379k jobs added in February

James Liu, Founder and CEO of Clearnomics, will be attending the Yahoo Finance Live panel to discuss the latest job report.
Video transcript
ZACK GUZMAN: I want to break it down a little more precisely what it means for the market and your portfolio. James Liu, Founder and CEO of Clearnomics, is now joining us to find out more. James, nice to chat with you again. I mean, you just heard how Emily broke all of this. And some people note that the report would have been stronger had it not been for this cold front that really interrupted a lot of things here in the US. What do you notice in this report and what kind of reaction have we received in the 10 years we hit a new annual high?
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JAMES LIU: Hey, Zack, good morning, nice to talk to you. Obviously it was a really good report. It exceeded expectations. And it was a reverse of some of the bad numbers we'd seen late last year and in the early winter months. All in all, this confirms that the economy is getting back on track. And this is basically the best case that could have been imagined a year ago when this all started. But as for the impact on the markets, there are two competing theories in the market right now.
The first is that interest rates are rising because we may see inflation out of control, the economy may overheat, and the Fed may blink and start taking the punch bowl away. The other theory we're going to endorse is that interest rates are going up, but overall that's generally a good thing. This is because the economy is recovering strongly. And if you look at history, although the short-term shocks are upsetting interest rates, as we are currently seeing, it is a good thing for the stock markets and for the economy in the long run.
So there seems to be a lot of disagreement in the market, which is why we are seeing these big swings. Overall, however, we think these reports are good for the economy and the pace of recovery.
AKIKO FUJITA: James, this comes against the backdrop of Washington, the Senate legislature, which is currently debating this $ 1.9 trillion stimulus plan. Given how strong the numbers were released today, does this justify some of the concerns we have seen in the market about overheating? Essentially, we have an economy that is recovering, at least when you look at the labor market in its recovery, and you have $ 1.9 trillion that could potentially get online right now.
JAMES LIU: Yes, that's right, Akiko. I think that speaks volumes about how targeted stimulus measures can or should be. Because around half of the economy has already recovered. Of the more than 22 million jobs lost, we regained over 13 million of them. However, in the other half, you still have around 42% of the unemployed who have been unemployed for 27 weeks or more. That is really the concern.
Hopefully when the vaccine comes in and the economy is back on its way it should resolve itself, but it will take time. We are therefore of the opinion that the incentive measures are still justified at this point in time. We don't think they're as inflationary as many may think, even because we still have a long way to go in terms of economic recovery. Overall, however, this means that there is a cushion for those who are still suffering from this crisis. And of course that should help cushion a blow to the economy as a whole.
ZACK GUZMAN: And James, I mean, when we think about what it means for those inflation expectations and this position that Jay Powell is trapped in now, what do you think of his stance there to say, look, we will If we intervene here, we will be accommodating, but not necessarily as many investors would have asked him to do, and perhaps push some of these new proposals forward. And we'll hear what happened, we'll hear what happens in a couple of weeks as soon as we get this new policy update. But what do you think of the position he is in now, and how does it relate to what we saw with the tantrum years ago?
JAMES LIU: Well, Jay Powell is obviously in a difficult position. He has to thread the needle in relation to language, just like his last two predecessors did. But I find it funny and ironic that essentially every time the Fed is about to reverse policy, markets and investors focus heavily on this first step. But as we've basically seen for the past decade, the market is able to take this into account when that first step is taken, whether it is to reduce the balance sheet in terms of buying assets or actually having To start increasing the interest rate step as soon as it is able to take this into account.
So it's really about communication and timing. It is clear that the long end of the curve, moving as much as it has been before, was a shock to how quickly it happened. However, we still firmly believe that the Fed has learned from the last two cycles, including the tantrum. And the Fed is unlikely to blink in this scenario, especially as the economy is still recovering.
AKIKO FUJITA: So James, let's talk about where investors should put their money. Right now we're looking at some of the sectors that are developing, the strongest energy right now, no surprise here, up around 2%. Although this is largely based on the OPEC decision that came out. I wonder where the money is going right now. When there are so many who say it is no more, they are no longer holding their money in bonds. Does it jump to certain stocks immediately or do we see money pouring into other assets?
JAMES LIU: So there is rotation trading going on right now. Hence, in stocks, we tend to believe that rotation will continue in essentially reopening trade, the sectors that have been hard hit and may outperform the rest of this year. We have seen that so far this year. It is still open if this is the case, depending on the pace of vaccinations and reopening. But we think that's probably where the more interesting trade is on the stock side.
When it comes to fixed income, we basically have these two challenges. The interest rates are of course very low. But that has been the case for at least 12 years. In fact, interest rates have been falling for 40 years. At the same time, the bigger challenge today is that interest rate volatility has increased, meaning that duration risk is much more pronounced today than it was in the past. So on the fixed income side, investors not only need to find higher returns, they may also need to take a bit more risk, whether that moves from investment grade to high yield or from high yields to personal loans, cetera.
Or it means shortening duration on the other end of the spectrum, where you can get some return but take a little less risk of total return when interest rates change. So bond investors are still in a very difficult position here. We still believe in a standard portfolio of 60-40. Some adjustments may need to be made in these percentages. Overall, however, we believe that this portfolio and staying on course still makes sense in terms of maintaining a balanced portfolio in this environment.
ZACK GUZMAN: Interestingly, when we talk about technology, it has met a lot of these responses to rising returns. But today only around a tenth of a percent. Consumer discretion is down 1.5%, the biggest loser today. And I kind of guess the concerns there. We know what technology there would suffer if interest rates rose. But a lot of people say we're a few years away from that. So if you look at the current discretionary element of the consumer, people are suggesting that energy prices may go up and prices at the pump may have an impact on how we're going to spend here.
If you look at the underlying health of the consumer, we've talked a lot about savings rates rising higher here in the pandemic. Talk to me about the strength there and what could happen in the short term as you think about this reopening and where you will be spending your money.
JAMES LIU: Well, that's right, Zack. In terms of sectors, the immediate impact of the shocks we have seen in the markets is clearly having a direct impact on the sectors. So energy is a good example of this as energy and oil prices are rising. You also have financial data with a steeper yield curve that can potentially benefit from it. But once the dust settles, that's really what you mention, the consumer is in a strong position. Now they may not spend twice as much as they do in normal times, but there is some catching up to do.
They've seen a significant boost in retail spending, albeit with higher savings on the side, meaning consumers are essentially saving some ammo for later spending. Overall, we believe that many sectors that underperformed last year due to the crisis may be ready to do a little better here. You mentioned tech too. And technology, it's important to differentiate between the short-term effects of interest rates and the long-term secular trends in technology, which are really the main reason technology is exciting, not because they do well when everyone is necessarily stuck at home .
So, overall, there are still some of these important technology, finance, and consumer thematic ideas that we think will be very attractive over the next 12 to 24 months.
ZACK GUZMAN: All right. James Liu, Founder and CEO of Clearnomics. Thank you for joining us. Have a nice weekend.
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