Mnuchin, Powell promise action to aid economic recovery
Kathy Entwistle, Managing Director at Morgan Stanley, joins Yahoo Finance's Akiko Fujita to disscuss how the 2020 election could impact the markets and what investors should keep in mind as they grow their portfolios.
Video Transcript
AKIKO FUJITA: Let's kick things off, though, this hour with that hearing that wrapped up a short time ago with Treasury Secretary Steven Mnuchin and Federal Reserve Chair Jay Powell testifying before the House Financial Services Committee discussing the economic recovery. We heard Powell saying the path of the recovery remains highly uncertain, even though we've seen activity to pick up since the lows of the pandemic. Take a listen.
JEROME POWELL: The economy will begin to feel those negative effects at some time. At the same time, the economy is recovering, and that's a good thing, and it's very hard to have any certainty about the path forward, because we don't know which of those two forces will, you know, dominate.
AKIKO FUJITA: Let's bring in Kathy Entwistle. She is a managing director at Morgan Stanley. She joins us from her home in New Jersey today. Kathy, let's talk about what we heard in that hearing testimony today. Jay Powell really reiterating what we have heard him say over and over that the economy will recover faster with monetary and fiscal policy working together, but that fiscal side just isn't there right now. What stood out to you in terms of the comments that we got from the Fed Chair today?
KATHY ENTWISTLE: I would say what stood out the most is that he repeated what pretty much we have already known, and that is small businesses have not really felt the support and the help. And if you look at any of the numbers, small business is what holds up the economy. When people don't have the money to make purchases and we're not supporting the small businesses, that's where we start to see some of the unwinding, and we start to see job loss and so forth.
You and I were speaking earlier, you're in New York, and you can probably see companies, small businesses going under. Shops that were there before you maybe you were out of town, when you came back, they're no longer there. And we've heard, you know, personally, from a number of small business owners that this has been really detrimental to their business and their outlook. And just like personal finance, business finance can get really tricky. You've got to have your emergency savings on the sidelines, otherwise, you're going to get caught short like a lot of business owners did this past spring.
And again, very challenging, but there's got to be some sort of support directed towards the small businesses that they don't get like sort of stood up for by the big companies as what happened with PPP.
AKIKO FUJITA: Yeah, I mean, the debate in that session at least was really about not about giving support to the small businesses, but how to go about doing it. And both Powell and Mnuchin pressed on--
KATHY ENTWISTLE: Right.
AKIKO FUJITA: The issue of the Main Street Lending Program that small businesses simply haven't been utilizing it enough, largely because of the higher threshold for the loan.
KATHY ENTWISTLE: Right. The higher thresholds, yes. Yeah, they're-- go ahead.
AKIKO FUJITA: Should that be adjusted, or is really the PPP program the way to go in terms of direct help for these small businesses that need that help right away?
KATHY ENTWISTLE: I think the PPP program would have worked really beautifully if there was enough information at advance about how to go ahead and access that capital and also if there wasn't such a rush to access the capital. So there were some banks that didn't have all the rules down pat, and people that banked with those banks had to wait in order to apply, and there was a lot of nervousness and anxiety around that whole process. And then, of course, having larger companies have the same ability to go and access that company and maybe have the resources to fill out the paperwork properly and have it all ahead of, you know, ahead of it, that helped the larger companies. So I think it's not that the way it worked last time wouldn't work well going forward, it's just a matter of rejiggering the rules and the structure to really focus on the small business and to take the larger businesses out of the, you know, opportunity.
AKIKO FUJITA: And taking a look at some of the market activity we've seen, the pullback we've seen over the last several sessions, you say the markets now faced with two potential outcomes-- Congress either failing to pass the bill, the stimulus bill, and recovery stalling, or Congress passing the second CARES Act here. Wouldn't you argue that the market has already priced in a potential outcome here that there is no stimulus bill in place, there will be no action taken until after the election?
KATHY ENTWISTLE: I would say actually I think that we probably had that priced in before we had some of the unwinding with the markets over the last week or two, and I think that probably people are starting to get nervous about that, about whether or not there can be the opportunity to have a stimulus bill passed or if that's going to wait until later. So I would say that in terms of the general, you know, investing market, people are starting to come off and sit on the sidelines to see what that outcome could be. We've had a great run since March. The markets are up tremendously, and I do think that people who are investors are taking money off the table to sort of give it a breather, take some profits off, and see what the outcome is with not just the CARES Act and potential support in the economy, but also the election.
AKIKO FUJITA: Having said that, is now the time is it to put that money to use? I mean, you're talking about some cash on the sidelines right now, but we have seen a pretty decent pullback, especially in some of those growth names. Is this the time you think investors should be maybe looking at diversifying their portfolio in anticipation of what's likely to play out after the election?
KATHY ENTWISTLE: I do think it's always important. It's very smart to take a look at where your holdings are prior to an event that we're aware of, and we know one event that we are aware of is the election, and we can look at both sides what the outcome could be, and we are doing that for clients right now. I think that's very smart to do, and there's pros and cons of each potential president coming into office, right, of the outcome of what will happen in the markets. Another interesting piece though is the markets just aren't behaving as likely as they have in the past according to just certain, you know, rules that we followed like, oh, we start to see value more showing up in portfolios and growth in value over the growth portfolios as we're coming out of a recession.
Well, growth is still going strong, and I do think that part of that is because some of those stocks that we consider growth, or even like technology stocks, technology has made this huge transformation, the whole digital transformation, and almost any company that needs to succeed going forward has to have a piece of technology in it. So I think some of the old rules might not necessarily apply, so we're trying to sort of balance a little bit of it with the old rules of value coming out of a recession, small-cap, mid-cap, but also realizing that growth is probably not going to go away. And in that respect, maybe you're barbelling a little bit of both in order to capture the most value and return in your portfolio for the long term.
AKIKO FUJITA: So when you're looking at some of the growth names, what are some of the stocks that you think investors should be looking at? I mean, there's certainly concern about if you're looking at something like big tech, whether it is Amazon, which is up about I think 4% last I checked in the session. Certainly, there's concerns about just how frothy they are. So if you're being selective on growth right now, what are particular parts of those growth names that you think investors should be looking at where you find value right now?
KATHY ENTWISTLE: Yeah, and who's to say, you know, if a stock has too much in it, because we have to look at the future and the potential and what the opportunity is there, too. But I would say anything that's e-commerce, anything that has got like, you know, the telemed, the telehealth, you know, electronic, you know, documents, anything that can be done without having to be face-to-face or in-person, anything that is accelerating the success of a company because of that digital transformation, those are the companies that we're looking at to make sure we have in our clients portfolios for the long-term going forward.
AKIKO FUJITA: And finally, Kathy, I'm looking at your notes here, and you talk about exercising caution on passive ownership of stocks. Certainly, we have seen a lot of investors go that route given the volatility. Are you arguing for more active approach or maybe, to your point, just being a little more diversified beyond just going past that?
KATHY ENTWISTLE: Yeah, my point is if you look at the, you know, we've all been talking about it, that there's just a limited number of stocks that have been driving the market, so that stock selection. And there are other companies that are also, you know, able to perform and do well, and we want to be able to identify and target those as well. If you're buying an index, you will only do as well as all of those companies listed in that index, and you are not using selection, you're using just an overall broad based market. So I do think that in these kind of markets, selection is very valuable. There's nothing wrong with having some indices in the portfolio, but you do want to get specific in your holdings.
AKIKO FUJITA: Kathy Entwistle, always good to talk to you. She's a Managing Director at Morgan Stanley.
