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Market strategist: ‘Not all equities are created equal’ in volatile environment

New York Life Investments Economist and Portfolio Strategist Lauren Goodwin joins Yahoo Finance Live to discuss Friday's market reaction following November jobs report data, the Fed's fight to combat inflation, volatility, and the outlook for the labor market.

Video transcript

[AUDIO LOGO]

BRAD SMITH: And for more on the November jobs report, we're joined by New York Life Investments Economist and Portfolio Strategist, Lauren Goodwin. Lauren, great to have you here on set with us. A lot that we've been continuing to break down in terms of some of the data that's come out this morning from the BLS on the monthly jobs report side. But if you are looking at the market reaction this morning and trying to position your trade going into the start of today's activity, I mean, what do you have to think, what do you have to position yourself and position your portfolio best to do in this environment?

LAUREN GOODWIN: You know, I have to say, looking at Wednesday's reaction to Powell's speech at the Brookings Institution, I understood why the market was excited to see a slowdown in the pace of rate hikes, but I think today's reaction is more likely to be appropriate too, where we are in the economy, which is a still super hot labor market. Inflation, that's going to move lower, but probably at a very slow pace, and one in which the Fed has been, actually, pretty consistent in telling us that the hotter the labor market is, the hotter inflation is the more challenging it is for the economy actually in the medium and the long-term. And so in terms of the market reaction, I think this is appropriate.

Now, when we think about how we can consider that over the next couple of weeks, maybe next few months, this is a market that has been driven consistently by what the Fed's messaging is, or its interpretation of the Fed's messaging. I think the Fed has actually been pretty consistently hawkish, and we should take that to heart with today's strong jobs report.

JULIE HYMAN: So we earlier heard Joe Brusuelas saying that this report, especially the wages part, makes it more likely the terminal rate is closer to 5. If that is the case, what does that mean for stocks? Are stocks appropriately priced right now if the terminal rate is 5%?

LAUREN GOODWIN: It's probably going to be negative for stocks. It's one of the reasons why we're very cautious in equity moving into the first half of next year. The equity market, although the bond market has at times priced a pretty appropriate Fed hiking cycle with fewer rate cuts over the course of next year, the equity market again has moved very much in line with the day-to-day data. The path ahead-- I can completely agree with Joe that the path ahead is likely to be 5, maybe even higher in the terminal rate, and the Fed has said that. And so in equity, we have to be really cautious. Now, not equities are all created equal. There are some opportunities we see. We're looking specifically at the equities that bring quality defensiveness and income in a portfolio to help bring some resiliency. But it is likely to be a challenging market ahead.

I'll give one caveat, which is that in this market, because it is so Fed narrative driven, you have 5% up days. And so we believe we need to be fully invested, but again, it's how to be invested that's important.

BRAD SMITH: Some people look at that volatility, and they say, "You know what? I'm just going to look towards the end of the year. I'm going to set the cookies out for Santa. I'm just going to call it a day, and then we'll re-approach this sometime when I feel more comfortable and things have settled a little bit." And you can point to this week as still one of those volatile moments here, where you've got commentary from Fed Chair Jay Powell, but also you've got, of course, the economic data that's continued to come out on the employment situation front. So for those who are saying, "You know what? I'm just going to kind of hit the pause button for right now, even if the Fed hasn't hit pause yet," what do you tell them to keep them engaged within the markets right now?

LAUREN GOODWIN: You know, if someone said, "I'm going to hit pause," as in, "I'm going to set it and forget it," I'm OK with that.

BRAD SMITH: OK.

LAUREN GOODWIN: For someone who's saying, "I'm going to go all cash," that's where from an investment behavior perspective I think it's troublesome, because the hardest thing is always getting back in, right? And so we're looking at all weather strategies for the period of volatility, let's call it the next three or six months, that we expect is ahead as economic growth starts to slow. I mentioned a few of the factors that we like in equity-- quality income defensiveness. That's a pretty compelling story for actively managed value equities. So if you're going to set it and forget it, maybe there's an opportunity to set it and forget it in strategies like that infrastructure is another one where you can have reliable income built in a portfolio, maybe cash flows linked to inflation, a way to essentially build resilience, not just against the volatility we see in the market, but inflation.

You know, at this point with inflation running 6.5, 7%, that's taking a bite out of total return if you move out of the market. And so we have to balance those risks as investors.

JULIE HYMAN: What does defensive mean to you right now? Like, has the definition of defensive changed over time? Like, we tend to think that it-- as classic, certain sectors are defensive, is that still how you think about it?

LAUREN GOODWIN: That's part of it. I think there are sectors that provide some more consistent resilience to the market. But it's not just resilience to the economic cycle, again, it's resilience to inflation. And so that's maybe a way in which we can think of defensiveness having changed. And so that's why-- while I gave the example of value equities, that's maybe more traditional, your utilities, your staples, your health care, your financial services, there are compelling stories in each of those. They're expensive. Sometimes things are expensive for a reason. But then there's also-- but there are additional strategies. So I gave infrastructure equity as another potential interesting example. That's not just bridges and tunnels, but also communications infrastructure, digital infrastructure, green energy infrastructure, where we do see, not only spending, but contracted cash flows.

And so, again, those are some ways that you can build resiliency against, not just the cycle, but the inflation side of the equation.

BRAD SMITH: Earlier this week, we were in the frame of mind that, "Hey, maybe the Fed's just cleared the way for a Santa Claus rally at the end of the year." And now you get the economic data today, and perhaps that's not the case. But from your perspective, should we still be looking out for any type of near-term Santa Claus rally as cyclical or as expected as it may have come to be?

LAUREN GOODWIN: I don't expect that we'll see a consistent rally, but I do think that we could see some good days. We have a couple of big data days, as well as Fed and other central bank meeting days. There's lots of messaging that we're going to get. I expect some will be taken as hawkish, some will be taken as dovish. And so, again, being invested in that environment makes sense to me. If I were thinking about, you know, what are the types of things that I'm going to start to be either dollar cost averaging into or adding as we move closer to the end of the year. I'm actually really interested in taking a look at credit. Because while the volatility that we're seeing in the market and the uncertainty around Fed messaging has been really challenging for equities these past few weeks, as we get a line of sight on the terminal rate, where the Fed may pause, it's actually really constructive for credit.

BRAD SMITH: Sure.

LAUREN GOODWIN: Yields are higher, pricing has adjusted. And so even if you do still see some volatility as economic growth slows, you're clipping that coupon.

JULIE HYMAN: Yeah.

LAUREN GOODWIN: Right. And so as rates move higher, that's potentially interesting. Again, assuming that we are getting closer to that 5, 5.1/4% where the Fed will stick around for a while.

JULIE HYMAN: Yeah. I like your comment. And some things will be read as dovish, some will be read as hawkish, sometimes it's the exactly same thing said.

LAUREN GOODWIN: Exactly.

JULIE HYMAN: I know, exactly. Lauren, great to see you. Thanks so much for helping us make sense of how to think about investing based on this jobs report. New York Life Investments Economist and Portfolio Strategist, Lauren Goodwin. Appreciate it.