Markets mixed as Powell downplays negative rates

On Wednesday, Jerome Powell shared prepared remarks regarding the future outlook for the U.S. economy, but admits there are 'longer-term concerns.' Andrew Slimmon, Morgan Stanley Investment Management Managing Director and Sr. Portfolio Manager, joins Yahoo Finance to discuss.

Video Transcript

BRIAN SOZZI: Now let's take a closer look at the market action with Andrew Slimmon. He's Managing Director and Senior Portfolio Manager at Morgan Stanley Investment Management. Andrew, good to see you this morning. All eyes on what Jerome Powell had to say this morning.

You know, as you zoom out, you know, I think a lot of folks might start getting worried about the lasting damage from the COVID-19 pandemic. Are you worried about it and what it means to longer-term equity returns?

ANDREW SLIMMON: Well, yeah. I mean, look, the market's had a very good rally off the low, and I think it's priced in the economy reopening. I mean, I think we all have to remember-- it sounds simple, but the market's a leading indicator. It had to quickly price in the recession because it happened very quickly. And likewise it has now priced in the economy reopening.

But that's not going to be clear. It's not going to be a clean reopening, so now we get murkier. And that's why I think the market's going to run out of steam kind of at these levels at, you know, just below 3,000 until we get more clarity about, you know, the reopening.

So it doesn't surprise me. We've had a very big move. Doesn't surprise me the market's going to struggle.

ALEXIS CHRISTOFOROUS: Andrew, what could Chair Powell has said that would have excited investors today or perhaps extended the recent rally?

ANDREW SLIMMON: Yeah, I mean, I think his caution was enough to cause people to take pause, but I think his caution only after such a rally in the stock market. If it had been caution at the end of March, I don't think it would have caused, you know, much damage because the market was down so much. So I think it's a combination of caution after such a big rally that is a reason for concern.

I would point out, however, that there is an old axiom which is markets do best when things go from horrible to less bad. And what I did hear Jerome Powell say is the unemployment rate is peaking in the next month or so. So that's a good sign because, you know, the rate of change is going to improve in the near future. That's positive. We can't forget the fact that stock do best in that scenario. They do worst when things go from great to only good.

BRIAN SOZZI: Andrew, what is a struggling market look like to you? Is it a market that goes into correction?

ANDREW SLIMMON: Yeah, I don't see the market moving substantially back to the retest of the lows, primarily because of what the Fed has done as well as if you study previous kind of health scares, most of the damage to markets is done early on. And I think this, you know, news of development of vaccines and so forth will continue to put a floor on really the retest of the low.

But I think, you know, we've had kind of the reflex rally. So I think at this juncture, we're into stall speed. One of the things that worries me is companies have effectively removed their guidance. And so as we get closer to the second-quarter earnings report, I think there's going to be more anxiety because they haven't basically guided Wall Street to where they should come in for the quarter. So the effect is that earnings dispersion estimates have gone through the roof, and so there's a lot more uncertainty.

So I think it's a combination of the states not opening as cleanly as the market had thought plus we're coming-- the uncertainty of earnings leads me to believe that, you know, we're going to-- you know, we're going to-- we're into stall mode now at this juncture.

I will tell you this, that the fourth quarter is historically the best quarter for stocks. The reason for that is that the market anticipates the next year, and we're going to have obviously very good year-over-year earnings growth in the fourth quarter. I'm sorry, in next year given the anemic negative growth this year, and the market probably will respond positively to that. But that's way too early right now, so I think we're into stall mode now. And, you know, it's conceivable we could be back at 2,600, you know, in the next few weeks.

ALEXIS CHRISTOFOROUS: Andrew--

INES FERRE: Andrew-- oh.

ALEXIS CHRISTOFOROUS: Go ahead. Go ahead, Ines.

INES FERRE: Ines Ferre here. Jerome Powell talked about the measures the Fed has taken to help companies. Are those measures enough to avoid massive bankruptcies? And also he said that more fiscal help may be needed. On the fiscal side, what would the markets be expecting to see?

ANDREW SLIMMON: Well, yeah. I mean, I think that's-- look, I think what has been proven is that monetary and fiscal policy has done whatever it's taken to protect the US economy. So I think they will continue to judge the situation, and they will continue to push for policies to protect companies.

Will there be bankruptcies? Yes. Will there be store closings? You saw some yesterday. Absolutely. That's the-- you know, that's, unfortunately, the natural evolution of recession.

But I think what has been proven and one of the reasons why I think the market so quickly rallied off the low is that the government was very quick-- unlike in 2008, was very quick to respond with policy stimulus. So I'm not as worried about that because I think there will be continued efforts to shore up the economy coming out of Washington.

BRIAN SOZZI: All right, let's leave it there. Andrew Slimmon, Morgan Stanley Investment Management managing director and senior portfolio manager, good to speak with you. Have a great rest of the week.

ANDREW SLIMMON: Take care. Thank you.