Bond yields ‘provide a little relief’ amid volatility, strategist says

John Hancock Investment Management Co-Chief Investment Strategist Emily Roland joins Yahoo Finance Live to discuss market volatility, bond yields, investors, Fed policy, the 60-40 investment portfolio, and the outlook for the economy.

Video transcript

JARED BLIKRE: Now joining us to talk more about what investors are looking at and where the markets are headed is Emily Roland. She is a co-chief investment strategist at John Hancock Investment Management, and, Emily, it is great to be with you today. Just want to get your thoughts on what's happening here as we roll out into this new trading day.

EMILY ROLAND: Yeah, look, I think equity markets here continue to come under pressure. Certainly been a challenge as far as some of the earnings results that we've seen, and now we're seeing things like the Citi Economic Surprise Index move into negative territory.

So I think there's some clear evidence here that growth is decelerating, and stocks are starting to reflect that. One part of the market, though-- and Jared, you mentioned that this is not yet reflecting this decelerating economic growth backdrop is the bond market. So bond yields remain elevated. They have come down a bit or quite meaningfully. This volatility we've seen in rates is almost astonishing.

But we are starting to see bond yields move lower here, which is certainly what we would expect given the growth backdrop that's playing out. So bonds are offering finally a nice way to dampen the volatility here of a 60-40 portfolio and provide a bit of a relief for investors.

JULIE HYMAN: Yeah, it's interesting. We're hearing that from more and more folks in your kind of role that maybe bond prices have a little bit more to rally here. What is the sort of appropriate level for, say, a 10 year in an environment where the economy is slowing but the Fed is still raising rates, right? Like, what's that sweet spot?

EMILY ROLAND: Well, it's a really unusual environment, Julie, because the Fed is raising rates into a decelerating growth backdrop, and that's not usually what happens. And I think one thing that's potentially been overlooked by investors is how aggressive the Fed has been in using forward guidance or using their words to signal what's coming, and the bond market immediately prices that in.

So when we look across this major backup that we've seen across the yield curve to start this year, the bond market is pricing in 11 quarter-point rate hikes. So that means that if you think that the Fed is-- that rates are going to move higher based on Fed policy, you actually think that the Fed needs to raise rates more than 11 times, and we've been taking the under on that.

As you know, we think that the Fed will move aggressively here over the next two meetings-- 50 basis points, 50 basis points-- and then they probably pause as they're getting the tightening that they want. Clearly demand is slowing, as we talked about earlier. And the Fed will probably get the chance here to tap on the brakes and hopefully engineer a soft landing, but that's getting trickier and trickier.

JARED BLIKRE: It's always tricky. I wouldn't want to be Chair Powell right now.

I want to ask you-- and keep talking about the 60-40 because 60-40 has failed this year, but we've been through other periods and decades-- years ago, decades ago before a lot of us were adults and trading and investing, and I'm just wondering, is 60-40 out for potentially another lost decade? Because we saw this before the '80s. We saw this in the 1920s, and you can go back through history.

If we're in this environment-- and I think it's really pertinent to investors. What's worked for the last 40 years is suddenly not working. Is it going to work again and when?

EMILY ROLAND: Yeah, investors who own a 60-40 balanced portfolio just feel like they've been punched in the gut. Just to start the year, year to date, a 60-40 portfolio is down about 10%. The only time we've ever seen a worst four month streak has been in 1987 and in 2008.

Now interestingly, both of those periods were pretty nice entry points as we look at the year that followed. So we're also looking at an opportunity where the valuations have really cheapened up across both bonds and equities. We're seeing the yields on the aggregate bond index now over 3 and 1/2%. Investors haven't gotten a yield like that in at least a decade.

And we've also seen valuations on the S&P 500 keeping up, going from about 22 times forward earnings to start the year down to 16, 17 times forward earnings today, and we think that there are parts of the market here that have been sold off amidst this indiscriminate selling that now offer value and now offer opportunities. So we have our shopping list out.

JULIE HYMAN: And I know you can't tell us specifically what's on your shopping list-- or maybe you can-- but give us some the criteria that you're using.

EMILY ROLAND: Yeah, so we want to start to think about this market being about defense and not offense. And I think one of the things that you saw amidst the retailer earnings reports was this big shift in consumer spending that we're seeing away from the things that people want, like high-ticket-item discretionary items to the things that people need now that consumers are having to make some trade-offs, given high energy prices, given high food prices, between what they're buying.

I know we went to the gas pump the other day and said, well, we're just looking. You know, it's really a big challenge in terms of consumers' wallets right now.

And so we're seeing parts of the market that have opportunity in areas like utility-type businesses, infrastructure businesses, areas that have consistent demand, consistent income as even if we are heading into a slower growth or even a recessionary period, you know, people are still going to turn their lights on. They're still going to take a shower. And we want to think about, again, emphasizing those areas that can hold up amidst that slower growth backdrop.

JULIE HYMAN: Emily, great to see you. Hope you have a great day. Emily Roland co-chief investment strategist of John Hancock Investment Management.