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January jobs report ‘confirmation’ of economic strength, strategist says

Thornburg Investment Management co-head of investments Jeff Klingelhofer joins Yahoo Finance Live to discuss the January jobs report, Fed policy, the U.S. economy, and the outlook for fixed income.

Video Transcript

- Well, as January adds an eye popping number of jobs to the US economy, the rate of employment came in below expectations as average hourly wages cooled down to 4.4% in January. So what does this mean for markets as investors navigate the slew of economic data and earnings? We're here to discuss-- is Jeff Klingelhofer, Thornburg Investment Management co-head of investments. Good to see you, Jeff. So as we break some of this down, obviously, you have this bump a number, some nuances in there as well. What are investors making of this picture as we saw the markets tank initially, but at least, starting to come back a little now?

JEFF KLINGELHOFER: Yeah, look, I think this is a monster of a jobs report. And really, I think this is the Goldilocks scenario for both equity and fixed income. Right? Coming into the year, we've seen fixed income yields decline. We've seen equities move notably higher, and all of this is on the strength of the consumer, and I think what we saw from this morning's jobs number is just confirmation. The consumer continues to be strong. And ultimately, where we're heading is a period of sustained higher inflation coming from a very strong labor market and sustained higher wages. This is great for markets.

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- So then what about for Powell? Because we know he tried to give a lesson-- well, it ended up being a more dovish tone, at least from the market's perspective. Does this jobs report at least take some of the pressure off him saying, look, clearly there's still some work to be done?

JEFF KLINGELHOFER: I don't think it takes the pressure off of him. But look, in my perspective, Chair Powell has been incredibly transparent with markets. They're going to continue to hike. They're going to find a terminal Fed funds rate of slightly above 5%, and then they're going to pause for a prolonged period. The market's been discounting this for the entirety of the year thus far and really through much of the last year. The market's expecting that they get to terminal Fed's fund and are forced to cut very quickly thereafter.

And I think, again, what this jobs number this morning points to is confirmation that ultimately the economy is, at least as of now, on a very, very strong track, again, pointing to sustained higher inflation, pointing to sustained higher rates, and really to me, an opportunity within fixed-income markets.

- So let's talk about some of these opportunities. What are some of the best ways investors can put their money to work right now?

JEFF KLINGELHOFER: Yeah, look, I think as I've been listening to the show this morning, we hear-- looking forward, there remains a significant amount of uncertainty. But that's really where fixed income shines. Yields are notably higher today that the consumer, at least as of now, remains on strong footing. For us, it's focusing on both yield generation primarily within the securitized market, focusing on the higher quality portion of the consumer side, and balance that out with longer duration treasuries, right? The ability to reinsert ballast within a portfolio.

- And you highlight in your notes the income component of fixed income. What are you honing in on there?

JEFF KLINGELHOFER: For us, today's marketplace is-- the old world of fixed income is back. The ability to have not only some capital appreciation, which we've seen here to date. But really, it's the ability to generate at very interesting level of yield. Today to find 6% in a broad fixed income portfolio is relatively easy, and 6% offsets, a lot of the inflationary pressures for your average investor.

But importantly, for managers that focus on the defensive component of fixed income, like we do here at Thornburg, you have a rates backdrop where if we do head into a much deeper recession, ultimately the Fed will be forced to cut rates, and you can reinsert ballast into the portfolio. So the ability to generate an interesting income and offset with really the preservation of capital side of fixed income today is tremendously, tremendously interesting.

- And one of the ways you're looking at keeping your asset allocation a bit more balanced is also keeping an eye on what's been happening with gold under some pressure today but still positive for the year so far. How do you see that progressing?

JEFF KLINGELHOFER: Sure. I mean, as I look at really coming out of the press conference this week, I was perplexed that the market reaction, right? The only way that I can square, I move higher in equities, and I move lower in yields-- is the Goldilocks scenario that, at least as of this morning, it seems like we're getting. Where labor remains very strong, yet potentially inflation comes down. Now, it's not my base case, but into that, the potential the Fed cuts.

But the reason why I like gold here is looking forward, the Fed would be cutting in that scenario looking back with very high inflation, right? Stimulating the economy at perhaps the exact wrong time. So to us, and within our asset allocation portfolios, gold conserve is a pretty interesting place as a hedge on future inflation if monetary accommodation does continue.

- And Jeff, depending on your time horizon, say, if you in the one-year-- perhaps one-year mark versus some of these longer time horizons really planning for what happens on the other side when the Fed does eventually pivot, or perhaps decrease interest rates, what's the play there?

JEFF KLINGELHOFER: Sure. For us, it goes back to, again, yield generation, but also a focus on defense. While across the cycle, the world of high yield looks pretty interesting. We worry about the potential future volatility. Right? Last year was entirely explained by the movement in risk-free rates, but ultimately, spreads were relatively contained, and that continues into this year. And so we're, at this point, a little hesitant to move into the world of high yield very selectively, more defensively oriented companies.

Companies like health care that continue to have pricing power, insurance, et cetera. But really, what we want to focus in on is not just our base case, one of at least a slowdown in growth, or perhaps even a mild recession, but importantly, as fixed-income investors, we also need to focus on the left tail, a much deeper recession. So within the world of high yield and income generation, always keeping an eye towards defense and building robust portfolios to perform throughout the cycle.

- And certainly a lot of unexpected moves could be ahead, but we'll be keeping an eye on what happens with the economy, and of course, how investors react. Jeff Klingelhofer, Thornburg Investment Management co-head of investments, thank you so much for joining me.