Pandemic recession could have been three times as bad: IMF

Jeff Mortimer, BNY Mellon Wealth Management Director of Investment Strategy joins the Yahoo Finance Live panel to discuss the latest market action.

Video Transcript

ZACK GUZMAN: Jeff, I mean, there's a lot to get into here. Not sure if you want to start with the IMF update that the US is poised for relative strength, they say the only economy here to hit back to that 2020 growth target is if, you know, the pandemic didn't happen there, or if you want to talk about the fact that we got the JOLTS update and that employers out there are finally hiring again, the latest clip higher than expected. So where do you put us right now in this recovery and how investors should be looking at?

JEFF MORTIMER: We are certainly well on our way to what the market had expected, even going back into last year. I think the rally off the March 23 low of 2020 was really a precursor to the market having wonderful information, the ability to predict strong economic growth in the year ahead. Economics trail those things. One of the last pillars to fall or last to improve certainly has been the unemployment picture.

But Friday's jobs number clearly above consensus with the revisions to prior months upward-- upward move, as well, really shows that we may be really on the cusp of stronger economic growth. Last year certainly was one in which Wall Street beat Main Street. This year Main Street seems to wonderfully be playing catch up.

So that's how I look at it. Really, the unemployment, to me, is the-- sort of the last pillar to fall. PMIs are strong around the world, US among the leaders there. But I think this is well-anticipated by markets. You can see it in the relative strength of our markets versus others internationally.

AKIKO FUJITA: So Jeff, how have you positioned yourself in the expectation or anticipation of that accelerated growth? What are particular sectors you're liking right now?

JEFF MORTIMER: So when growth becomes ubiquitous, investors are less willing to pay for companies that are growing on their own. In other words, during last year in which there was no economic growth, investors bid up companies that had the ability to grow innately. And now that you have a global economy expanding, what investors tend to do historically is to favor value stocks. They can get growth now because the overall economy is lifting all boats, so why pay a high multiple for that?

So we started repositioning client assets even starting in the summer of last year and continuing throughout Q1 of this year, selling US large cap and buying US small cap, emerging markets, and even international investments. I think it is highly probable that the US S&P 500 is among-- at the caboose of returns in 2021. Certainly this year, we have small caps outperforming large, just as they've done from the crescendo low of March 23. EM is holding its own. International, we'll have to see on the dollar.

But I think the days of the S&P 500 sort of trumping all others is over and diversification, although it hasn't worked, right, in the past three or four years, I think that is what investors must be beginning to do in their portfolio to rotate to those styles, asset classes, even sectors which have underperformed. Perhaps even financials, energy, those value sectors, you should make sure that you have exposure. Don't forsake growth in technology, and health care, and all those high-growth names, the wave of the future, but don't expect them to do what they did last year, for sure.

ZACK GUZMAN: I mean, how much of that stems from-- I mean, you're talking about companies who have been able to grow even in the pandemic. But as we come out of that, I wonder about valuations on some of these names that are now poised to see a nice bounce back. Maybe look at the airlines today, once again rising.

You got Southwest at, what, now at a new all-time high. I mean, we've been talking about that name and the airlines in general about expectations already being built in, so there is maybe that counterpoint to the value side of the equation. But talk to me about valuations there and what you like.

JEFF MORTIMER: Yeah, there's certain-- I can't discuss individual names, but we can certainly get into sectors and some industry groups. You have to be cognizant that the market is a discounting mechanism. And make sure that what you're buying is not a value stock in a growth wrapper.

At times of transition, value becomes growth and growth becomes value. And so you have to be cognizant that sometimes if everyone's playing the value trade, it can get pushed to levels which are unsustainable. But certainly to me, the real danger continues to be on that growth side of the equation, where these companies and their multiples, and especially in the backdrop of the potential for higher inflation and higher interest rates, you may continue to see downward pressure, especially on those growth multiples.

Value, yes, it's not a-- it's not a free ride. This is not a-- it's not a secret that the global economy is beginning to open up, that vaccines have the potential to be a light switch to turn our economy from off to on. And whenever the economy has been surprisingly strong historically, value has outperformed growth. But the market is well aware of that.

Please be cognizant of those things as you weed through individual names, but understand that that's what the market will find-- will define as beauty going forward, typically. So you'll at least have that wind at your sails. Just be careful of the really high PE multiples of some of those growth names that have been such strong performers. The market may continue, if history is a guide, to sort of pick on those names from-- from a multiple perspective.