the rate where we're vaccinating folks by a million to million a half a day, we have 300 some million folks in the US. In 200 to 300 days, we will be able to vaccinate all the people in the US, and that is a game changer. So when you look back between that and another $1.9 trillion or somewhere around there of additional stimulus that hits people's checking accounts, I think that creates a great setup.

FRED KATAYAMA: Well, Jerry, we got the 10-year yield, the Treasury, spiking to 1.625% today before paring some of those gains. How should investors reposition their fixed income portfolios at a time when yields are rising? Do you send them into TIPS? Do you put them into core bond funds, high yield? Where should they be reallocating their assets within fixed income?

JERRY BRAAKMAN: Sure. What we see first of all, that higher rate is just another indication that the bond market thinks the future is better than the present. The steep yield curve is indicative that we're going to see higher growth in the future. That drives some inflation concerns. And so to your point, from a fixed income investor, over the longer term, higher rates are great, because when your bonds mature, you're going to get a higher yield.

And so from that perspective, what we do like in a recovering economy is obviously, credit, credit over governments. And so looking at high quality credit, investment grade corporates, for example, as well as high quality munis are where we're positioning our clients. And we think that is still a very attractive market, because a recovering economy will suppress any default or credit issues on the underlying issuers.

And a rising tide lifts all boats from that perspective. So corporate earnings, as we saw this last earnings season, have been very strong. But from a credit profile, the overall corporate credit market has been improving from its fundamental standpoint. And with less risk of default going forward, we think that's an attractive space.

FRED KATAYAMA: All right. Thank you, Jerry.

JERRY BRAAKMAN: Thank you very much.

FRED KATAYAMA: All right. Our Thanks to Jerry Braakman of First American Trust. I'm Fred Katayama in New York. This is Reuters. Have a wonderful weekend.