Larger companies with the 'ability to weather the storm' will prevail: Strategist

Direxion Managing Director of Capital Markets Sylvia Jablonski joins Yahoo Finance’s On The Move to break down how the economy is faring amid the COVID-19 pandemic.

Video Transcript

ADAM SHAPIRO: Let's turn to the markets right now. And one thing we want to let you know is that Wayfair reported earnings for the first quarter this morning, and their sales grew 20% year over year. $2.33 billion. Their loss also grew to $285 million in the quarter, up from $200 million year over year.

The CEO is saying that margins are improving, but as we take that into context we want to look at the overall market, which is trading higher right now. And Sylvia Jablonski, Managing Director of Capital Markets joins us. And you seem to think that the market thinks that perhaps the second half of the year, we're back in line. But would you agree with what the market's telling us, Sylvia?

SYLVIA JABLONSKI: It's a hard call to make. I think there are a lot of factors here. Number one, the market and the economy don't really match. So if we look at some of the economic data you just mentioned, some of the numbers that we got out this morning-- you know, jobs are an issue. We came into this year with jobs at all time highs. Now we're at near-depression lows.

Consumer spending is likely to be down. Consumer confidence is down. Manufacturing is very likely to be down globally. But all of this is for a known reason. And that reason is the coronavirus. And we've been talking about this for months, but I think if we looked at that in a bubble, then I would say that we're looking at closer to a really long U or an L-shape type of recovery. But what will keep us in a potential U and not a wide U, let's say-- or W-- is that fiscal and monetary policy have been incredibly proportionally responsive to this.

So the Fed acted. What the Fed did over the course of months in 2008, they did over the course of weeks this year. You have trillions of dollars coming to the market, bond purchases, loan forgiveness, small business loans, all of these types of policies that will prop the market up. And I think that we're in phase two now. Right? We sort of crashed, and now we have all this stimulus for the coronavirus specifically to try to keep us at a level, even playing field and come out of this. But I think what will be key is Q3, Q4, do we start to then grow again?

And that's when the market will probably match the economy. And I think that we got the drop off of, this is really bad in the short term, at least for Q1, Q2. And we're optimistic that because of all this support to the market, and the idea that we are going to start reopening the economies, we might see that end of year recovery. The big if though is, let's see what happens when we open up the economy. We don't know that that's a good idea yet.

JULIE HYMAN: Well Sylvia, all of this timing uncertainty means that investors have to make some decisions about when they want to hit that buy button on certain sectors in particular. And you've been gaming it out, looking at consumer spending, I know, in particular, and some of the other sectors. So when is too soon? I mean, are people maybe even already too late as we've already seen this rebound?

SYLVIA JABLONSKI: I definitely don't think that people are too late. And I think that there are a lot of different opportunities out there. So you mentioned consumer discretionary. So a few months back, the various spider sector indices were shuffled around, and Amazon was put into consumer discretionary. It's the top name in that index. If you just look at the last month, Amazon has been up about 20% or so, Home Depot is up around that amount. McDonald's is up double digits. And these are the names that lead that index.

So people are out there buying things. They're out there buying tons of toilet paper. You've got Procter & Gamble in the Staples index, but you've got Amazon in the discretionary index. And I think the amount of paper goods, household staples, and things like that, stockpiling has really paid off for those companies. And they just they do continue to grow. And the fact that they keep hiring people to manage the demand tells me that there's still some room in that trade.

Another one is-- look at us. We're all working from home right now using various types of technology. We need 5G, we need data, we need semiconductors, we need WebEx, Zoom, Google, whatever it might be. And all of those names are pretty much supporting the ability for us to efficiently work and flexibly work during this pandemic. And given what's to come in the next couple of years, I would assume that companies will now invest in that work-from-home theme. So I think technology and semiconductors is another huge one.

And in my mind, number three for the longer term is AI and robotics. Again, I love this theme. I always talk about this with you guys, but robots and 5G are the way of the future. Imagine factories now, full of people standing next to each other on the line. If you replace you every five feet or so with automation, perhaps a robot, and maybe there's a big factor in terms of globalization too and how technology plays into that. All of those sectors-- technology, semiconductors, and robotics-- will play a huge role. So, I still think there's some good buys there.

BRIAN CHEUNG: Sylvia, it's Brian Cheung here. So it seems like all those things-- especially on robotics, for example-- might lend itself to needing scale, or needing to be a large company to begin with. So do you see a divergence in the performance of these large cap stocks relative to those smaller stocks? Do you think that's going to be the play, especially when the recovery does eventually come around?

SYLVIA JABLONSKI: You know, I do. And I think it's a great point that you make. The biggest thing there is that the larger companies, particularly the ones that we're talking about in these indices-- just take Apple and Microsoft, for example. The factories have been shut in China for months, and now they're almost full steam and whatever it might be. But Apple has a very strong balance sheet. Microsoft has a very strong balance sheet. So these are large companies, they do still pay dividends, they are cash heavy.

And if they have a pullback for a few months, their ability to weather the storm is just so much higher versus a start-up firm that really, you know, debt is cheap, but you need some cash to grow. So I do think large caps will probably prevail in this market. They have so far. It's interesting, what has bought us up has also stuck around in the pullback and recovery, which is sort of the first time we've seen that.

ADAM SHAPIRO: Sylvia, part of what you're sharing with us, though, is contingent upon consumer demand coming back. And you pointed out the IMF expects that 2021, we should see global growth recover to about 5.8%. But I want to throw something at you, and I realize it's mostly travel related. We see that, for instance, Norwegian Cruise lines may have to file for bankruptcy.

The airlines-- Amtrak this morning out with it-- they are extending their status for their clients through 2023. That says at least the travel industry doesn't expect that kind of demand to come back for at least two and a half years. Why do you think it looks better for the rest of the economy, if not by those indices? I'll call it the "don't cut me" indicie from the travel industry.

SYLVIA JABLONSKI: Yeah. I think if we look at-- like we were talking before, about whether you see a V shape, which we're not really seeing. Maybe it'll be a U shape, if you had an L shape. For me, the travel industry is the L shape. And I totally agree with you. People are not likely to get up and go out on a cruise or maybe even fly anywhere or rent a car. And you really see the impact of that across the whole transportation index.

But there are other parts of the economy that can start to open, albeit more slowly. Are people going to go out to restaurants right away? I'm not sure that they will. But perhaps 25% of the room will be filled. When Starbucks opens up, perhaps people will start walking back in there.

I do think that there are areas that have a shot to recover. I think that their revenues will be hit for sure. But I do think that there are some bright spots in terms of slow recovery possible. And on the other side, the consumer seems to be spending. If we listen to the banks-- I've heard some of the chairmen come on from Goldman Sachs, Bank of America, and whatnot, and they're saying that in the last week or so, spending is up. So consumers are out there shopping a little bit more than they were before too.

So I just really think it depends on which sector. And I think the recovery will be slow. But if the virus is contained, and there is this logical, sensical, get back to work where people can consume, I think that there's a shot that other areas-- outside of transportation-- can do OK.

ADAM SHAPIRO: Sylvia, thank you. You mentioned Starbucks, 85% of their stores, they say they're going to start to try and reopen. So people who love Starbucks, like our Julia La Roche, will be very happy with that. Sylvia Jablonski, thank you so much for joining us. Direction Managing Director of Capital Markets.