Markets: ‘There’s a lot of value to be found’ in financials and health care, portfolio manager says

Diane Jaffee, group managing director and senior portfolio manager of TCW Group, joins Yahoo Finance Live to discuss how investors should navigate market volatility amid Fed uncertainty and record inflation.

Video transcript

BRIAN CHEUNG: It's been a roller coaster ride of a 2022 in markets. But when you see the reaction in markets to the Fed Chairman's commentary last week, and then also into this week, interesting to see that you have the Fed chairman, for the first time, acknowledging the risk of a recession, and markets are going up. What the heck is going on here?

DIANE JAFFEE: Really, the investors want the chair to understand that inflation is a significant problem and that dealing with it earlier is actually better for the long-term. So I think the investors are taking heart that the Fed is going to do whatever it takes.

BRIAN CHEUNG: Diane, is there anything to be said that the Fed having to get more aggressive last week, right-- because the expectation prior to last Monday was that the Fed was going to go by a 1/2 a percentage point. They pivoted last minute to the more aggressive 75 basis point move. Does that give you any sort of worry that, look, the next stop is going to be a Fed induced recession?

DIANE JAFFEE: Well, they are trying to be data dependent. And the CPI for the month of May and then the University of Michigan inflation expectations were much higher than expected. And so literally, over the weekend, they made the big jump to say, we're going to go 75. And I think the investors took that well and are going to take fighting inflation faster and harder better for the longer term.

BRIAN CHEUNG: So, Diane, what's the thing that you're going to be watching most closely? I mean, obviously, it's going to be the inflation reports. But it's not so clear that good news is bad news, bad news is good news right now, because, obviously, Americans would like to see inflation going down. But that has a lot of implications now that the Fed has frontloaded their rate hikes. Could it mean something very different, depending on whether or not the next CPI or PC report comes in hotter or lower than expected?

DIANE JAFFEE: You're exactly right, Brian. So I think it's a question of how much is already discounted in the stock prices. As you pointed out, some of these growth names have really been pummeled. But the overall market is clearly in bear market territory. And the question is whether that's-- a lot of the bad news is already discounted into stocks. And we think it's prudent for investors to be diversified. We think it's prudent to invest in companies that have a dividend yield, that can raise their dividend yield, and can make adjustments to inflation on the go.

BRIAN CHEUNG: So that sounds like a play into traditional value stocks. Am I hearing you right? Because a lot of people were looking at some of these growth stocks, as we were just talking about with Emily. Look, Facebook might be a value stock now. So are you saying, hey, still stay away from those, even though they look attractive at the pricing now. Go into kind of your traditional types of blue chip companies that have dividends.

DIANE JAFFEE: Well, I do think you do-- I think it's super important to pay attention to valuation. And the Russell reconstitution is clearly earmarking some of these names as more value plays. So you want to pick and choose wisely. But when we think of the world, not only do we do it from the bottom up, but we also look at sectors. And we think there's a lot of value to be found in the market, particularly in financials and health care.

BRIAN CHEUNG: So I saw in your note also that you're flagging BBB rated corporate bonds as something to watch. I got so excited when I see that. I love it when we talk about corporate bonds. But, you know, it's rising higher, and that makes sense because of rising rates. But look, rates also go higher on risky corporate debt because it also maybe signals a higher risk, if we do go into recession, some of these companies won't be able to pay those bonds back. So how should people and investors be thinking about getting into the corporate bond market perhaps?

DIANE JAFFEE: Well, we have a great fixed income team at TCW. And they're the experts there. But what they've pointed out to me is that the spreads are widening over treasuries. And if you can be selected from the bottom up, we have a great credit department. You really want to be looking at companies that have taken advantage of lower interest rates and restructured their debt maturities. And a lot of will be for those companies that haven't taken up that opportunity to restructure their debt. But for the ones that have, I think that you can find great valuations there.