Markets are moving higher following Tuesday's opening bell. Megan Horneman, Director of Portfolio Strategy at Verdence Capital Advisors, joins Yahoo Finance to discuss.
BRIAN SOZZI: I want to get right to Megan Horneman, Director of Portfolio Strategy at Verdence Capital Advisors. Megan, good to speak with you again.
You know, this market has ignored a lot of bad news. It's ignored a lot of bad macro news, but I'm taking some notes here on the side of my screen. Norwegian Cruise Line has added a bunch of-- a bunch of debt to its books-- and I think we've lost-- or, there we go. OK, Megan, there we go. Sorry about that. Norwegian Cruise Line has added a lot of debt to its books here. You have Hertz exploring a potential bankruptcy and then J Crew-- J Crew Group in bankruptcy. So do you think the market is right to be ignoring some of this company-specific news that continues to pile up?
MEGAN HORNEMAN: Yeah, so I think that what the equity markets are really acting on right now is the reopenings and that we're seeing that starting gradually across the country. Now we know and we knew going into this that you would see quite a bit of bankruptcies, especially in certain sectors of the economy, retail being one of them. But we think that what the market's doing is really pricing more of the second half of this year and 2021 and what that recovery may look like.
Keep in mind that equity markets, historically, they tend to be much more forward looking. So they tend to look about six to nine months before the trough in economic activity. So right now if we are expecting a atrocious number for second quarter but some gradual recovery in the third and fourth quarter, then that market bottom in March, if you just look at history as a guide, could very well have been the bottom in this bear market.
BRIAN SOZZI: And, Megan, one byproduct of this-- you know, just staying on that from a company-specific perspective here that, you know, a Hertz might exit this with a lot less debt. Same with Norwegian Cruise Lines. Same with the J Crew. So maybe you think the market could be right that we might see some quick acceleration in earnings growth coming out of this?
MEGAN HORNEMAN: I think for some of those companies, you're going to see a lot of companies, I think, take advantage of the US laws in that they can reduce or eliminate their debt by using the bankruptcy system. We've started to see, as you mentioned, some individual stock names, but we're starting to see just the overall levels increase.
When we come out of this, we're going to be strong for several reasons, not only some people who took the opportunity to restructure their balance sheets with low interest rates-- maybe some that did take the opportunity to restructure through using bankruptcy but also the unprecedented amount of fiscal stimulus that we've put into the economy, both from the fiscal side and the monetary side.
ALEXIS CHRISTOFOROUS: Megan, you spoke a moment ago about atrocious economic data. We're expecting another atrocious number this Friday with the monthly unemployment report. Given all the data you've been seeing, would you feel comfortable characterizing this economy right now as being in a depression versus a recession?
MEGAN HORNEMAN: I would definitely say that this is more of a forced economic recession than a depression. If you remember, the Great Depression had so many different characteristics than what we're seeing right now. First of all, coming into the Great Depression, we had slowing economic growth, and that was not the case that we had in this instance. You were-- it was really exacerbated by speculative stock buying. That was not the case in this instance. And it was really solidified by the fact that the money supply was contracted and the Federal Reserve made error there, and that is definitely not what we're seeing here. And the last thing, really, is that it lasted a decade. This is something that we see as a temporary forced economic recession.
ALEXIS CHRISTOFOROUS: Also, we've seen something happen recently that hasn't happened in a while, and that's small-cap stocks are sort of having their moment in the sun, if you will. Do you see opportunities there? And why are we seeing that rotation into small caps right now, do you think?
MEGAN HORNEMAN: Well, oftentimes when you come out of a recession, some of those areas that either, you know, lagged going into it or were the most beaten down tend to be those areas that rally the most coming out of it.
We've been a bit overweight the mid-cap and small-cap space for some time, basically because their valuations were just so much more attractive than your large cap, especially your large-cap growth area. So we would still be looking for opportunity in that small- and mid-cap space despite the fact that they have led this rally in the past couple weeks.
BRIAN SOZZI: Megan, where have you been kicking the tires in terms of sectors? We had John Rogers on yesterday from Ariel Investments, and it surprised me to hear him say he's been taking a position in Madison Square Garden Entertainment. There's no sports. Where have you been looking?
MEGAN HORNEMAN: So we don't necessarily talk about specific stocks, but from the sector level, there's been opportunity, we think, in financials. There's opportunity in technology and health care especially, considering what's been used the most in this crisis. And then there was opportunity and there probably still is some opportunity in the energy sector only because that was the most beaten-down sector that there was, and we do think that you'll consider-- you'll continue to see some consolidation in that sector too.
BRIAN SOZZI: How do you pick a stock right now in the energy sector? With all the dividends being off in the mix, what are you looking for?
MEGAN HORNEMAN: We're looking for solid, you know, balance sheets. And again, dividends, that's totally up in the air, but we're looking for the solid balance sheets, those that can still-- you know, have the ability from the debt side. They can still make some additions to their balance sheet by actually acquiring some companies as well. So we're looking at those types of companies.
ALEXIS CHRISTOFOROUS: And, Mega, what about fiscal stimulus at this point? There's talk that there might be another bill coming down the pike. Is it enough? Is that going to be enough to help pull us out of this-- of this economic recession, as you called it?
MEGAN HORNEMAN: Yes. Let's just put it in perspective. It took us 55 days to come up with $2 trillion in fiscal stimulus. Back in the Great Recession, it took over 500 days. So this is a very different fiscal stimulus package, not only because of its size but also because of how fast we were able to come to the economy with this.
Now this next wave that they're talking about coming through, there are certain aspects of the economy that have not gotten enough aid yet. First of all, I do think the state and-- state and local municipalities need money. There still is some dislocation in the municipal-bond market. And I also think that a payroll-tax cut would help for some of those families that did not qualify for the stimulus checks but are taking on much more added expenses as well as a result of the crisis.
So I think those two things are very important. And then the third thing that would really have longer-term lasting effects to bring people also back to work would be some agreement on infrastructure.
BRIAN SOZZI: All right, let's leave it there. Megan Horneman, director of portfolio strategy at Verdence Capital Advisors, good to speak with you again. Have a good--
MEGAN HORNEMAN: Thank you.
BRIAN SOZZI: --rest of the week.
MEGAN HORNEMAN: Thanks.