'We are approaching a period of a very precipitous drop in economic activity': Strategist

Jack Manley, Global Market Strategist at J.P. Morgan Asset Management, joined Yahoo Finance's Jen Rogers, Myles Udland, and Andy Serwer to discuss his outlook for the U.S.'s economic recovery following coronavirus.

Video Transcript

MYLES UDLAND: We're joined now by Jack Manley. He's a global market strategist at JP Morgan Asset Management. So, Jack, let's kind of go through the standard exercise that we all do at this point, which is what's the shape of this recovery-- V, W, U, L? We had a guest say a bathtub-shaped recovery's what they saw coming. I guess, how are you seeing this right now? And is this, indeed, the way that clients want to frame this in their mind for making sense of what's happening?

JACK MANLEY: So I think that a lot of clients are certainly asking this question when it comes to what we can expect out of the recovery. And when we're looking at it, I think it's going to look like the letter U, maybe something like a swoosh, if that makes sense. I think very clearly we are approaching a period of a very precipitous drop in economic activity-- that first quarter number really just the tip of the iceberg. We're looking at something much more substantial in the second quarter.

But what happens in the back half I think is either going to be flat or modestly positive. And that's going to determine whether or not it is a true U-shape or if it's more-- more of a swoosh. But because this is an event-driven recession rather than something structural, rather than some something cyclical, I think it's important to remember that there is a light at the end of this tunnel, which is that successful kind of development distribution of a COVID-19 vaccine. All of a sudden, this doesn't really become a problem anymore, and we have that to look forward to, which is, I think, where you start to turn the corner again and pick up quite a bit of speed in 2021.

JEN ROGERS: So then what do you think of this month overall? Here we are at the end of April. And we're down today, but we've had an incredible rally, right-- historic proportions. We're going to be going back, as Andy Serwer said, you know, talking about 1987. So do you think right now that this market is just a little too hot given what you're talking about with U-shaped and potential and recovery?

JACK MANLEY: Sure. Well, the stock market is forward-looking inherently. And one of the sort of bright sides of the severity of the economic data that we've been seeing recently is that it has happened all so quickly that it can't get much worse for much longer, which I think may be one of the reasons why the market has started to move higher. But I do think there is a very serious risk that it has gotten ahead of itself.

When you consider the fact that once we do relax social distancing guidelines, there is a very real possibility that we see a resurgence in cases later this year. I think there's room for disappointment from that perspective. Then you look at where stocks are trading right now, you're looking at multiples that are rivaling what we saw during the dotcom bubble but on extraordinarily shaky ground. There is just so much uncertainty out there that there may be room for markets to retest those lows, absolutely.

ANDY SERWER: Yes, so, Jack, I'm hearing a lot of people sitting on edge waiting for the market to go back down to get back in. And of course, this month has been extremely frustrating for those people-- cough cough, my brother, who I hope is listening. But you know, it's just-- I don't know how you make that kind of a call, though, right? I mean, you're suggesting that's going to happen, and my brother's happy. But it might not.

JACK MANLEY: So it's tough. And I think there's a very real risk out there for a lot of investors that they fall into the same trap that they fell into after the financial crisis, which is just waiting forever. I mean, we looked at the stock market after the GFC-- 350%, 400% return on the S&P 500, and yet there was still a record amount of cash on the sidelines-- I think very clearly a symptom of that kind of anxiety about getting back in.

The best way I've been able to frame this with our clients is that markets may move lower before the end of the year. They may also not. There is a good chance that this is the start of a real recovery. But what really matters, I think, is that if you look at where we are right now versus where we were just a couple of months ago in mid-February, you are still looking at a market that has an upside of roughly 20% just to get back to where we were before, let alone achieve new highs.

I think if you think about it that way-- put it into perspective with that longer term goal-- that we still have a whole lot more to go. Even if this is the start of a recovery, it allows you to make those decisions about getting in early or getting in sooner and staying invested, really, through the long run.

MYLES UDLAND: Well, so, Jack, let's finish this way-- talk a little bit about some things you've had, conversations with respect to portfolio construction. What should people be looking to do? What can they do? Because ultimately, it's not like people want 100% in cash. They still have a lot of money invested in a lot of places. And even just changing your allocations can make a huge difference, whether you nail the bottom or you miss the next downturn or not. That kind of stuff is really where you make money.

JACK MANLEY: Oh, absolutely. And I suppose it goes without saying, but I think it is really helpful right now to think about the present situation-- all the problems that we're facing right now-- so COVID-19, the social distancing recession, this collapse in oil prices-- and then figure out based off of where we stand at the moment who's winning and who's losing. And so we look at what's going on with bond yields right now, they are at near-record lows. The fixed income market is extraordinarily expensive, a whole lot of turmoil even in the credit side of things.

I'm not a big fixed income fan right now. I think I'm underweight in that space-- within fixed income, probably overweight to treasuries, probably overweight to duration. And then within that overweight to equities, again, who's winning, who's losing? I like those larger cap stocks. They're going to be more stable, more diverse supply chains, more profitable. I like those US stocks, because I think we've seen in multiple years now that anytime there is a global flight to quality, it benefits our assets, it benefits our currency. And I like those sectors that I think are particularly well-positioned to talk technology, communication services.

The fact that we're able to conduct this interview right now over computers, whereas only a couple months ago we would have been doing it in person I think is proof positive of how well-positioned some of the sectors are in response to the current situation. So with those winners, with those losers, I think you can allocate effectively to navigate the storm going forward.

MYLES UDLAND: All right. Jack Manley with JP Morgan Asset Management-- always good to talk to you. Maybe someday not too far from now, we'll actually see in person. But for the time being, this works great. Stay safe out there, talk soon.

JACK MANLEY: Thanks.