Here's why stocks keep rallying despite civil unrest, lousy ADP data

Optimal Capital Director of Strategy Frances Newton Stacy joins Yahoo Finance’s Kristin Myers to discuss the outlook for the U.S. economy amid disappointing economic data and civil unrest.

Video Transcript

KRISTIN MYERS: Markets got a little bit of some optimistic news. ADP private farm rolls fell by less than three million. Now, that's compared to what was roughly nine million expected. So obviously the picture a lot less worse than a lot of people were expecting. Of course, however, we're going to have a jobs report out on Friday, so we're going to have to wait just a couple of days to see if on Friday that optimism carries through the rest of the week. To continue more on this conversation on the markets, I want to bring in Optimal Capital Director of Strategy Frances Newton Stacy. Frances, thanks so much for joining me this morning.

FRANCES NEWTON STACY: Hi.

KRISTIN MYERS: So first I want to start off with this rally, essentially, that we're seeing. It seems as if investors are completely shrugging off any bad news that might be out there, and there is a lot of it.

FRANCES NEWTON STACY: Yeah, I think that markets are just getting more comfortable with the fact that the Fed is willing to do anything, and they're talking about widening the asset purchases going forward. And they have successfully just shored up the liquidity issues, put a tremendous amount of stimulus in at once, but they actually have only use a small percentage of what they have promised for the lending facilities. So we haven't even seen all of the, you know, liquidity provided yet by the Fed, and I think markets are getting more and more comfortable with that, and I think that's what's helping us shrug off, you know, historically very bad news, even if it's a little bit better than expected.

KRISTIN MYERS: So Frances, it seems as if it was not too long ago, pretty recent history, that we were talking about investors being potentially more downbeat than they really needed to be when approaching the market. Do you think the flip side could be happening here? Are they a little bit more positive than they should be? And is that setting them up essentially to be really hurt in the next coming months?

FRANCES NEWTON STACY: I mean, the thing that you're really seeing right now is that, you know, the multiples are extremely high. But what that's telling you is that the debt on the corporate balance sheets is not at risk, because again, the Fed has said that they're going to come in and backstop the corporate debt. A lot of the corporate debt that probably, you know, or any of the debt that was kind of triple B, we expected it to fall into sort of the drunk credit rating based on the risk of default. That risk of default has kind of come off of the table because of the Fed, and the Fed has even gone in and said that they're going to backstop the high yield credit. So you know, they've taken so much risk out of the market from traditional calculations that these multiples don't seem to make sense. I think where the reconciliation point comes is as we move forward, if the recovery does hit a snag, or isn't as easy as we thought it was, and we've got a couple of things coming up that might support that.

You know, at the end of June coming into July, we're looking at the end of the first round of the PPP, the Paycheck Protection Program, and the thing about that is is that some of those companies that kept employees to be, you know, along with that program may drop some employees, so we may see a small uptick in unemployment. We've got taxes due on July 15. You know, that could put a little bit of a liquidity strain on the markets like it did in September, which started sort of the Fed's impetus about, you know, raising the balance sheet up again with quantitative easing, or they're not calling it quantitative easing, but increasing the balance sheet. And then, you know, we've got that forbearance program for mortgages coming off October 31. So just going forward, we do have some headwinds. But right now, I think the markets are very comfortable with what the Fed and Congress has done thus far.

KRISTIN MYERS: So I want to pick up on that point that you just made about the recovery. This is something that my colleague Zack was talking about in the last hour with Deutsche Bank Torsten Slok. He had a really nice chart about the recovery. That we're looking at a V shaped recovery, but he said in the last hour, that right now we are essentially standing in the canyon looking up at the mountain top of that recovery that we have to climb. Are you picturing that recovery the same way?

FRANCES NEWTON STACY: Yeah. I mean, the thing is is it's very deep. The V is very deep, and the only thing that we can do going forward is, you know, look at technical analysis, look at the quintessential areas of resistance. 3125 is some resistance. If the S&P kind of closes above that, that's a signal of strength. That's a signal of, you know, the markets are comfortable at these levels. So we just have to continuously watch these levels of resistance and see how the markets react. And if they kind of blow by them and continue at this comfort, then we just know that the Fed is the underlying cause, probably asset prices going so much higher despite the fact that the real economy and main street is probably suffering the most.

KRISTIN MYERS: Frances, I have time for one last question with you, and with the jobs report coming up on Friday, I feel like I have to ask you to pick out your crystal ball and tell us what you're expecting on Friday. Is there room for optimism, or do you think we're going to get clobbered?

FRANCES NEWTON STACY: I expect a continuing decline in the jobless claims. However, the unemployment report, you know, it's speculated that it's going to be 20% unemployment. The thing to note will be how quickly we recover from that historic number and if we can kind of get back into-- there's estimates that 42% of the jobs lost might continue to be permanent, which is half. So if you think of reducing that number down to about 8% unemployment, then you're getting back into the financial crisis levels. And we've already had so much stimulus and so much government intervention ahead of the financial crisis level, so if it levels out there with the stimulus that we have, then that's kind of a good sign even though they're terrible numbers.

KRISTIN MYERS: All right, well, we we'll have to leave it there. Frances Newton Stacy from Optimal Capital. Thank you so much.

FRANCES NEWTON STACY: Thank you.