Markets: ‘No news is bad news’ for investors, strategist says

Jack Manley, global market strategist at J.P.Morgan Asset Management, joins Yahoo Finance Live to explain why a lack of clarity on inflation and Fed action is dragging down market sentiment.

Video Transcript

SEANA SMITH: We are very, very excited that Jack Manley is here in studio with us. JP Morgan Asset Management global market strategist. So, Jack, lots to unpack here. Jared was just talking about the key inflation reading we're going to be getting before the bell tomorrow. Taking a look, though, at today's market action and what we've really seen play out over the last several weeks, clearly, there is something holding investors back, keeping the market in check. Yes, inflation is one of those things. But what else do you think is the reason why it's another day, and we're seeing the Dow off 324 points?

JACK MANLEY: I do think the inflation story is a big component to that. But at the end of the day, markets are just faced with a whole lot of uncertainty right now. And it's not just that inflation story, as you said, Seana. We have still some uncertainty, some lack of clarity around what the Fed is going to do. The war in Europe continues to rage. And we know there are new developments happening on that front every few days.

There's a lot to unpack right now. There's a lot to digest right now. And without any sort of real clarity on these things, it's hard for markets to meaningfully move higher or lower, right? It's all markets really want at the end of the day, is news. And no news is bad news.

RACHELLE AKUFFO: And Jack, people are really looking for some signals here, as we look at what's happening with the 10-year Treasury yields crossing that 3% threshold, rising oil prices. What are some of the signals that you're watching that are determining how people should be positioning their portfolios?

JACK MANLEY: So I think the big thing we need to take a look at is that inflation print tomorrow, because if, indeed, it comes in the way that we are expecting it to, it should represent another moderate decline relative to the previous month. I see inflation cooling off, more or less, on its own, particularly as base effects become more challenging and as some of those supply chain issues start to subside. I mean, we know China is finally starting to reopen. That should be an encouraging story.

If inflation does continue to move lower and if we take lessons from the employment report the other week that showed that there was some moderation in wage gains, and we see that the economy is slowing down, maybe then the Fed starts to realize that it doesn't have to be as aggressive in normalization as the market is currently fearing. That, I think, is the big overall issue that markets are staring down at the moment. If we get a little bit of a reprieve from the Fed, I think it's a tailwind for risk assets. It's not happening tomorrow. It's certainly not happening next week at that meeting. But it likely will be something that we see happen in the back half of this year.

DAVE BRIGGS: Jack, Dave here. Nice to see you in studio. One step forward for you, two steps back on this side. But another sign that people are watching, we'll wait that inflation print tomorrow. But the tenuous 10-year, are the markets held hostage to that at the moment?

JACK MANLEY: Oh, I think absolutely. I mean, it's seen as a barometer, kind of a bellwether for the overall trajectory of interest rates in this country. But we've also seen that that 10-year number has been sort of range bound for quite some time. I mean, it was over 3% about a month ago. It slipped down. It's back up just a little bit over 3%. But I'd say that the bond market, very much like the stock market, is a forward-looking financial instrument. And a lot of the pain that we've seen or that markets, I guess, are anticipating out of the Federal Reserve has already been priced in to a lot of these longer dated yields, like the 10-year Treasury.

So if that is the case, not only would a Fed balk or a Fed pivot be a tailwind for risk assets, particularly on the equity side of things. I think it could mean that duration actually starts to make more sense in a portfolio, correlations finally working the way that they're supposed to.

SEANA SMITH: Jack, when we take a look at the labor market, lots of fear about the economy slowing down. Economists have been pointing to the strong labor market. It's almost the one thing that we've been relying on. Today, we got that jobless claims number out. 229,000 just last week, the highest level that we have seen in about five months. Is that worrisome to you? And what does that potentially signal?

JACK MANLEY: So that number in and of itself doesn't worry me too much. I mean, it's still reasonably in line with long term averages. It's a little bit greater than it has been recently. But the economy has just been on fire for the last several months, several years. So a modest uptick on that front is not particularly concerning. What we really need to pay attention to in the labor market right now is what's going on with the participation rate.

Because if you look at the labor force, it is structurally smaller by a couple million people, relative to where it was just a few years ago. That smaller labor force is what is directly causing this incredible surge in wages that we've been seeing, wage growth running at four decade highs. If you're worried about inflation, if you're worried about profitability in corporate America, that wage growth story is an integral part to the overall puzzle. And so we need to pay attention to what goes on with that participation rate. Hope that more people come into this economy and wage growth continues to moderate.

RACHELLE AKUFFO: So, Jack, as you look at how the markets have been reacting to some of these inflation datas, the points that come out, other sort of data points in the economy, do you think that the markets are pricing the risks incorrectly?

JACK MANLEY: I think that markets are probably a little bit too pessimistic right now. I think there's a lot of momentum when it comes to performance in periods like this, right? I mean, granted, I'll admit it. There's not a whole lot of good news out there. It's easy to not feel particularly good about how-- about the current state of affairs. But I think we're in an interesting position right now where so much pain has already been felt in the equity market. So much pain has already been felt in the bond market that investors need to start considering the upside potential, as opposed to just the downside potential.

You do a little bit of very quick back of the envelope math. If you assume that the S&P 500 gets back to where it was in January, right, forget about hitting new highs, just getting back to that previous peak, you're looking at a pretty healthy double digit return over the next 12 months. If it's a little bit longer than that, the return, of course, comes a little bit lower than that. But if we can assume that most of the pain is already priced in, and perhaps it's been overpriced, and markets are a little bit too fearful, then, again, we need to start considering that longer term upside potential. I think it's more powerful.

DAVE BRIGGS: Jack, you do hear a lot of fear. CNBC released the results of their CFO survey, which asked 22 CFOs if they see a future recession by the end of '23. All 22 said yes. Do you disagree?

JACK MANLEY: I don't know if I necessarily disagree with that. I think that '23 is more likely than '22. But what I think is so important to remember is that we have been extraordinarily unlucky when it comes to the recessions that we've experienced in the last 15 years. The COVID-19 recession is not a normal recession. The global financial crisis is not a normal recession.

And if you look at the health of the consumer right now, you look at the state of the economy, what's going on with the labor market, if we do see a recession in the next couple of years, this is not going to be a double digit decline in economic activity. This is not going to be a spike in the unemployment rate to 14%, 15%. This is not going to be a dragged out process.

This will be a short, very light, technical recession that should, frankly, allow prices to reset to something that's a little bit more manageable, a little bit more comfortable. And then I think it's back off to the races and perhaps a more healthy environment than where we are right now.

SEANA SMITH: I like the optimistic outlook, helping to alleviate some of the fears out there. Jack Manley, great to have you in studio. Thanks so much for joining us today.

JACK MANLEY: Pleasure to be here.