'At the end of the day, this is all about the economy reopening': Stifel CIO

Michael O'Keeffe, Stifel's CIO, joined Yahoo Finance's Jen Rogers and kiko Fujita to discuss his market outlook amid volatility and his thoughts on reopening the economy.

Video Transcript

AKIKO FUJITA: And Michael, you know, going into last week, it seemed like we were talking so much about this disconnect between the grim economic data we were getting and then where the markets ended up, especially in the month of April. It seemed like there was a bit of a reality check that we saw last week, though, given some of the earnings that we got from the tech names. How are you seeing the broader markets right now?

MICHAEL O'KEEFE: Yeah, no, broadly, I think what's super interesting about this environment is while we have to stay true to our fundamental work, right, at the end of the day, this is all about the economy reopening. And so what you're seeing in my view with this volatility is this back and forth between people sort of taking stock of where we've been so far, but then looking forward and trying to gauge, you know, some optimism. So from here, we think markets are going to go modestly higher, but we're going to experience this kind of volatility.

JEN ROGERS: So hey, it's Jen Rogers. Why do you think we're going to go higher here? Because we have this reopening happening. It's a real patchwork. People have no idea how it's going to pan out. What makes you convinced that higher here is the trajectory, given all the concerns, especially everything we hear about a second wave?

MICHAEL O'KEEFE: Yeah, I mean, basically, it's sort of anchored in this view and the fact that it's that messiness that keeps people a little bit guarded. So, you know, and again, I think it's a little bit about our system in the way that the US ultimately gets through these kinds of things. We're going to see these sort of patchwork kind of recoveries, but ultimately, it's going to lead to things coming back online.

And I would say that at some level, the markets have not yet fully incorporated that. So again-- and I also say, Jen, we have three scenarios. We have that scenario, which is modestly higher. We acknowledge the potential for downside and upside and kind of model that as well.

AKIKO FUJITA: So having said that, you know, where do you position yourself right now? And as Jen pointed to, we've got the reopening in places like Florida and Georgia. There's still question marks on some of the major hubs like a New York or like a California.

MICHAEL O'KEEFE: Right.

AKIKO FUJITA: How do you kind of take that patchwork and see where to allocate your money?

MICHAEL O'KEEFE: Yeah, I mean, basically, there's a couple of key tenants that we're sort of anchored on right now as it relates to putting money to work. The first is, unlike normal times, we're in a time when there is an increased risk of permanent loss. So think of within fixed income, bonds going into default within equities, smaller companies, for example, going out of business.

So, you know, usually, things are kind of going along and you're trying to look at these subtle moves left and right. Nowadays, you're basically wanting to focus on quality. And, you know, so in the equity space, for example, we might be a little bit overweight large cap. Growth companies are going to be a little bit stronger. And then in fixed income, we're going to be a little bit overweight to hire great paper.

But the other thing, the other anchor I would say this environment is one where good, active management is super helpful. Because where that stress comes, so comes opportunities. So somebody's good, for example, at buying small cap companies, doing the heavy work and deciding where to invest, there's good money to be made at that point.

AKIKO FUJITA: The thing that we keep hearing is that any of the trends that we saw maybe pre-COVID are just going to be accelerated. It's not necessarily that there's a big shakedown that's coming. It's more that things have been kind of pulled forward as a result of these stay-at-home closures.

One of the spaces we were talking about earlier, retail J.Crew coming out announcing that they are filing for bankruptcy, certainly a lot of other names in the pipeline as well. How are you looking at that space right now?

MICHAEL O'KEEFE: Well, yeah, it's a great point. We were late, late cycle. And late in the cycle, you tend to see, at some point, sort of a slowdown and a little bit of a shakeout. And to your point, this has just accelerated that. So there's no question that companies that were on the edge, if you will, are really troubled by this. And, you know, we have to be mindful of that as we're investing. And again, I think that's why, you know, having good active management, looking at companies making decisions is very helpful.

AKIKO FUJITA: OK, Stifel CIO Michael O'Keeffe, great to talk to you. Thanks so much for joining us.

MICHAEL O'KEEFE: Thank you.