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Why the U.S. economy may take years to recover

Yahoo Finance’s Alexis Christoforous and Brian Sozzi speak with Deutsche Bank Wealth Management CIO for the Americas Deepak Puri about how long and what it will take for the market to fully recover.

Video Transcript

ALEXIS CHRISTOFOROUS: The markets may have rebounded off their lows in late March, but investors remain cautious as we head into the summer with growing signs that the economic recovery may-- may not be quick or painless. Deepak Puri is the CIO for the Americas at Deutsche Bank Wealth Management, and he joins us now. And Deepak, DB's latest outlook predicts we won't fully recover until late next year, possibly into 2022. Why that timeline, Deepak?

DEEPAK PURI: Well, thank you, Alexis. Good morning, everyone. I think the timeline is primarily dictated by our strong conviction that we're not gonna see a V-shaped recovery anytime soon.

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What we are calling for-- if you think of a square root, a mirror image of the square root, meaning [AUDIO OUT] and you come back up, and then you sort of go flat. And if you take that sort of symbolism into account, we don't really get back into the same level of activity as of fourth quarter 2019 until sometime in 2022. It might even be the second half of 2022.

By the way, this is not too dissimilar than what the Fed has been talking about. And we're gonna get more in terms of the summary of economic projections from the Fed on June 10 meeting. So that'll really, you know, tell us a bit more in terms of what they are thinking.

ALEXIS CHRISTOFOROUS: Deepak--

BRIAN SOZZI: Deepak--

ALEXIS CHRISTOFOROUS: Go ahead, Brian.

BRIAN SOZZI: Deepak, just-- Deepak, going through your research, you don't hide the fact that you have baked in political tensions into how you think about the S&P 500 and the economy. But what about a new-- baking in something new, the social unrest tensions? You know, what-- how do you think that will impact the market moving forward?

DEEPAK PURI: Well, the timing could not have been any worse than-- you know, all of sudden we have 90% of the population in the US now in some sort of, you know, phase-back state. So here you are trying to reopen the society, the small businesses that are so critical, and the social unrest really, you know, derails that economic recovery. So I think anything more than-- it pushes back. I don't think this is gonna be something that permanently hampers the economic output, but it really makes concerns. And obviously, when you have congregation of people, it also heightens the risk of the epidemic, the second wave of infections that all of us are so concerned about.

ALEXIS CHRISTOFOROUS: Deepak, what are your clients telling you right now? I mean, you're in charge of Wealth Management at Deutsche Bank's Americas unit. What are those higher net worth investors doing with their money right now? And are a large portion of them just sitting this out waiting for some more clarity? Are they holding onto cash?

DEEPAK PURI: Well, cash has definitely taken a much bigger and more prominent role in your asset allocation, no doubt about that. I think people have realized even though, you know, it's-- it's not really gonna generate much return for you, the safety aspect of return of your principal has in times over the last three months taken precedence over return on capital. So I would not be surprised if high-net worth individuals continue to have elevated levels of cash as we, you know, go through this sort of turmoil in the financial markets.

I would ask investors to look beyond what we have seen over the last two months where the markets have rallied because some of these things may or may not be quite sustainable. I think we have seen this amazing backdrop of fiscal and monetary cocktail of stimulus, which might not be [AUDIO OUT] possible going forward. You're already seeing some delays in the next leg of fiscal stimulus. On the monetary side, Jay Powell has shifted the onus onto fiscal stimulus. So my point being, I think in these kind of, you know, environment, having a little bit more in cash makes a lot of sense.

The other thing I would recommend is for investors-- and this is something we talk to our investors a lot-- is to look at the markets at a more strategic level. So strategic asset allocation really takes a lot more precedence over what I would call "trading" or "tactical asset allocation." You know, and case in point, Alexis and Brian, for the last couple of weeks, we have seen a lot of, you know, cyclicals and valued-like stocks do well, but I would still say that this rotation is short term, and I would stick to the more strategic basis of structural growth, which will then divert [AUDIO OUT] sectors like technology, and health care, and telecom where we feel that the gains are much more sustainable.

BRIAN SOZZI: You know, Deepak, given the political tensions we have seen in this country before the social unrest, do you think the S&P 500 trades higher into November election, or what we've seen the past month and a half is as good it's-- as it's going to get this year?

DEEPAK PURI: It's a tough call, Brian, because I think at this time the risks are balanced. You know, the election-- general election years are unique in the way that, you know, every year you see a summer softness. You know, from Memorial Day to Labor Day, markets usually have a sideways trajectory. In an election year, you can add that sideways trajectory and even some highly-volatile months prior to the election in November.

So September and October tends to be quite volatile. You see the service numbers go on a pause. No one's really hiring. [AUDIO OUT]. Point being, that-- I feel that the election year-- from now till the election time, you can see a [INAUDIBLE] trajectory.

I think after that, you tend to see a relief rally in the markets, which might happen this time around as well. And obviously, the COVID epidemic creates another curveball on top of all of this because if the expectations of a vaccine or a cure gets pushed back, you start to see reopening jitters, that can also create so bears come back into the markets. On the other side, on the bulls perspective, I think the breadth of the rally that we have witnessed over the last couple of weeks has been quite encouraging because you're seeing 95% of the companies beating 50-day moving average. That tends to be a good, you know, one-year-out call for the markets.

Our fair market assessment is $3,100 on the S&P going to, you know, May of 2021. But we would not be surprised if the markets [AUDIO OUT] trade in a [AUDIO OUT]. So $2,650 being the-- the low, and then $3,400 being on the high end. So we are rightly sitting in that sweet spot of being in the middle of that range.

ALEXIS CHRISTOFOROUS: All right. We're gonna leave it there. Deepak Puri of Deutsche Bank, thanks for your time this morning.