'Fundamentals of the economy are quite weak': Strategist

Credit Suisse Chief U.S. Equity Strategist Jonathan Golub joins Yahoo Finance’s On The Move to weigh in on the Federal Reserve’s response to COVID-19.

Video Transcript

ADAM SHAPIRO: We invite into the stream, Jonathan Golub, Credit Suisse Chief US Equity Strategist. Good to have you here. Several things to talk about. We've got the fed purchasing corporate debt via ETFs, and eventually, they're going to go even further. But I want to start with one thing you've pointed out. That 23% of companies will deliver an increase in their earnings per share growth in the second quarter of 2020, year over year, at least. Why do you believe that's going to happen?

JONATHAN GOLUB: Well, first of all, the estimates that we're using, are based on consensus numbers. So it's not Credit Suisse that thinks this is going to happen, these are thousands of stock analysts who are looking at companies bottom up and making that determination. But the real key story here, is there's not one monolithic stock market. These are, you know, in the S&P 500, there's 500 companies. And you know a substantial portion of them are actually seeing profit growth. Now these tend to be in areas related to tech and other non and non-cyclical parts of the market, like health care, consumer staples, which have not been harmed by what's going on.

Now there's also about 15% of the market that's actually expected to see profit losses or economic losses to their businesses. And those tend to be in areas that are quite cyclical. These would be auto companies and energy companies and restaurants and hotels, and things that we're hearing so much about. And the reason the market is so bifurcated between these winners and losers, is because they have very different economics.

JULIE HYMAN: Hey, Jonathan, it's Julie here. At the same time that we're seeing that bifurcation, we are also seeing, as Adam mentioned, the Fed come in and buy corporate debt through ETFs. And of course, the Fed, that's not all the Fed has done. The Fed has been very supportive here in terms of providing liquidity to all kinds of different companies and entities. So is there also sort of a support under the market as a whole as a result of these kinds of actions? Or do you think that it's still going to more advantage the companies that you're talking about, that are on better footing?

JONATHAN GOLUB: No, you know, Julie, I think there's actually, there's really two stories here. The first is, what's going on between individual stocks and within the market itself. And the second is, the market broadly. I would argue that the Fed's purchases of bonds, that it doesn't really matter whether they buy the bonds directly or they buy them through an ETF. They're ultimately buying up corporate debt. And that backstops equities. So this is a very important thing.

And you can almost think about it as if the fundamentals of the economy are quite weak. And they're likely to stay weaker than we all want to believe for the next quarter or two at least. And yet, the market's going up, partially because the Fed kind of has their thumb on the scale, providing a boost. And the boost that they're giving is not going to be towards the healthiest companies that don't need it, the companies that may be growing or have flat earnings growth. It's those companies that are in much more precarious situations that if not for the Fed, may be down substantially more than they already are.

JULIA LA ROCHE: Hey, Jonathan, it's Julia La Roche. I want to kind of go off that point you just made, that the fundamentals in the economy are weak, yet the market has still been going up, and partially because of the Fed moves. Yeah, it makes me wonder, are the markets [AUDIO OUT] kind of an almost impossible case recovery scenario from the pandemic at this point?

JONATHAN GOLUB: Well, I mean, I think that there's a, you know, there's a number of underlying issues. The first one, if you actually look at what was predicted in terms of the progress of the virus and the infections and death counts and things like that, the predictions only a few weeks ago, was that we would have already peaked and that this would be rapidly moving towards effectively a zero death rate in places like New York, but in most of the country.

And instead, what seems like is happening, and I think we're going to hear about this from Fauci and others today in front of Congress, is that we appear to be plateauing at a higher level of about 2,000 deaths a day, and that that's not meaningfully coming down. The benefits, the improvement that we're seeing in places like New York are not playing out elsewhere.

And so I think this is going to mean that this whole discussion of, is this a rapid V shaped bounce, it may have been a V shaped bounce in the stock market because of the Fed and the policy response, but I don't think you're going to have a V shaped bounce in the economy if people are afraid to go back to work and go out to a restaurant or the like.

ADAM SHAPIRO: Jonathan, Neel Kashkari, the Federal Reserve Bank President in Minneapolis, has actually just said that it's more likely, this is a quote, "more likely based on what we know, a gradual muted recovery. We're not going to fix our economy until we get our hands around the virus." It's that comment about the virus. We heard from Fauci not from long ago, not an exact quote, but essentially that the rush to produce a vaccine may actually create more problems in the long run than they cure. And yet, you know, Schwab or Credit Suisse put out the note, which second quarter 2020 earnings per share for a lot the health care companies is looking pretty good. Does Fauci's comment jeopardize that?

JONATHAN GOLUB: You know, I'm not familiar with the comment, and I don't quite, just listening to the way you're describing it, see how our desire to get a quicker vaccine or therapeutic is in some way, you know, a bad thing. Obviously, you know, we need to move through this. He's also commented, which I think is correct, that you don't get, you could try as hard as you want, but we're really right now, only you know, eight weeks into, or so, this does self-quarantining or shelter at home process. And this is going to potentially take a while.

So the more that, and right now, the market seems a little bit disconnected from this. The market believes that we're going to quickly maybe, you know, June 1, all be getting back to a normal routine. And I think that the comments you made were right. We are going to step forward into a renormalization process. But right now, we don't really have guidelines on what does it mean for kids to go back to school.

What does it mean to go into an office building with an elevator with a whole bunch of people very close to each other. Or to commute by train. And for those of us who are on air right now, you know, many of us have to commute in using the train or the subway. Until we really have a sense of that process, I think this is going to be somewhat precarious, which is why it's also so amazing to see the volatility of the market has been coming down so meaningfully. And so the only logical explanation, is that it's not the conditions that are really dictating, it's this huge government response, which is nice to see, but it has its own side effects.

JULIE HYMAN: So Jonathan, to come back full circle to what you were saying in the beginning and this sort of bifurcated market between the areas that may be more resistant or more resilient in this, to put a fine point on it, do you think people should be buying those areas or just kind of holding on in those areas? I mean, I think you mentioned hardline retail, insurance, sectors like that.

JONATHAN GOLUB: I think that those areas of the market that are healthy, are going to continue to be healthy. That doesn't mean that if the economy is weak, that online ad sales will be a little bit softer or that we may go out and purchase something, you know, a little bit less of something. But those areas, like consumer staples and food items and cosmetic items or personal care items, and even you know, the use of technology, which in many ways, is increasing while we're at home, because we're communicating digitally with each other and the like, those areas, if they appear reasonably healthy, I think that there's no reason why you can't be, you know, putting money in them.

There's a reason why the NASDAQ is actually up year to date. It's not a spec, it's not just speculation. It's a group of much healthier companies that are vibrant. And the, you know, the stock prices are reflecting that. Not just simply, it's not only a safe haven. These are, many of these are very good stories.