Stocks surge as Johnson & Johnson preps coronavirus vaccine trials

Brian Jacobsen, Wells Fargo Asset Management Multi-Asset Strategist, joins Yahoo Finance’s Seana Smith to discuss how the market outlook amid the coronavirus outbreak.

Video Transcript

SEANA SMITH: Want to bring in Brian Jacobsen of Wells Fargo Asset Management. And Brian, there's been lots of talk, lots of conflicting reports I guess should say, just in terms of where we go from here, whether or not the market will be able to hold on to its recent rally. From where you stand, what do you think?

BRIAN JACOBSEN: Well, for my team, we have a call every day, sometimes multiple times a day to discuss that very issue. And our position is that we think that this isn't just a bear market rally. And I think that really is what's fundamentally driving the difference of opinion here.

We view this as being like a natural disaster on a global scale, where it's going to be a huge economic shock. But it does, we believe, with all the policy accommodation and just the nature of the type of shock, lend itself to a type of rebound that could be just as abrupt as what the drop has been. But other people would probably take the other side and say that no, this is just things were overvalued going in. This is going to be a longer-lasting economic hit to the economy.

And as a result, this is just a bear market rally. So that, I think, explains the difference of opinion. And we tend to be in that more bullish side of the argument.

SEANA SMITH: Do you think, though, we could risk, or do you think we are at risk of retesting some of the lows that we recently saw, at least in the short term?

BRIAN JACOBSEN: Yeah, we believe that there is a risk that we could do that. Although, we do think that if we retest those lows, that it would set up a firmer foundation for a rally higher. Now, one of the dangers here is that we keep in mind this was the fastest bear market in history, or at least going back to the Great Depression.

I mean, the data going prior to that is a little sketchy. And so given that, it was very unique in terms of how abruptly things fell. We don't see any reason why old historical patterns around retesting most of that necessarily have to follow suit. It could be just as an abrupt rebound from where we were.

SEANA SMITH: Brian, what do you expect if we do see that abrupt rebound? What do you think will lead us higher?

BRIAN JACOBSEN: [CHUCKLING] Well, you know, I think that just if we see the light at the end of the tunnel, and we notice that it's not a train barreling down on us, that it's actually some sunshine at the end there, that that could really help. You know, the Trump administration came out yesterday. It was reported that they're going to be extending these social distancing guidelines until the end of April.

But within a lot of that commentary around the justification for it is that the peak of the cases, they anticipate, should be within two weeks. So I think a lot of people are going to be really keying in on those numbers not just in the US, but even in, say, Italy, is if they are seeing a slowdown in the case that the number of people who have been dying from it, that could go a long way towards people thinking that we're getting closer to the end of this social distancing and this freezing up of the global economy.

SEANA SMITH: Brian, I know, in your notes you were talking about what the Fed has done recently. You had said that they are not out of ammunition. The Fed has pretty extensively implemented numerous rescue measures already. Do you think they will be forced to act again?

BRIAN JACOBSEN: Yeah, our view is that they have done quite a bit, and they will, we believe, act in conjunction with the US Treasury as part of the economic relief package that was just signed into law. So there-- it's yet to be announced as to what that Main Street lending program is actually going to be. So that could be the next phase.

But if necessary, what they could do is what, like, the Bank of Japan has been doing for a while, which is called the yield curve control. Right now the Federal Reserve is purchasing an unlimited quantity of treasury securities and mortgage-backed securities to affect the cap market. They might want to be a little bit more explicit about what they're trying to accomplish with that not just in terms of maybe not the dollar value of what they're buying, but what yields are they actually targeting. And you know, they could take something, a page from the playbook of the Bank of Japan and implement a yield curve control program just to give people reassurances that they have no intention of withdrawing the stimulus prematurely.

SEANA SMITH: Brian, it's interesting. So I was going through a bunch of notes this morning, including yours. But one stuck out to me from IHS Market. And they were talking about how most economies-- they don't expect most economies to return to pre-pandemic levels of output for two to three years. And that's a very long frame, I guess, when we think about just in terms of the ripple effects that this shutdown could have not only on the US economy, but the global economy. Where do you stand on that?

BRIAN JACOBSEN: Yeah, you know, we don't necessarily take a-- like a hard-line stance as the when will we get back to the pre-coronavirus levels of economic activity mainly because we think that what matters is the direction and not necessarily the magnitude of the change. We just want to get the direction right. Are things getting better or not?

And if you think about it, this does kind of illustrate a problem with economics and with investing in general called sequence-of-return risk. If you drop by, say, 10%, you need to earn more than 10% to get back to even, right, because of the compounding of those returns. And so I can understand why they might have that view.

We think back to, say, 1957 with the H2N2 virus that hit back then. 116,000 Americans died. You also had a recession, where the economy dropped by about 6% annualized. But then it actually rebounded pretty aggressively, by more than 11% in the following quarter. So it would not be unprecedented to see some sort of rapid decline but then an equally if not more rapid rebound just because of all the pent-up activity and a coordinated unfreezing of the economy.

SEANA SMITH: Brian, I guess if you were to put money to work today and you were trying to determine what sectors are looking most attractive to you right now-- there have been a slew of sectors really that have-- are well off of their highs, to say the least. Where are you putting money to work?

BRIAN JACOBSEN: Yeah, so I'm liking the way that we've been positioning portfolios to try to take advantage of the rebound mainly by focusing on, say, the NASDAQ versus the S&P 500 because the NASDAQ has a little bit more exposure, the health-care exposure. And those are areas that we like. But we would not rule out a rebound in what are called the more cyclical areas, like, say, industrials or even with financials.

Although, right now we're favoring technology. And also we're looking at energy. Energy stocks have gotten pummeled with the-- with the price war between Saudi Arabia and Russia. But we do think that there are a lot of names in the energy space that are beginning to look really attractive and that we think will be able to weather the storm.

SEANA SMITH: Brian, just in terms of oil, and what we've seen there has just been-- it's been astonishing almost, the price of oil dropping another almost 10% today. It's down below $20 a barrel. When we're trying to determine when is a good time to bet on the energy sector, what are you looking at just in terms of the data that you're trying to see or the different key statistics that you're looking at that you're trying to determine that now is an attractive time to enter that space?

BRIAN JACOBSEN: You know, one of the things that we like to look at is the forward or the futures curve for oil, as far as what's being priced in, in terms of storage and clearing supply and demand. And it just is not a pretty picture right now. However, we also know that when it comes to investing not necessarily in the commodity, but in the stocks and of the companies that represent that commodity, it's oftentimes that the point of peak pessimism that becomes the most attractive time to be investing in there.

And so that's kind of what we're looking for. You know, we see the gaps down in the price, struggle to rebound, and maybe a smaller gap down in price kind of looking at that type of [INAUDIBLE] pattern lower-- lower for the oil price itself. That's what we're sort of looking forward to determine when it is that we might want to establish those positions in energy stocks. Now, we do think that timing it is almost impossible. And so that's where we think there's been value. And so as a result, we start kind of dipping our toe in the water very gradually and average into it over time.

SEANA SMITH: All right, Brian Jacobsen, Wells Fargo Asset Management, thanks for joining me today.

BRIAN JACOBSEN: Thank you!