John Hancock Investment Management Co-Chief Investment Strategist Emily Roland and RSM Chief Economist Joe Brusuelas join Yahoo Finance Live to discuss markets, yield curve inversions, marginal pressures, and the outlook for bond investors.

Video Transcript

BRIAN SOZZI: Welcome back. Emily Roland and Joe Brusuelas are still with us for analysis on those jobs numbers. Again, 431,000 jobs created in the month of March. Below estimates, though hourly earnings rose 5.6%, really a nice bounceback of sorts from February. Joe, over to you, you flagged a good stat for us inside the jobs report, just this increase in the number of people returning to the workforce. Why do you think that's the case? JOE BRUSUELAS: I think that the combination of wages are rising, that some-- a portion of the pandemic is clearly behind us. And I think there's another thing. I think people just are getting bored sitting at home. So a confluence of events is increasing the size of the US labor force, and that's an undeniable positive element in this report. JULIE HYMAN: Emily, can I ask you to tell the anecdote that you told during the break? Can we do that? Can we do that publicly? Because you have an exam-- a real world example-- EMILY ROLAND: Of course. JULIE HYMAN: --of somebody coming back to work. EMILY ROLAND: Yeah, I think my mom would love it if she knew that I was talking about her on TV, but she gave me a call the other day. She's 72 years old. She had a long, successful career in sales. She retired during the height of the pandemic, even though she didn't really want to. And she just called me the other day and told me that she's headed back to work. She missed it too much. So unfortunately, that means I'm losing a little bit of child care here, but I think it's a positive development for the US economy for sure, to have her back. JULIE HYMAN: Yes, most definitely. So there's an example for you, Joe. You can put that in your research note, too. Emily's mom can feature on TV and in Joe's research, too. So that's just one example. JOE BRUSUELAS: I'm going to use it. JULIE HYMAN: Yes. So, Emily, as you sit as in the strategy seat and looking at this report, is there anything that you see today that changes how you're positioning your portfolios or perhaps reinforces your thinking on how you're positioning? EMILY ROLAND: Yeah, nothing really in today's report. You know, I think it's always important to remember that the jobs data tends to be a coincident indicator. So it doesn't really give us the ability to sniff out what might happen in the future or give us an understanding of how soon a recession is coming. In general, the economic data lately has had a nice little perk up here of nice-- as Joe mentioned, Omicron's behind us. We're seeing really strong broad manufacturing data, things like PMI surprising on the upside. We watch the Conference Board's Leading Economic Indicators Index, and it's sitting at around 7% year over year growth. So US economic data is pretty solid right now. But as we've talked about, it is decelerating as we head forward. I think as it relates to the markets, the strong data, the super hawkish Fed, this repricing of estimates as far as Fed rate hikes has led to a period in which bond investors have gotten absolutely crushed. We're all looking at the Q1 data right now, and the BarCap Ag, Aggregate Bond Index is about to have its worst quarter since Q1 of 1980. And clearly, we're seeing negative sentiment building around bonds. The investors I talked of are starting to sort of throw their hands up and say, I no longer want to be an owner of bonds. And we actually see that as a potential mistake as we move throughout the rest of the year. Investors tend to hate bonds right before we love them. And as we do inch closer to late cycle dynamics, inch closer to potential recession in the back half of 2023, which is our base case, you actually want to add duration of portfolios and start to embrace bonds a little bit more. Again, not there quite yet, but we always want to look at where the puck is going. And we think bonds are starting to look a lot more interesting at these levels. JULIE HYMAN: Joe, I want to come back to what we're seeing inflation wise with the Fed dynamic, right, and how this feeds into everything that Emily is saying. In other words, I keep paying attention to this wage growth not keeping pace now with inflation as it is. And when the Fed raises rates, it's not just going to bring down, at least the Fed hopes, inflation overall. It's going to bring down the wage inflation, too, isn't it? So, in other words, if people are in a tight spot now because gasoline prices are rising and their wages aren't keeping pace, when everything slows down, I mean, isn't that going to be a problem? If it's problematic now, isn't it just going to get more problematic? JOE BRUSUELAS: Well, it's why you don't want to fall behind the curve, right? So, yeah, in the next six to 12 months, things are going to be difficult. No matter how good the economy is, public opinion is going to be sour. So it's going to be a significant challenge for American households, especially those at the lower end of the income ladder, in terms of their adjustment. I mean, we've talked about this before. If I spend $200 a month on food and food prices increase 10%, am I going to notice? Probably not. Will a family of three that lives on $55,000 a year? Yeah, that's a real problem. And that's, I think, the best way to look at this. Now, in the economy-- and this is unfortunate, right-- we have some real economic inequality. In our economy, basically 62% of spending is supported by 40% of households. The other 60% of households, they're only responsible for 38%. It's that cohort that I'm most worried about. The upper end cohort is going to push the economy along. I'm not really worried about them. They'll be OK with this adjustment, right? But politically, this is a real problem. And let me say one more thing about this report before we exit. This report really does give us a good idea just how resilient the economy is. If you think about the sampling period mid-February to mid-March, what happened? We got Mr. Putin's price shock via the Russian invasion of Ukraine. It did not frighten the American commercial community away from hiring. And there were some very big name economists this month with-- had zeros in front of their forecasts, and basically, they thought that it would all come to a stop because of the price shock. It hasn't. And I think that's a very important element that we don't want to discount, just how, A, resilient the economy is, and, B, just how American commercial community intends to meet demand and go out and pay labor for it. And that's a good story. BRIAN SOZZI: Emily, is that point by Joe-- and of course, it's definitely well taken and something we're seeing in a lot of companies. But is that enough to stay bullish on stocks when we're here, sitting and talking about a recession, yield curve inversion, prices for food going through the roof? Is that enough to have more of an allocation to stocks in your portfolio, instead of cash? EMILY ROLAND: Brian, what I would be watching-- and Joe highlighted the resilience of the US economy-- the resilience of US corporate earnings. We continue to see next 12-month earnings growth estimates move higher here. We know that there are companies out there with solid operating leverage, great pricing power, who have been able to expand their margins in this period of elevated inflation. Is it going to get harder? Yes. Some of those inputs are going to go up. We're going to see some pressure on margins, but the corporate fundamental backdrop is there right now. You do want to be careful about where you're allocated. As the economic cycle progresses, as we move closer to late cycle, you want to think about paring value. So right now, we're in a strange place where we want to own some cyclicality. We like areas like US industrial stock, US mid-cap equities for that offense, that inflation protection in portfolios, but we want to start to pair that with quality growth. We want to own stocks and sectors that have great earnings stability, that have the ability to grow organically even in a more normal or slower growth backdrop. So it's really important to be thoughtful, I think, in terms of equity markets and how you're allocated in this very unusual period of elevated inflation and slower growth. JULIE HYMAN: And Emily, finally, kind of related to that point, Brian and I have been on watch-- on earnings watch, as we always are. And we've been noticing that there definitely are some companies that are-- there's sort of a ratcheting up in concerns on company conference calls about input costs and also about, in some cases, a waning of demand. We think in particular of Tempur Sealy, the mattress company, RH, a.k.a. Restoration Hardware. Are there areas where you are more concerned right now that you want to be hands off with? EMILY ROLAND: Yeah, there's definitely areas where we're seeing waning consumer demand. And what that's really the result of is all of the pulling forward of purchases in some areas like that. In fact, when we look at the data, areas like furniture are one piece where I think consumers really kind of exhausted their budgets for in the height of the pandemic. So really, where we want to be focused is, again, those sectors and stocks that have the ability to grow organically, even as we see an economic climate that's slower, heading towards recession. So for us, that's bringing us to quality growth sectors, like technology and communication services, but again, pairing that with more cyclical areas like industrials that have high investment in fixed costs, property, plant, and equipment. There's not a lot of additional investment or variable costs associated with those types of companies, but they can still pass those higher prices on to consumers. I think companies that have higher variable costs, things like merchandise at a retailer, are going to be in a more challenging position here as we move forward, and margins get compressed. JULIE HYMAN: I love having you guys here. Joe giving us perspective on the report, Emily, too, and then Emily breaking it down, how to trade all of it. Really appreciate it, you guys. Emily Roland, co-chief investment strategist at John Hancock Investment Management, and Joe Brusuelas, RSM chief economist, thanks to you both. Have a great day, guys, and a weekend, too. The weekend's here.