In an interview with 60 Minutes, the Chair of the Federal Reserve Jay Powell said the U.S. economy might not recover from the coronavirus pandemic until the end of 2021. Despite the prediction, however, Dow futures heading into Monday morning were up nearly 400 points. WGBH Morning Edition host Joe Mathieu spoke with National Securities Chief Market Strategist Art Hogan about how we can interpret what's going on in the markets and what we might be able to expect in the next couple of years. The transcript below has been edited for clarity.
Joe Mathieu: I find myself using the old phrase "whistling past the graveyard" every time I see stocks go up lately. It's like traders will take any excuse, Art, to push prices higher even as we head into a recession.
Art Hogan: Yeah, I think what investors are trying to do here is look through the bad news in the here and now, and look forward to better news as we work our way into the second half of this year and into next year. I think that markets historically have been forward pricing mechanisms and I think that that currently still holds true. So there's known unknowns like the unemployment rate, which is likely to be in the 20 percent range — 20, 25 percent. There's the devastating retail sales that we saw on Friday. There's certainly a GDP estimate for the second quarter that's going to look historic in its magnitude, down some 30-odd percent. But markets do well in an environment where horrible news gets better, and I think that we've got a second quarter that probably is the low point of this cycle. Incremental business openings and state reopening will probably get us to see a fourth quarter that's better than the second quarter significantly, and a 2021 that's better than 2020. I think investors are investing for that future, not for the past.
Mathieu: I know the president likes to say things are going to come roaring back in a couple of months. Economists call that the V-shaped recovery, if you want to geek out for a second here, that we go down and then just shoot right back up to where we were. And I wonder how priced to perfection this market is. I know we've written off the second quarter, but if that doesn't happen, Art, and restaurants and retailers are at lower capacity and we're kind of crawling through the fall, let's say there is maybe another wave, does this market look overpriced?
Hogan: If we were to focus on what we think a credible estimate would be for 2021's earnings capability for the S&P 500 and put a fair market multiple on that, I think about 2,800 would be about where we should be. And oddly enough as we come into today we're at 2,863, so we're probably getting a little ahead of ourselves. We're about 25 percent off the lows that we put in on March 23rd, and we're about 15 percent off the highs that were put in Feb. 19. So in that middle ground probably is where we should be. Unfortunately, the battle in that middle ground is pretty violent. So we see down 2 percent last week, up 2 percent the week before. So volatility is really the norm, not the exception. But I would say that we're not that overpriced, but we're certainly not looking cheap right here at 2,863. I would say we're a shade in the overbought territory.
Mathieu: Jay Powell, the Chair of the Federal Reserve, in that [60 Minutes] interview said don't bet against the American economy. That seems to be what really has people focused here. He says we're not out of ammo yet — the Fed, that is. But with interest rates near zero here and trillions of dollars in bond buying, Art Hogan, is there really anything the Fed has left that it can do?
Hogan: Well, there really is. It's all about providing liquidity. It's not about interest rates necessarily going into negative territory because that's an experiment that's been proven not to work, but it's keeping interest rates low for a long period of time. And that's likely to be the environment we're in. The massive amount of liquidity is keeping businesses open. It's certainly keeping liquidity in the system so that businesses that need access to capital will get it. We don't have to worry about banks seizing up like we did in the Great Financial Crisis. I think we've got a Fed that's really pulling out all the stops and it will continue to do so. I think that's as important as anything. They're trying to mitigate the damage that is obviously going to follow in the wake of this pandemic, but they're also hoping to stimulate economic growth as things start to get better.
Mathieu: There's a lot to consider about where we go here in the near term, Art. Some strategists like yourself think we might retest the lows that we fell to about a month ago that you just mentioned. Is that part of building back up, going back to the lows?
Hogan: I don't know that we necessarily have to retest those lows, and I say that for three reasons. First of all, we got there really quickly. We did a lot of damage to the broad market indices, down 35 percent in about 20 days. That's historic in and of itself, and I think that the fact that we've seen historic fiscal and monetary policy response probably keeps us from retesting those lows. That's not to say, though, that we're going to race off to the all-time high again. I think we spend a lot of time in this middle ground, somewhere in between the all-time high and the all-time low. And probably that's going to be the case for most of this year. So what you would see is a quick recovery and we're probably going to remain some 10 to 20 percent off of the lows and 10 to 20 percent off of the highs for the balance of this year, kind of slow and steady, grinding it out as we incrementally open businesses up and start to see economic activity pickup. It's not going to be fast and it's not going to be a V-shape, it's certainly going to be more of a U-shaped recovery for the economy, and I think that's what the market's pricing in.
Mathieu: That's important for you to say to us, though. A U-shaped, not a V-shape — that's kind of important when you picture that and here's some of the rhetoric. Lastly, Art, we get to earnings reports from some big retailers this week — Target, TJX, Home Depot, a bunch of others. Is that going to set the near-term direction?
Hogan: Yeah, the retailers always report at the end of the earnings reporting season and a lot of the brick and mortar stores are going to come out and tell us what we already know: that the American consumer is saving more money and spending a lot less money.
Mathieu: So it's not going to be good?
Hogan: Unless you're Amazon or somebody that's got a really good online presence, you've been hurt by what's been going on. And even when those stores reopen, it's gonna be difficult to see them actually produce at capacity.
