The market is ignoring 'big risks': Strategist

U.S. jobless claims fell below 1 million to 963,000 for the first time since March. John Hancock Investment Management Co-Chief Investment Strategist Emily Roland joins the On the Move panel to discuss.

Video Transcript

ADAM SHAPIRO: We're watching that, but we're also watching what's happening with this economy. We want to invite into the stream Emily Roland, John Hancock Investment Management co-chief investment strategist. Especially when we look at these initial claims for unemployment benefits, down below 1 million, is that a milestone? And should we be cheering, Emily?

EMILY ROLAND: Thanks, Adam, for having me today. And certainly, I think it's evidence that we are sort of reigniting this recovery in the jobs market. We had 20 straight weeks of initial unemployment claims over a million, but we're still digging out of an incredibly deep hole here. We still have about 15 and a half million Americans who are receiving unemployment benefits right now. The unemployment rate, of course, at 10%.

So we still have a really long ways to go in terms of healing the jobs market. Today, certainly some momentum, but just to put things in context-- the worst week that we ever saw in terms of initial jobless claims before this in the global financial crisis was about 665 million Americans. So even a reading like we got today, just under a million-- yes, good progress, but still, again, very devastating numbers.

JULIE HYMAN: So, Emily, it's Julie here. It's great to see you. So if you look at this collection of data out there, whether you're talking about economic data that is improving but still not great, when you look at the situation between the US and China and tension there, when you look at the lack of stimulus agreement that we are seeing. And the other-- on the other hand, you see markets that are trading near record highs. How are you thinking about that? And are you thinking that the markets are being overly optimistic here about the outcomes of all of these items?

EMILY ROLAND: Yeah, Julie, I think it's such a great question. And it's pretty remarkable that we're talking about, you know, reaching these new all-time highs. And the market's ignoring a lot of big risks right now-- the tensions in terms of the fiscal stimulus getting done in Washington, which continues to get pushed out, obviously this sort of renewed breakdown in US-China relations. And let's not forget, in 82 days, we have a presidential election here in the US. So if we weren't already exhausted enough from 2020, we're heading into a very heated political environment as well.

So you know, stocks are priced for perfection right now. We've got a forward PE on the S&P 500 of 22 times forward earnings. And really, investors are ignoring some of these big risks. We want to stay invested in equities. We want to be able to participate in upside potential if this momentum and this sentiment-driven market continues. But we want to be really thoughtful about how we do that across asset classes.

We want to own a mix of high quality stocks and defensive parts of the market. And we also want to be exposed to quality within fixed income with a mild credit bias in order to navigate this environment.

BRIAN CHEUNG: Emily, it's Brian Cheung here. So obviously, the political event in November being a headwind in the future, but it seems like we've also seen a shift in the types of economic data that the markets care about. So originally, it seemed like these jobless reports every Thursday were driving a lot of the movement in equities at least-- seems like people don't care as much anymore. There's been a shift in focus, it seems like, to inflationary numbers. You could argue, I guess, to what degree that signals maybe optimism over where we are in this cycle.

But what do you think is going to be the major headlines that the markets will be watching, let's say, in the next month or two? Is it not just inflationary numbers but other types of metrics that you particularly are watching?

EMILY ROLAND: I think without a doubt, the biggest driver of the markets over the next few months is going to be developments around the vaccine. So I think really right now, because we've just talked about the fact that markets are ignoring a lot of these issues, what they're focused on, in our view, is really the developments around finding a cure or finding a treatment for COVID-19 itself. Because as we know, the economy can't fully reopen until we have that vaccine.

I know as a mother of a second and fifth grader, I'm not going to be able to go back and start traveling again this fall, because my kids are going to be full-time remote in school. So we think about that element as being very critical in terms of getting the economy back on its own two feet. And investors are largely ignoring some of the more traditional inputs that all of us think about when we analyze the macro environment. That's a really challenging environment for investors-- very easy to get whipsawed here. So staying balanced is really important.

JULIA LA ROCHE: Hey, Emily, it's Julia La Roche, and I totally hear you on that. You know, there's been a lot of talk lately about the weakening US dollar. I would love to hear your insights there and how you sort of navigate that from an investor's perspective.

EMILY ROLAND: Yeah, so the weaker dollar has been a really key sort of trend that's been developing. And when we think about what that means, typically in a weaker US dollar environment, that bodes well for foreign stocks. You know, you've got sort of this better-- slightly better economic growth playing out overseas. If you look at PMI data, it was better for the eurozone than it was for the US for the first time since February this past month, and that's translated into a bid for foreign currencies and a weaker dollar in return.

The one thing, though, that we're waiting for to fully rotate into international equities to benefit from that weaker dollar is for earnings estimates to start to improve. So in the US, if you look at next 12 month forward earnings estimates, they're really starting to turn higher. Overseas, when you look at that same data, it still remains very depressed.

So in playing the recovery in overseas equities, we would look to a more quality growth approach instead of rotating all the way into sort of value or deep cyclicals overseas. So we want some exposure there to play the weaker dollar, but we're not ready to sort of go all the way yet.

ADAM SHAPIRO: Emily Roland is John Hancock Investment Management co-chief investment strategist. It's always good to have you here "On the Move." All the best to you and your--