We're expecting a U-shaped recovery after COVID-19: Strategist

Gabriela Santos, JP Morgan Asset Management Global Market Strategist, joins Yahoo Finance’s Alexis Christoforous and Brian Sozzi to discuss how the markets are faring amid the coronavirus outbreak.

Video Transcript

ALEXIS CHRISTOFOROUS: All right, I want to bring in Gabriela Santos, who's a Global Market Strategist at JP Morgan Asset Management. Gabriela, always good to see you on the show. So look, we are bracing for a very bad second quarter. We know the first quarter is wrapping up today. We're looking at an earnings recession ahead. What are your expectations?

GABRIELA SANTOS: So I think investors have generally a pretty good idea about how deep of a hole we're going to have here for the month of March and for the second quarter. So we've already been getting quite bad economic data last week, this week. We'll see both the manufacturing and services PMIs fall quite substantially around the world. And we've also, of course, had very, very terrible jobless claims last week and probably this week as well. I think at this point that's probably expected.

I really think the question for investors for the month of April is when we can expect a recovery to begin. And that's where we still have very, very little information. We don't know when infection rates will peak and what returning to normal will look like. So that's really a big test for April, I think. Less so how bad the second quarter will be, more so what the second half of the year can look like.

BRIAN SOZZI: Gabriela, Brian here. You know, we just-- we were just speaking with Mervyn King, former Bank of England governor. And he brought up a key point that there is no exit strategy to allow these social distancing efforts put in by the Trump administration, but even more so around-- around the world. Does that cap upside for equities here?

GABRIELA SANTOS: So I think it-- it probably still creates a period here of volatility. I know we've had a change in tone. We've had a really good week in the markets, and that's because we have gotten more information about where we are, and we've gotten some good monetary and fiscal policy in place for an eventual rebound in 2021.

But we still do not know exactly, as you're saying, when infection rates will peak, how activity will go back to normal, what speed we can expect. So for us, we're not really thinking we're past the volatility storm here. We might still see a few weeks of that.

But for investors, I think it's important to realize that they still need protection for this volatility storm, that especially good quality fixed income and with the Fed actions that started to work again, so that's a really good sign, that diversification benefit. And then for investors who are thinking more about equities, about high-yield credit, then it's more focusing on 2021 and beyond and being positioned for that rebound.

ALEXIS CHRISTOFOROUS: What are you seeing, Gabriela, in terms of a recovery? We keep talking about that V-shape sort of snap-back, or is this going to be a choppier sort of W-shaped recovery?

GABRIELA SANTOS: So in our view, it's probably neither. So a V-shaped, I think we should, unfortunately, discount at this point because even when infection rates peak for COVID-19 around the world, what the China experience is teaching us is even though the governments begin to relax some social distancing guidelines, individuals themselves are still very careful about how exactly they go back to their day-to-day lives. So demand was quick to shut down, but it's actually much slower to come back online.

We're seeing that in China. So for us, the better shape, the better analogy here is a U. There's a very sharp drop in activity in the first half. There's a bit of a stall in the second. And then 2021 is when that strong rebound begins.

ALEXIS CHRISTOFOROUS: All right, Gabriela Santos, Global Market Strategist at JP Morgan Asset Management. Always great to see you. Be healthy.

GABRIELA SANTOS: You as well. Thank you.