'We're likely see interest rates settle in a little bit': Expert

U.S. Bank Wealth Management CIO Eric Freedman joins Yahoo Finance Live to discuss the latest outlook for stocks as the February jobs report crushed expectations.

Video Transcript

SEANA SMITH: To help us better understand all this and look ahead to what we could see going forward, we want to bring in Eric Freedman. He is the chief investment officer of US Bank Wealth Management. And Eric, great to talk to you again. Let's start with the bond markets since that has been the big topic this week, this jump in yields certainly triggering a lot of volatility. How big of a threat do you think higher yields are to the market right now?

ERIC FREEDMAN: Well, thanks so much for having me on, and great job as always. Your team does incredible coverage. I'd just say a couple of thoughts on the bond market. One is going to be in terms of the importance, we have to find some level where we settle out. And we had, for a long time settled in around 100 basis points or 1%.

And since then, we've had this really strong ratchet higher, from 1% to north of 1.6%. And that happens in a very short period of time. That's going to make people concerned. So we do think that the bond market will likely settle out around these levels. It doesn't mean we can't stretch a little bit higher. But the market's not ready, meaning the broader asset class ecosystem is not ready for a movement to, like, 1.75% or 2%.

So I think the Fed understands that. The chairman had an opportunity yesterday to further talk down rates. He chose not to. And I think the market is certainly aware that there's probably some limited upside for the near term in terms of interest rates. But we don't think there's a massive upward trajectory in bonds. So we think this is a time where we'll likely see interest rates settle in a little bit here.

ADAM SHAPIRO: OK, so if they do settle down-- and we've had other Fed presidents actually allude to the fact, what, we'll have 2%, maybe even better than 2% inflation. But it's temporary. So if that's the case, you've got two horizons for investors. I want to focus on the one you call the steady state. What is that, and what does that mean to me as a regular investor?

ERIC FREEDMAN: Yeah, so it's the way that we try to project this for clients is that there are really two investment horizons that the market is very focused on. Investment horizon one is this recovery or reflationary opening horizon. And the second is the steady state that will follow once we have, again, the vaccine progress, and we see the broad economy open again. So we're very focused on that second time horizon.

Again, we think that for a trade, things like energy, things like cyclicals, those are places to be during that first horizon, the second horizon, that steady state. The issues that the global economy had before the pandemic are still there. So productivity challenges in Japan and Europe, those are still very evident. And we think that as an investor, where you want to be positioned in that second horizon is still in technology and still in healthcare. We think those are two demographic stories that are very durable, and that's where we would be focusing client attention as we get deeper into this year.

SEANA SMITH: And going off the weakness that we saw yesterday, when you see a drop of, what, it was down off of over 700 points at the lows of the session, how do you think investors should be playing? You mentioned some of the things that you're liking right now. Should they be using those pullbacks and buying the dip?

ERIC FREEDMAN: We think so. And the way to think about it is that in an environment like this, where we still have some shop to interest rates, that if you have a slug of capital you're waiting to put to work, do it in tranches. And yesterday, today, good times to put capital to work. We still are seeing an overall downtrend in a lot of the areas of the market where we still have some conviction. But you don't have to do everything at once.

So our viewpoint is that once we get into this more leveling off effect of interest rates, that the global economy is going to still grow. It's just going to grow a little bit slower than potential. So you want to be involved in parts of the market that we think sector wise will benefit. That's why we're focused on areas like tech and healthcare, in particular.

ADAM SHAPIRO: Tech and healthcare, but what about energy? Is it too expensive at this point? Because we've seen oil rise dramatically over the last month and a half.

ERIC FREEDMAN: Yeah, I think that the low hanging fruit has been picked, if you will. But there's probably some upside still. And so, the way that we think about it is that it's difficult to gauge the spot price of oil. But if you look at the trajectory we're seeing across not just the emerging markets, but also the US and parts of Latin America and even parts of Europe, that there will likely be a recovery bid to energy and energy prices.

As we get into the summer, as we get into the fall and the early winter of next year, when we should have more of that global reopening apparent, that's a time when you actually could see further demand increases for not just fuel, but also for heating products, as we get into the winter of next year. Hard to think of that as we're getting out of the winter of this year. But that's the discount time horizon you have to have. So we think it's a good place to be. It's not going to be a good place to be for forever, but we think it's still a worthwhile trade for investors.

SEANA SMITH: Eric Freedman, always great to speak with you. US Bank Wealth Management chief investment officer, have a great weekend.