Stocks fall as concern over virus fallout mounts

Yahoo Finance’s Alexis Christoforous and Brian Sozzi break down today’s stock market news with Brown Brothers Harriman Chief Investment Strategist Scott Clemons.

Video Transcript

- Let's stay on the markets here and bring in Scott Clemons, chief investment strategist at Brown Brothers Harriman. Scott, good to see you as always. Lots of focus this morning with regard to what Warren Buffett announced with the airlines and in the markets more broadly. What do you make of his comments?

SCOTT CLEMONS: Well, first of all it was a wonderful way to spend the weekend catching up with Uncle Warren and I'm a big fan of his. I guess every investor has their Achilles heel, maybe the airlines are Warren only Achilles heel. But I think his decision is motivated not so much by the current impairment of airlines but by the anticipated change in consumer behavior, even once we're beyond all of this.

And I think the technology such as we're using right now is such that a lot of people in the future, business travelers are going to think maybe that's more of a video call and maybe it's a Zoom call more so than flight. So I think that's one of many areas in which consumer behavior and corporate behavior will change and Buffett's simply getting ahead of that likely change.

- Hey, Scott, what do you not like right now? I know Warren Buffett out of airlines but what are some of the sectors that you're staying away from? We heard this morning that Carnival Cruises says it's not going to be cruising at all until at least August 1st, that's when it hopes to start to come back with some cruises. So what do you not like right now?

SCOTT CLEMONS: Well, we're thinking ahead towards the way in which these consumer patterns change in the future. But the one area that concerns us right now where we think there's probably more bad news to come is in the banking and financials sector. This is an environment which we're at the very early stages of figuring out what kind of mortgages won't be paid, what kind of loans won't be repaid.

Of course banks in the first quarter earnings season get ahead of that by posting pretty large reserves for loan losses but it's still to be seen how that plays out. The banks look cheap if you just compare them to book value but therein lies the problem. Book value was a concept that's very difficult to nail down in such a rapidly moving environment.

HEIDI CHUNG: Hey, Scott, it's Heidi Chung here. So one thing looking at the markets that sort of caught a lot of market participants attention is the fact that even as stocks had this massive rally in April, bonds sort of held their own as well when you look at the 10 year yield it's been flirting with those new highs. So I want to get your thoughts on what you think about this sort of conundrum, if you will.

SCOTT CLEMONS: Heidi, I think what happened on the 23rd of March was really important. I mean we think of that-- I'm a stock guy so we think of that 23rd of March as a stake in the sand of that was the low in the markets. Maybe the low for the cycle, maybe a low that will be retested, but that was also the date on which the Federal Reserve launched four or five different credit markets facilities. And in doing, so basically established themselves as the buyer of last resort [INAUDIBLE] first resort in some markets.

And in doing so I think effectively poured a lot of oil on the troubled water of a variety of financial markets but fixed income in particular. And it is no small thing. If you look back to the end of March to where we are today, the fed's balance sheet is 2.6 trillion, with a T, larger. That's an extraordinary amount of liquidity that's gone into financial markets. And it's calmed the markets down at least for now. That shock and awe time monetary approach has worked so far.

- And Scott, just staying on, going back to Warren buffet here. He made a good point it's not I see your point, I get your point on the consumer demand with airlines but the other side of this is that a lot of the companies are taking on more debt to survive this. As you look forward, because of that higher, those higher interest payments that increase debt, you're going to see or you could see fewer dividends, fewer stock buybacks. Does this mean that we're looking at a decade of suboptimal returns for stocks?

SCOTT CLEMONS: You know, Brian, I think we're probably looking at a decade in which there is a greater differentiation between sectors and between stocks as well. I've never as an investor at Brown, there's never been a big fan of leverage. Leverage, of course, magnifies both on the upside and on the downside. I've always preferred, and I think this will work over the next market cycle, those companies that have, let's call it a greater than average degree of control over their own destiny.

That usually takes the form of a strong balance sheet, less debt than normal, it takes the form of a lot of free cash flow. Those dynamics give a company the ability to pursue a variety of options. Hoarding the cash if they want to, as Buffett does at Berkshire Hathaway in anticipation of opportunities, paying dividends, buying back shares, a wide variety of options. Quality I think will be the order of the day going forward and indebtedness is the other side of that fray. I would avoid heavily indebted companies. They're simply too close to the line.

- All right, let's leave it there. Scott Clemons, chief investment strategist at Brown Brothers Harriman. Always good to see you and thanks for spending a week at Yahoo Finance watching Livestream.

SCOTT CLEMONS: Likewise, talk to you soon.